Handling cases of misusing tax incentives for improper purposes

Misusing tax incentives for improper purposes is one of the practices that carries significant legal risks in business operations, if enterprises intentionally take advantage of tax incentive policies despite not meeting the eligible criteria, failing to satisfy the required conditions, or using incentives for purposes other than those originally registered.

I. Is there a risk of having all previously exempted or reduced taxes recovered if an enterprise is found to have misused tax incentives?

Under the current tax framework, tax incentives are regarded as an important policy tool to encourage investment in prioritized sectors, geographical areas, and industries. However, when an enterprise misuses tax incentives for improper purposes, the legal consequences extend beyond the termination of such incentives and may result in the recovery of all taxes that were previously exempted or reduced.

Specifically, under tax administration regulations, if the tax authority determines that an enterprise failed to satisfy the eligibility requirements for tax incentives from the outset, failed to maintain the required conditions throughout the incentive period, or made inaccurate declarations or engaged in fraudulent conduct to obtain tax incentives; etc. The enterprise may be required to repay the entire amount of tax previously exempted or reduced. In addition, the enterprise may be subject to:

• Late payment interest calculated on the reassessed tax amount;
• Administrative sanctions for tax violations (which may amount to up to 20% of the underpaid tax or higher in cases involving fraudulent conduct);
• Criminal prosecution for tax evasion in serious cases.

II. Understanding the misuse of tax incentives for improper purposes

1. What is the legal definition of misusing tax incentives for improper purposes under Vietnam's tax law system?

Currently, Vietnamese tax laws do not provide a single, direct definition of the term “misuse of tax incentives for improper purposes”. However, the concept may be interpreted through regulations concerning:

• Incorrect declarations resulting in underpayment of tax;
• Tax evasion and tax fraud;
• Improper application of tax incentive conditions under specialized tax laws such as the Law on Corporate Income Tax and the Law on Value-Added Tax.

Accordingly, the misuse of tax incentives for improper purposes may be broadly understood as an act whereby a taxpayer, intentionally or unintentionally, applies tax incentive policies to ineligible subjects, without satisfying the required conditions, or for purposes inconsistent with the registered use, thereby reducing the tax liability payable.

Such conduct may manifest in various forms, including misrepresenting the location entitled to incentives, transfer pricing practices, splitting enterprises to continue enjoying incentives, or failing to maintain the incentive conditions after obtaining the benefits.

2. Which sectors are most vulnerable to violations involving the misuse of tax incentives?

Certain sectors present a higher risk of such violations, including:

• Investments in industrial parks, economic zones, and incentive-designated areas: Due to the availability of attractive tax exemptions and reductions, enterprises may attempt to circumvent regulations concerning location or actual operations;
• High-tech and research and development (R&D) sectors: The complexity of assessing eligibility conditions makes these sectors more susceptible to abuse;
• Education, healthcare, and environmental protection sectors: These socialized sectors enjoy substantial tax incentives;
• Newly established enterprises and new investment projects: Situations involving corporate restructuring, separation, or transformation to continue receiving incentives may arise;
• Processing and export-oriented businesses: Enterprises may submit inaccurate declarations to obtain preferential tax rates.

3. What is the relationship between failing to meet employment requirements and the misuse of tax incentives?

This relationship is reflected in the following aspects:

• Failure to maintain the committed workforce size: If an enterprise obtains incentives based on a certain employment scale but subsequently fails to maintain it, the continued enjoyment of incentives may be considered non-compliant;
• False declarations regarding employees: Inflating employee numbers to satisfy incentive conditions may constitute tax fraud;
• Changes in workforce structure without adjusting incentive eligibility: Continuing to claim incentives after no longer satisfying the requirements may result in tax reassessment and recovery.

III. Legal regulations relating to the misuse of tax incentives for improper purposes

1. What are the fundamental conditions for an investment project to qualify for tax incentives?

Pursuant to Article 18 of the Law on Corporate Income Tax 2025, corporate income tax incentives apply only to enterprises that maintain proper accounting records, invoices, supporting documents, and declare taxes under the declaration-based method.

Corporate income tax incentives applicable to new investment projects (including projects falling under Point g, Clause 2, Article 12 of the Law) as prescribed in Articles 13 and 14 shall not apply to cases involving mergers, consolidations, divisions, separations, changes in ownership, conversion of enterprise types, or other cases prescribed by the Government.

Enterprises must separately account for income derived from tax-incentivized business activities as prescribed in Articles 4, 13, 14, and 15 of the Law and income derived from non-incentivized activities. If separate accounting is not possible, incentivized income shall be determined based on the ratio of revenue or expenses attributable to incentivized activities to the enterprise’s total revenue or expenses.

The preferential tax rates of 15% and 17% prescribed in Clauses 2 and 3 of Article 10, as well as the tax incentives provided under Articles 4, 13, 14, and 15 of the Law, do not apply to:

• Income from capital transfers, transfers of capital contribution rights, transfers of real estate (except income from social housing development projects prescribed under Point s, Clause 2, Article 12), transfers of investment projects (except mineral processing projects), transfers of rights to participate in investment projects, and transfers of mineral exploration, extraction, and processing rights; and income generated from business activities conducted outside Vietnam;
• Income from the exploration and extraction of petroleum, rare natural resources, and minerals;
• Income from online electronic gaming businesses and the production or trading of goods and services subject to Special Consumption Tax, except projects involving the manufacture and assembly of automobiles, aircraft, helicopters, gliders, yachts, and petroleum refining and petrochemical activities;
• Other special cases as prescribed by the Government.

The preferential tax rates of 15% and 17% shall also not apply to enterprises that are subsidiaries or affiliated enterprises where the related enterprise does not satisfy the eligibility conditions prescribed under Clauses 2 and 3 of Article 10.

2. What authority does the Tax Department have to recover taxes and impose sanctions?

Pursuant to Clause 2, Article 47 of the Law on Tax Administration 2025, the head of a tax administration authority has the authority to issue decisions imposing administrative sanctions for acts involving the misuse of tax incentives.

Specifically, the Provincial Tax Department has the authority to:

• Conduct tax inspections and audits of enterprises;
• Assess and recover taxes that were improperly exempted or reduced;
• Issue administrative decisions for tax violations;
• Transfer case files to investigation authorities where criminal elements are detected, in accordance with the law.

3. What are the late payment charges and sanctions ranging from one to three times the evaded tax amount?

Pursuant to Article 17 of Decree No. 125/2020/ND-CP, administrative sanctions ranging from one to three times the amount of evaded tax may be imposed on acts of tax evasion involving the misuse of tax incentives.

- Fine equal to one time the evaded tax amount

A fine equal to one time the evaded tax amount shall apply where the taxpayer has at least one mitigating circumstance and commits any of the prescribed violations, including:

• Failure to submit tax registration dossiers or tax returns;
• Failure to record taxable revenues in accounting books;
• Failure to issue invoices or issuance of invoices with inaccurate quantities or values;
• Use of unlawful invoices;
• Use of unlawful supporting documents;
• Improper use of tax-exempt goods or goods eligible for tax exemption without declaring the change in purpose of use;
• Conducting business during a period of business suspension without notifying the tax authority.

- Fine equal to 1.5 times the evaded tax amount shall apply where the taxpayer commits the aforementioned violations without any aggravating or mitigating circumstances.

- Fine equal to two times the evaded tax amount shall apply where one aggravating circumstance exists.

- Fine equal to 2.5 times the evaded tax amount shall apply where two aggravating circumstances exist.

- Fine equal to three times the evaded tax amount shall apply where three or more aggravating circumstances exist.

4. What sanctions apply to the forgery of documents used to demonstrate eligibility for tax incentives?

Pursuant to Article 28 of Decree No. 125/2020/ND-CP, any person who forges documents to demonstrate eligibility for tax incentives and thereby fabricates tax refund dossiers may be subject to administrative sanctions for the unlawful use of invoices.

The fine may be as high as 50,000,000 VND, together with remedial measures requiring the cancellation of the unlawfully used invoices.

5. Are there any regulations concerning a five-year post-audit period for enterprises misusing tax incentives?

Vietnamese tax laws do not establish a specific “five-year post-audit mechanism” exclusively for cases involving the misuse of tax incentives. However, relevant regulations do exist.

Pursuant to Clause 7, Article 44 of the Law on Tax Administration 2025, the statute of limitations for imposing administrative sanctions and recovering taxes in ordinary cases of tax evasion not serious enough for criminal prosecution, or cases involving incorrect declarations resulting in underpaid taxes or excessive tax exemptions, reductions, refunds, or non-collection, is five years. The limitation period is calculated in accordance with the laws governing administrative violations. Accordingly, tax authorities are entitled to conduct inspections and audits during this period, including with respect to tax periods during which incentives were granted.

In addition, from a practical tax administration perspective:

• Enterprises classified as high-risk taxpayers are often subject to more frequent post-audits over several consecutive years;
• Projects enjoying tax incentives are commonly monitored throughout the incentive period, which may last five years, ten years, or even longer depending on the applicable policy.

IV. Questions regarding the misuse of tax incentives for improper purposes

1. If a company establishes a branch in a remote or disadvantaged area but manages operations from Ho Chi Minh City, could it be considered a misuse of tax incentives?

Tax incentives granted based on geographical location (remote, isolated, or economically disadvantaged areas) are only applicable where the actual production and business activities are conducted in those locations. If an enterprise merely registers a branch address in an incentive-eligible area while all management activities, production operations, and revenue generation take place in Ho Chi Minh City, this may indicate a failure to satisfy the geographical requirements for tax incentives, and the incentives enjoyed may be deemed improperly applied.

However, if the enterprise maintains genuine operations in the locality, including personnel, facilities, and revenue-generating activities, the fact that its management headquarters is located elsewhere will not automatically constitute a violation.

2. Why are software companies sometimes subject to tax reassessment when providing digital content services?

The primary reason is the confusion between “software production” and “digital content services”.

• Software production generally qualifies for significant tax incentives.
• Digital content services (such as online games, digital platforms, and online services) are typically not entitled to the same level of tax incentives.

Many enterprises declare all of their revenue as income derived from software production, whereas, in reality, a substantial portion of their revenue originates from digital content services. It may result in the improper application of tax incentives and lead to tax reassessment and recovery by the tax authorities.

3. Can leasing a virtual office in a high-tech park be considered a misuse of tax incentives?

If an enterprise leases a virtual office solely for the purpose of obtaining a registered address and enjoying tax incentives, while having no actual operations, personnel, production, or business activities at that location, it may be considered ineligible for the incentives and may consequently be subject to tax recovery.

Conversely, if the enterprise conducts genuine business activities within the high-tech park and the virtual office arrangement forms only part of its operational structure, such an arrangement will not automatically be regarded as a violation.

4. Can an enterprise apply for an extension of tax payment deadlines while being investigated for misusing tax incentives?

An enterprise may request an extension of tax payment deadlines if it experiences exceptional difficulties, such as natural disasters, epidemics, or force majeure, or may be permitted to pay outstanding tax liabilities in installments if the applicable conditions are satisfied.

However, if the enterprise is undergoing an inspection or audit concerning potential violations, the tax authority will scrutinize such requests carefully. Any extension granted does not alter the obligation to fully pay the outstanding taxes and any applicable sanctions.

V. How can enterprises maximize tax incentives while maintaining legal compliance? Let NPLaw advise you

As tax incentive policies become increasingly complex and tax authorities intensify post-audit activities, maximizing available incentives without violating legal requirements has become a significant challenge for businesses. This is where professional legal advisors such as NPLaw can provide substantial value.

• Accurate identification of available incentives: Determining the correct industries, locations, and eligibility conditions applicable to the enterprise;
• Optimized investment structuring: Assisting enterprises in lawfully maximizing incentives while avoiding high-risk areas;
• Compliance reviews and early-warning services: Examining records, supporting documents, and business models to prevent future tax reassessments;
• Representation before tax authorities: Assisting with explanations, negotiations, and mitigation of penalties where risks arise;
• Long-term legal support: Providing guidance throughout the entire lifecycle of a project, from establishment to the expiration of incentive periods.

The above information is provided for reference purposes only. Should you require detailed advice regarding a specific case, please contact NPLaw for immediate legal assistance.