Circular No. 49/1999/TT-BTC guiding the implementation of the Value Added Tax Law for financial leasing activities

CIRCULAR

Guidelines for Implementing the Value Added Tax Law

concerning financial leasing activities

________________________

Pursuant to the Law on Value Added Tax (VAT) No. 02/1997/QH9 dated May 10, 1997;

Pursuant to Decree No. 28/1998/NĐ-CP dated May 11, 1998 of the Government detailing the implementation of the Law on VAT;

Based on current laws governing financial leasing and the specific characteristics of leased assets, the Ministry of Finance guides the implementation of the Law on Value Added Tax for financial leasing activities as follows:

I. GENERAL PROVISIONS

1\. This Circular applies to financial leasing companies and enterprises engaged in financial leasing established in accordance with the law (hereinafter referred to collectively as the lessor) and lessees who lease assets under financial leasing in compliance with the current laws on financial leasing and pay VAT using the tax deduction method.

2\. Financial leasing assets are assets used by the lessor in financial leasing services. These assets are formed from imports or purchases within the country. For imported assets, the lessor is the taxpayer for VAT on imported goods. For domestically purchased assets, the lessor indirectly pays VAT through payment for the purchased asset. Financial leasing services, as defined by law, are medium- and long-term credit services based on a leasing asset contract between the lessor and the lessee. Revenue from financial leasing not subject to VAT includes rental income, commitment fees, and residual value (in cases where the lessee repurchases the leased asset at the nominal price at the end of the lease term).

3\. The VAT paid by the lessor on financial leasing assets will be gradually reimbursed by the lessee based on the leasing contract.

4\. This Circular does not apply to ordinary asset leasing services.

II- SPECIFIC PROVISIONS

For the lessor:

a\. The lessor is exempt from VAT on financial leasing services, but if the assets purchased or imported for leasing have already been subject to VAT, the lessee will gradually reimburse the lessor according to the following requirements:

- Assets purchased by the lessor for leasing must have a VAT invoice or import tax payment receipt in accordance with the law.

- The financial leasing contract must clearly specify the rent, VAT, total payment amount, lease period, and payment cycle.

For assets imported by the lessor for financial leasing that fall under the list of goods exempt from VAT on imports, the lessor is not required to pay VAT on imported goods.

b\. When providing financial leasing services, the lessor may use the following documents:

- The lessor issues a financial leasing service invoice. The invoice must comply with the attached model specified in this Circular and must be registered for use after receiving approval from the General Department of Taxation. Issuance of invoices shall be carried out according to the payment schedule stipulated in the contract (monthly or quarterly), but to simplify the invoice issuance process, lessors are permitted to issue invoices twice a year (in June and December each fiscal year or at the time of ownership transfer).

- When issuing a financial leasing service invoice, the lessor must fully record all elements specified on the invoice. Specifically, the VAT column (for this period) is determined based on the principle of evenly allocating the VAT already paid on the leased asset over the lease period.

Example: Company A leases an asset to Enterprise X. In the VAT invoice, the VAT amount is recorded as 360 million VND. Assuming:

+ Lease term according to the contract: 3 years, from February 1, 1999 to February 1, 2002.

+ Payment cycle: the first day of each month.

According to this example, the monthly VAT is calculated as: 360,000,000 VND ÷ 36 months = 10,000,000 VND. Company A issues an invoice to X. X records the VAT as follows:

Period 1: In June of the first year, deducting VAT for 5 months (from February to June) is: 10,000,000 VND × 5 = 50,000,000 VND.

Period 2: In December of the first year (1999), 10,000,000 VND × 6 = 60,000,000 VND.

Period 3: In June of the second year: 10,000,000 VND × 6 = 60,000,000 VND.

Period 4: In December of the second year (2000), 10,000,000 VND × 6 = 60,000,000 VND.

Period 5: In June of the third year: 10,000,000 VND × 6 = 60,000,000 VND.

Period 6: In December of the third year (2001), 10,000,000 VND × 6 = 60,000,000 VND.

Period 7: In January 2002: 10,000,000 VND × 1 = 10,000,000 VND.

Cumulative total (36 months) 360,000,000 VND.

- When issuing a financial leasing service invoice, the following principles must be followed:

+ Purchased leased assets must have a VAT invoice or tax payment receipt and must be evenly allocated as specified above.

+ The total VAT recorded on the financial leasing service invoice issued by the lessor must match the amount recorded on the VAT invoice or tax payment receipt when the company purchased the asset.

+ If there is no VAT on the purchase of the asset, or if there is no VAT invoice or tax payment receipt as prescribed by law, VAT cannot be reflected on the financial leasing service invoice.

For the lessee:

In addition to paying rent, the lessee must also pay the VAT that the lessor has paid to the supplier of the asset. Based on the invoice issued by the lessor, the lessee records the VAT paid to the lessor in the tax deduction account.

3\. Provisions on invoice management

a\. The lessor is responsible for managing VAT invoices for assets purchased for leasing. In cases where the lessor directly imports goods, the lessor must manage import tax receipts (if applicable). These documents will be transferred to the leasing enterprise after the VAT has been fully deducted and ownership transferred to the lessee upon completion of the financial leasing contract.

b- In case the lessee does not perform the lease contract leading to the lessor having to reclaim the asset: the lessor must notify the lessee, clearly stating the amount of VAT already paid and the remaining unpaid VAT. This notification shall be made in three copies: one copy sent to the lessee, two copies retained by the lessor. If the asset continues to be leased, the lessor retains one copy and transfers one copy to the lessee. In the new lease contract, the remaining VAT owed by the previous lessee will be paid by the subsequent lessee and recorded in the VAT deduction account. The issuance of invoices shall be similar to the provisions at point b, Section II.1 of this Circular.

- In case the financial lessor does not sublease the asset to a third party but sells it, they must pay VAT and issue a VAT invoice in accordance with the provisions of the Law.

c- In case the lease contract stipulates that the lessee only leases part of the asset's value and then purchases the asset, the lessor manages the purchase invoice of the leased asset until the sale procedures are completed. The remaining VAT (the VAT on the invoice minus the VAT already paid) will be further deducted similarly to the case of directly purchasing fixed assets with input VAT.

The documents for the lessee to deduct VAT when purchasing the asset include: the VAT invoice for purchasing the asset (domestic purchase) or the tax payment receipt (import) transferred by the financial lessor, and the service invoice for leasing at the time the buyer repurchases the asset. The additional VAT deduction when the lessee repurchases the asset through financial leasing equals the VAT on the invoice transferred by the lessor minus the VAT paid on the leasing service invoice (item 3, cumulative column).

d- In case the lease contract involves both the lessor and lessee jointly investing in machinery and equipment, and subsequently the lessor only collects rent (capital and interest) corresponding to their investment, the purchase invoice of the leased asset shall be managed by the lessor until the ownership rights are transferred to the lessee. The VAT corresponding to the lessee's investment will be included in the first payment invoice issued by the lessor.

e- In case the financial lease contract has been fully executed and all VAT has been paid by the lessee, and both parties agree to continue leasing, the issuance of the service invoice for financial leasing will not reflect VAT.

4) Handling violations:

It is strictly prohibited to exploit the form of financial leasing to cause revenue loss to the State budget. All acts violating the provisions of this Circular shall be handled according to the provisions of the Law on Value Added Tax, current legal regulations.

III- IMPLEMENTATION

This Circular takes effect fifteen days from the date of signature, but applies to contracts signed from January 1, 1999. Matters not covered in this Circular shall be implemented according to Circular No. 89/1998/TT-BTC dated June 27, 1998, guiding the implementation of Decree No. 28/1998/NĐ-CP dated May 11, 1998, detailing the implementation of the Law on Value Added Tax, and other supplementary and amended legal documents currently in force.

During the implementation process, if there are any difficulties, organizations and individuals are requested to promptly report them to the Ministry of Finance for research and resolution.