Dissolving a Household Business to Set Up a New Company: Is the Rumored 3-Year Tax Exemption Really True?

There Are No Wrong Questions—Only Questions That Need to Be Asked in the Right Context

“Should I dissolve my household business and set up a new company? I heard there’s a 3-year tax exemption.”

This is not a hasty question. On the contrary, it reflects the mindset of many household businesses when revenue begins to grow, operations become more stable, and concepts such as taxes, invoices, and compliance costs start to become more “tangible.”

When information about tax incentive policies circulates, considering a conversion is entirely understandable. However, the decision to move from a household business to a company is a structural one and should not be based solely on a short-term benefit heard in passing.

The 3-Year Tax Incentive: Where Does It Currently Stand in the Legal Framework?

At present, the policy on a 3-year corporate income tax exemption for newly established small and medium-sized enterprises (SMEs) is only stipulated at the level of a Government Resolution.

This means that:

• The policy direction is clear,
• But there is not yet a law or detailed guiding decree for uniform application.

In other words, this is not yet a benefit that can be immediately applied to all newly established companies. It still needs to be properly understood in terms of conditions, eligible entities, and scope of application.

Not Every “Newly Established” Company Is Eligible for Tax Exemption

According to draft proposals and related regulations, the entities considered for incentives are SMEs registering for business for the first time. However, the concept of “first time” here is not simply about obtaining a business registration certificate for the first time.

The regulations clearly exclude cases such as:

• Companies newly formed through mergers, consolidations, divisions, or splits;
• Companies that convert their business type or change ownership;
• Companies where the legal representative, general partner, or largest capital contributor has previously participated in business activities in a similar role in:
  
  • An operating company; or
  • A company that has been dissolved for less than 12 months.

In these cases, the company is not considered to be registering for business for the first time, even if, in legal form, it is a “new company.”

So, Does Dissolving a Household Business and Opening a New Company Qualify for Incentives?

This is the point that causes the most confusion—and is also the easiest to misunderstand.

If:

• You are currently the owner of a household business;
• You dissolve the household business;
• You then establish a new company;
• You remain the legal representative;
• And the core business activities remain essentially unchanged,

Then, from a tax administration perspective, it is very difficult to consider this a completely new business activity.

In this case, not being entitled to tax incentives is not due to tax authorities “tightening controls,” but rather because the nature of the activity does not meet the conditions of the policy.

Converting to a Company: Don’t Look Only at Corporate Income Tax

One important point that is often overlooked is this:

Corporate income tax is not the tax that creates the greatest pressure in the early stages.

In practice, for many small businesses:

• Value-added tax (VAT) is the tax that arises most frequently,
• And it is also the tax most likely to cause cash flow mismatches if not properly understood.

Understanding Value-Added Tax Correctly

Currently:

• Most goods and services are subject to 8% VAT;
• A smaller portion is subject to 5%, 10%, or is non-taxable.

VAT is only creditable when:

• There is a valid VAT invoice; or
• Imported goods have had VAT paid at the import stage.

Conversely:

• Goods purchased without invoices; or
• Goods purchased from household businesses that issue sales invoices
  → Do not qualify for VAT credit.

A Familiar Example That Is Often Misunderstood

Suppose a consumer buys a Xiaomi TV with a total payment price of VND 8,490,000.

This amount actually includes:

• Pre-tax value of the goods: VND 7,861,111;
  
• VAT at 8%: VND 628,889.
  

The buyer does not perceive that they are “paying tax,” because the listed price is already the final price.

For household businesses—where customers are mainly individual consumers—this is a very important characteristic. Converting to a company does not automatically create a VAT advantage if the sales model remains unchanged.

Comparison of VAT Calculation Across Different Cases

Item		Formula (when VAT invoices are available)	Case 1	Case 2	Case 3
Output sales value	(1)		8.490.000	8.490.000	8.490.000
Output Value-Added Tax (VAT)	(2)	=(1) / 1,08	628.889	628.889	628.889
Net purchase value (excluding VAT)	(3)		7.861.111	7.861.111	7.861.111
Total purchase value (VAT-inclusive)	(4)		5.400.000	5.400.000	5.400.000
Input VAT on purchases	(5)	=(4) / 1,08	400.000	400.000	0
Net purchase value (excluding VAT)	(6)		5.000.000	5.000.000	0
Total selling expenses (VAT-inclusive)	(7)		2.000.000	2.000.000	2.000.000
Input VAT on selling expenses	(8)	=(7) / 1,08		148.148	148.148
Net selling expenses (excluding VAT)	(9)			1.851.852	1.851.852
VAT payable	(10)	=(2) – (4) – (8)	228.889	80.741	480.741
VAT payable / Revenue ratio	(11)	= (10) / (1)	2,70%	0,95%	5,66%
Item			In this case, only the purchase of goods is supported by VAT invoices.Selling expenses paid to sales staff do not have VAT invoices, therefore input VAT on selling expenses is not deductible.	In this case, there are VAT invoices for both the purchase of goods and the selling expenses incurred on the e-commerce platform.As a result, input VAT from both sources can be fully deducted.	In this case, there is no VAT invoice for the purchase of goods(only a sales invoice issued by a household business and approved by the tax authority).Only the VAT invoice for selling expenses on the e-commerce platform is deductible.

Clearly, although the total purchase value is the same, the VAT payable as a percentage of revenue differs significantly across the cases.

Only Case 2 is more advantageous compared to the 1.5% revenue-based tax that a household business is currently required to pay.

In the remaining cases, VAT alone after converting to the enterprise model already exceeds the entire tax liability that a household business engaged in trading would otherwise pay.

Therefore, from a VAT perspective alone, converting to an enterprise model is more beneficial than the revenue-based tax regime applied to household businesses only when:

• the enterprise has substantial input costs that are supported by VAT invoices, or
• operates in export-related activities, or
• sells goods and services that are not subject to VAT.

So, When Is the Right Time to Convert?

Moving from a household business to a company is a step forward—but it is only truly meaningful when:

• The business needs to issue VAT invoices regularly to partners that are other companies;
• There are plans to scale up, raise capital, or recruit employees;
• A transparent, standardized financial and accounting management system is required.

Conversely, if:

• Customers are still mainly end consumers;
• Revenue has not yet stabilized;
• Tax obligations arising after the conversion are not yet fully understood;

Then “converting for the sake of incentives” may not be the most optimal choice.

Conclusion: Incentives Are a Factor, Not the Only Reason

A 3-year tax exemption is certainly a policy worth paying attention to. However, a sound decision should not be based solely on a short-term incentive—especially when that incentive depends heavily on specific eligibility conditions.

Understanding the true nature of taxation, clearly grasping your own business model, and taking a long-term perspective—these are the real foundations of a sustainable decision.

Should a Household Business with Revenue Over VND 3 Billion Convert to a Company?

Hộ kinh doanh doanh thu trên 3 tỷ có nên chuyển đổi sang doanh nghiệp không?

Hủy hộ kinh doanh để mở doanh nghiệp mới: Có thật sự được miễn thuế 3 năm như lời đồn?