Structuring build-to-suit lease transaction in Viet Nam: Navigating legal-gaps and tax efficiency

In the current industrial real estate market in Vietnam, a “Build-to-Suit” model is becoming increasingly common. In this scenario, a manufacturing enterprise (the “Tenant”) requires a factory with specific technical specifications that standard ready-built factories cannot meet. To facilitate this, the Tenant often agrees to advance a substantial upfront sum to the Landlord to fund the construction. In exchange, the Tenant secures the right to lease the custom-built factory upon completion at a preferential rental rate. 

While this model offers clear commercial synergies, providing necessary capital to the Landlord and a tailored operational base to the Tenant, it introduces a complex web of legal and tax considerations. The recent entry into force of the Law on Real Estate Business 2023 has significantly altered the regulatory landscape, creating ambiguity regarding the lease of assets formed in the future. Furthermore, the characterization of these large upfront payments triggers intricate corporate income tax implications that require careful structuring. This article provides a comprehensive legal analysis of the nature of such transactions, assesses their feasibility under the new statutory framework, and proposes strategic mechanisms to mitigate compliance risks. 

1. The legal nature of the transaction

To apply the appropriate legal framework, it is essential to first determine the precise legal nature of the upfront payment made by the Tenant. Theoretically, a payment for construction could be classified in two distinct ways. The first perspective views it as a construction service fee, where the Landlord acts merely as a contractor. Under this scenario, the Tenant would legally be the project investor and would acquire full ownership title to the factory upon completion. However, this rarely aligns with the commercial reality where Landlords generally intend to retain title to the assets constructed on their land. 

The second and more accurate classification is that of a rental prepayment. In this context, the Tenant pays the sum to secure lease rights, while the Landlord retains ownership. Consequently, the transaction constitutes a lease of a future construction work – an asset that does not yet exist at the time the agreement is signed. Since the substance of the arrangement involves exchanging capital for future usage rights at a preferential rate, it must be governed by the regulations applicable to the trading and leasing of future real estate assets. 

2. Regulatory feasibility.

A primary legal consideration for this transaction model lies within the legislative changes introduced by the Law on Real Estate Business 2023 (“LREB 2023”). To understand the current ambiguity, it is necessary to examine the transition from the previous legislation. The former Law on Real Estate Business 2014 contained Article 54, which expressly permitted real estate developers to lease construction works formed in the future. This provided a clear statutory basis for Build-to-Suit leases, allowing parties to sign lease agreements and make payments even before the factory was built. 

However, the LREB 2023 represents a notable departure from its predecessor. The new law has removed the specific provisions that regulated the lease of future construction works. This legislative silence has created a significant point of discussion among legal practitioners: does the removal of the explicit permission imply that such transactions are now restricted? In the interpretation of specialized laws, the absence of a provision can sometimes be construed as a limitation. 

Despite this statutory silence, the prevailing legal view is that these transactions remain permissible based on the fundamental principles of the Civil Code 2015. While the LREB 2023 is a specialized law, the Civil Code serves as the foundation for civil transactions. Article 3.2 of the Civil Code 2015 stipulates that all civil commitments and agreements that are not expressly prohibited by law and do not contravene social ethics are binding. Furthermore, the Civil Code explicitly recognizes future property as a valid subject of civil transactions. 

This interpretation is supported by recent practical guidance from the Housing and Real Estate Market Management Authority. When consulted on this specific issue, the Authority has indicated that for real estate transactions not specifically regulated under the LREB 2023, the applicable legal framework reverts to the Civil Code and other relevant laws. Therefore, the absence of a specific regulatory framework in the LREB 2023 does not render the transaction invalid. Instead, it shifts the governance of the contract from the specialized real estate law to the broader, more flexible regime of the Civil Code. Parties are thus entitled to implement these transactions, provided the agreements are meticulously drafted to align with general civil regulations. 

3. Taxdeductibility risks 

Beyond the regulatory feasibility, the prepaid rent model creates exposure regarding Corporate Income Tax (“CIT”). The primary concern is the timing of deductibility. Under Vietnamese tax regulations, an expense is only deductible if it is actually incurred and directly related to the enterprise’s production and business activities. In a Build-to-Suit scenario, the Tenant makes the payment while the factory is still under construction. Because the facility is not yet in operation, the payment does not meet the statutory requirements for immediate deduction. Tax authorities often adopt a strict approach, disallowing such expenses until the asset is physically put into use. 

Furthermore, there is uncertainty regarding the scope of the deductible expense. If the Tenant pays a preferential rent that is significantly lower than the market rate, justified by the initial construction funding, tax authorities may scrutinize whether the declared fee reflects true market value. The authorities generally retain the right to reassess transactions where the price is inconsistent with market value. If they determine that the declared rental fee does not reflect the true market value, they may impose additional tax liabilities on the Landlord, who may then seek to shift this financial burden back to the Tenant. 

4. Possible approach:

To address the regulatory ambiguity of the LREB 2023 and the tax risks outlined above, a common approach observed in the market involves structuring the transaction using a “Long-term Deposit” mechanism rather than a direct rental prepayment. Under this approach, the transaction is typically framed within a deposit agreement (or a memorandum of understanding) where the construction funding is recorded as a security deposit. This deposit serves to guarantee the performance of the lease for the entire term, thereby falling under the security measures provisions of the Civil Code rather than the real estate business regulations. 

Commercially, this deposit is often refunded to the Tenant in installments throughout the lease term or converted into rental payments periodically. Once the factory is operational, the rental fees are paid or offset monthly or quarterly. These periodic payments are supported by valid invoices and are incurred while the factory is in use, thereby clearly qualifying as deductible operating expenses. This method effectively bypasses the complexities of the LREB 2023 regarding future assets and aligns the accounting treatment with the actual operational timeline of the business. 

5. Conclusion:

Structuring a Build-to-Suit transaction in Vietnam requires a sophisticated understanding of the intersection between the new real estate laws and established civil code principles. While the Law on Real Estate Business 2023 does not explicitly regulate the lease of future construction works, a valid legal argument exists to support such transactions under the Civil Code 2015. However, relying solely on a traditional prepayment model exposes investors to unnecessary tax compliance risks. Consequently, to successfully implement a Build-to-Suit lease transaction that is both legally enforceable and commercially viable, it is imperative for parties to seek synchronized guidance from both qualified legal counsel and professional accounting firms to navigate these complexities effectively. 

Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.

Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Real Estate and contact our team of lawyers in Vietnam via email info@apolatlegal.com.

Nguồn: https://ift.tt/9oe0OcN
Map: https://goo.gl/maps/JbCF1FiWPuD2Jsnx6
Thông tin: https://www.google.com.vn/search?q=Apolat+Legal&kponly=&kgmid=/g/11jkvqgmw_