Capital Gains Tax Between India and Vietnam Under DTAA

Quick answer: Under the India-Vietnam DTAA (signed 7 September 1994, in force from 2 February 1995, effective in India from 1 April 1996), Article 14 allocates capital gains taxing rights by asset type rather than setting a single rate. India can tax gains on Indian immovable property (Article 14(1)) and, notably, on any shares of an Indian-resident company regardless of shareholding level (Article 14(5)) at full domestic rates, while gains from most other property are taxed only in the seller's residence state under the Article 14(6) residual clause. India taxes listed-share long-term capital gains at 12.5% above INR 1.25 lakh per year, short-term gains on listed shares at 20%, and unlisted-share long-term gains at 12.5%, with Vietnam providing relief for the Indian tax paid.

Key takeaways:

• Article 14 allocates taxing rights by asset category; it does not prescribe a single capital gains rate.
• India can tax gains on Indian immovable property under Article 14(1) and on shares of a "property-rich" company under Article 14(4).
• Article 14(5) lets India tax gains on any shares of an Indian-resident company — there is no minimum-shareholding threshold and no look-back period in the treaty text.
• Ships and aircraft operated in international traffic are taxed only in the alienator's state of residence under Article 14(3).
• Gains not covered by paragraphs 1 to 5 are taxed only in the seller's residence state under the Article 14(6) residual clause.

Capital Gains Tax Rate Between India and Vietnam

The Double Taxation Avoidance Agreement (DTAA) between India and Vietnam, signed 7 September 1994 in Hanoi and in force from 2 February 1995 (effective in India from 1 April 1996), sets out specific rules for taxing capital gains under Article 14. Unlike dividends, interest, royalties, and technical fees, where the treaty caps a withholding percentage, capital gains taxation works differently: it allocates the right to tax based on the asset sold, and the domestic rate of whichever country holds that right then applies.

This distinction matters for Vietnamese investors selling Indian assets and Indian investors disposing of Vietnamese holdings. The treaty divides capital gains into six categories — immovable property, PE-connected movable property, ships and aircraft, shares of a "property-rich" company, other shares of a resident company, and a residual category for everything else — each governed by its own paragraph in Article 14. With Vietnamese manufacturing joint ventures increasingly structured through Indian holding entities, getting the Article 14 analysis right directly affects deal structuring, exit planning, and withholding compliance.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 14 of the India-Vietnam DTAA does not prescribe a withholding percentage for capital gains. It determines which country may tax the gain; that country's own domestic rates then apply. Here is how the framework operates for each category:

Immovable Property — Article 14(1)

Gains from the alienation of immovable property situated in India, sold by a Vietnamese resident, may be taxed in India. Correspondingly, gains on Vietnamese immovable property sold by an Indian resident may be taxed in Vietnam. India's domestic rates apply to the Indian-side gain: 12.5% long-term capital gains (assets held over 24 months) or applicable slab/surcharge rates for short-term gains.

Movable Property Connected to a PE — Article 14(2)

Gains from the alienation of movable property forming part of the business property of a permanent establishment that a Vietnamese enterprise has in India — or an Indian enterprise has in Vietnam — including gains from the alienation of the PE itself, may be taxed in the state where the PE is situated. In India, such gains are generally taxed at the applicable corporate rate for foreign companies (35%, plus surcharge and cess) as part of the PE's business profits.

Ships and Aircraft — Article 14(3)

Gains from the alienation of ships or aircraft operated in international traffic are taxable only in the Contracting State of which the alienator is a resident. This is an exclusive residence-state rule — the source state has no taxing right at all over such gains, giving shipping and aviation operators certainty regardless of where the vessel or aircraft happens to call.

Property-Rich Company Shares — Article 14(4)

Gains from the alienation of shares of a company whose property consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that state. The treaty text does not specify a percentage threshold for what counts as "principally" immovable property — unlike some other Indian treaties that use an explicit numerical test, this provision must be applied on a facts-and-circumstances basis to the composition of the company's property. The MLI adds a timing rule: both countries notified Article 14(4) under MLI Article 9(1), so the property test is met if it is satisfied at any time in the 365 days before the alienation, not only on the sale date. Vietnam reserved out Article 9(1)(b), so the paragraph still reaches only shares.

Other Shares of a Resident Company — Article 14(5)

This is the most commercially significant, and most distinctive, provision in the treaty. Under Article 14(5), gains from the alienation of shares other than those mentioned in paragraph 4, in a company which is a resident of a Contracting State, may be taxed in that State. There is no minimum-shareholding threshold in the text and no look-back period. This means India retains the right to tax a Vietnamese resident's gain on selling shares of any Indian-resident company — whether a 1% portfolio stake or a 100% controlling interest — and Vietnam retains a corresponding right over shares of Vietnamese-resident companies. This is a broader source-state right than treaties that protect small or non-controlling shareholdings by residence-only taxation.

Residual Clause — Article 14(6)

Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 3, 4, and 5 are taxable only in the Contracting State of which the alienator is a resident. Examples include gains from intellectual property, business goodwill, partnership interests, and other assets not connected to a PE and not consisting of company shares.

Who Qualifies for Treaty Protection on Capital Gains

Tax Residency Requirement

The person claiming treaty analysis must be tax resident of Vietnam (or India) under Article 4 — by incorporation or place of effective management for companies, or presence, habitual residence, or leased-dwelling tests under Vietnamese law for individuals, with Article 4's tie-breaker resolving dual residence. A valid Tax Residency Certificate from Vietnam's General Department of Taxation is essential.

Beneficial Ownership and Substance

Article 14 does not itself use beneficial-ownership language (unlike Articles 10 to 13), but substance still matters: the India-Vietnam DTAA is a matched Covered Tax Agreement under the MLI, so the Principal Purpose Test applies to India-source gains from 1 April 2024. A structure routed through Vietnam mainly to access Article 14(6) protection, not for genuine commercial reasons, is vulnerable under the PPT, with India's domestic GAAR (from April 2017) as a further backstop.

India's Domestic Law Override

Section 9 of the Income-tax Act, 2025 (section 9(1)(i) of the Income-tax Act, 1961; business-connection limb now section 9(2)(c), definition in section 9(9)) deems capital gains from shares of an Indian company as income arising in India. India's indirect-transfer provisions, carried forward from Explanation 5 to section 9(1)(i) of the 1961 Act — introduced post-Vodafone — can also tax gains from transferring shares of a foreign company deriving substantial value from Indian assets. Article 14(5)'s protection is confined to shares of a company resident in India or Vietnam, not a third-country company, so indirect transfers of that kind fall to be tested under Article 14(6) instead.

Section 159(6) of the Income-tax Act, 2025 (section 90(2A) of the Income-tax Act, 1961) makes GAAR apply notwithstanding the treaty-override rule in section 159(4) (section 90(2) of the Income-tax Act, 1961). Where a transaction is an impermissible avoidance arrangement, treaty protection under Article 14 — including the residual clause in Article 14(6) — may not be available.

Documentation Required for Capital Gains Treaty Claims

Tax Residency Certificate (TRC)

A TRC from Vietnam's General Department of Taxation confirming Vietnamese tax residency for the relevant fiscal year is required under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

Where the TRC does not contain all prescribed particulars, Form 41 must be filed electronically on the Indian Income Tax portal; a PAN is not mandatory for this filing.

Self-Declaration

A self-declaration of beneficial ownership of the asset and, where Article 14(6) protection is claimed, confirmation that the gain is not attributable to a PE in India, together with documentation of the commercial rationale for the holding structure.

Forms 145 and 146 for Remittances

When the Indian buyer remits sale proceeds to Vietnam, Form 145 must be filed electronically; for remittances exceeding INR 5 lakh, a Chartered Accountant's certificate in Form 146 is also required.

Withholding Procedure for Indian Payers

Where a Vietnamese resident sells Indian assets, the Indian buyer has withholding obligations under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961), which requires deduction at the rates in force.

TDS on Share Transfers

The buyer of shares from a non-resident must deduct tax at source on the capital gains component. Since Article 14 allocates taxing rights rather than prescribing a rate, India's domestic capital gains rates apply directly once valid TRC and Form 41 are on record: for listed shares, section 196 of the Income-tax Act, 2025 (section 111A of the Income-tax Act, 1961) gives 20% short-term gains, and section 198 of the Income-tax Act, 2025 (section 112A of the Income-tax Act, 1961) gives 12.5% long-term gains above the INR 1.25 lakh annual exemption. For unlisted shares, the 12.5% long-term rate applies under section 197 of the Income-tax Act, 2025 (section 112 of the Income-tax Act, 1961) — a different provision from the lower-deduction certificate below, which happens to carry the same number, 197, under the 1961 Act (now section 395(1) of the 2025 Act). Without valid documentation, the buyer must withhold at the higher rate applicable absent treaty support.

Section 395 Lower Withholding Certificate

The Vietnamese seller can apply to the Assessing Officer under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) — or, for sums covered by section 393(2), under section 395(2) of the Income-tax Act, 2025 (section 195(2) and (3) of the Income-tax Act, 1961) — for a certificate specifying a lower rate of withholding. This is useful where the actual gain is small relative to the sale consideration, or where losses are available to offset the gain.

Advance Ruling

For complex transactions, a Vietnamese entity can seek an advance ruling from the Board for Advance Rulings under section 380 of the Income-tax Act, 2025 (section 245N of the Income-tax Act, 1961) before completing the transaction.

Common Issues and Practical Notes

Article 14(5) Has No Minority-Shareholder Carve-Out

Investors familiar with treaties that protect small, non-controlling shareholdings by taxing them only in the residence state sometimes assume the same protection exists here. It does not: Article 14(5) lets India tax gains at any level of ownership, with no percentage threshold and no look-back rule written into the text.

Indirect Transfers and the Residual Clause

Article 14(5) covers only shares in a company resident in India or Vietnam. A sale of shares in a third-country holding company that indirectly owns Indian assets falls instead under Article 14(6) — subject always to India's domestic indirect-transfer provisions and GAAR, which reach such structures independently of the treaty.

PE Attribution Disputes

Disputes can arise over whether a share sale is attributable to a PE under Article 14(2). Attribution generally requires that the shares form part of the PE's actual business property — merely being held by an enterprise that also has a PE elsewhere is not enough.

Surcharge and Cess

Because Article 14 allocates taxing rights rather than capping a rate, ordinary surcharge and cess rules apply in full to whichever country's tax is charged — unlike the flat-rate articles for dividends, interest, royalties, and technical fees, there is no treaty ceiling to offset against.

Practical Examples and Calculations

Example 1: Vietnamese Company Selling Shares of an Indian Subsidiary

Hanoi Manufacturing JSC sells its 100% shareholding in an unlisted Indian subsidiary for INR 10 crore, with an original cost of INR 4 crore, held for three years.

• Capital gain: INR 6 crore, long-term (holding period exceeds 24 months for unlisted shares).
• India's right to tax: Yes — Article 14(5) allows India to tax gains from shares of an Indian-resident company, with no threshold to clear.
• Indian tax: 12.5% LTCG = INR 75 lakh (plus applicable surcharge and cess).
• Vietnam relief: Vietnam provides relief for the Indian tax paid under Article 24, preventing double taxation on the same gain.

Example 2: Vietnamese Investor Selling Listed Indian Shares

An individual Vietnamese investor sells listed shares on the NSE for INR 40 lakh, with an original cost of INR 25 lakh, held for 18 months.

• Capital gain: INR 15 lakh, long-term (holding period exceeds 12 months for listed shares).
• India's right to tax: Yes — Article 14(5).
• Indian tax: 12.5% LTCG on gains exceeding INR 1.25 lakh, under section 198 = approximately INR 1.72 lakh.
• Vietnam relief: Credit or exemption for the Indian tax paid, per Vietnam's domestic double-taxation relief rules.

Example 3: Ship Operated in International Traffic

A Vietnamese shipping line sells a vessel operated in international traffic, generating a gain that would otherwise attract Indian tax if the vessel had called frequently at Indian ports.

• Treaty position: Article 14(3) gives exclusive taxing rights to Vietnam, the alienator's state of residence — India has no taxing right over this gain at all, regardless of the vessel's port calls or trading pattern.

For expert guidance on structuring cross-border transactions between India and Vietnam, explore Beacon Filing's tax advisory services and the company registration guide for Vietnam. See also the complete India-Vietnam DTAA guide and withholding tax rates page.

Frequently Asked Questions

How are capital gains taxed under the India-Vietnam DTAA?

Article 14 allocates taxing rights by asset type rather than setting one rate. Immovable property gains are taxed where the property is located; gains on shares of a resident company may be taxed by that state; gains from most other property are taxed only in the seller's residence state. Domestic rates of the taxing country then apply — the treaty does not prescribe a specific capital gains percentage.

Can India tax a Vietnamese resident on gains from selling shares of an Indian company, even a small stake?

Yes. Under Article 14(5), gains from shares of a company resident in India may be taxed in India regardless of the percentage held — there is no minimum-shareholding threshold or look-back period in the treaty text. India applies its domestic rates: 12.5% long-term capital gains on listed shares (above INR 1.25 lakh/year) and unlisted shares, and 20% short-term gains on listed shares.

Does Article 14(6) protect gains from all property types not otherwise covered?

Article 14(6) gives exclusive taxing rights to the seller's residence state for gains from property not covered by paragraphs 1 to 5 — for example, intellectual property, goodwill, and partnership interests. India's domestic indirect-transfer provisions and GAAR can still apply independently in certain structured transactions.

What documentation does a Vietnamese investor need to claim treaty analysis on capital gains?

A Tax Residency Certificate from Vietnam's General Department of Taxation, Form 41 filed electronically, a self-declaration of beneficial ownership and non-PE status, and the buyer's filing of Form 145/Form 146 for remittances. For lower withholding, the seller can apply under section 395 of the Income-tax Act, 2025 (sections 195(2), 195(3), and 197 of the Income-tax Act, 1961).

Does the MLI affect capital gains taxation under the India-Vietnam DTAA?

Yes. The India-Vietnam DTAA is a Covered Tax Agreement, so the Principal Purpose Test applies to India-source gains from 1 April 2024. Structures with no genuine commercial substance, set up mainly to access the Article 14(6) residual-clause protection, can be denied treaty benefit under the PPT or India's domestic GAAR.

How does the property-rich company rule in Article 14(4) differ from Article 14(5)?

Article 14(4) applies specifically where the company's property consists principally, directly or indirectly, of immovable property — the treaty text sets no numerical percentage for "principally." Article 14(5) is broader and residual to Article 14(4): it covers all other shares in a resident company, with no property-composition test and no threshold at all.