Overview of foreign contractor tax in Vietnam
Foreign contractor tax (the “FCT”) is imposed on foreign organizations/individuals that conduct businesses or yield income originated from Vietnam on the contractual basis with Vietnamese organizations/individuals. This article will highlight some main and notable points regarding the FCT under laws of Vietnam:
Under the laws of Vietnam, there is no definition of FCT. However, FCT is understood as a combination of several taxes, normally insists of value added tax (the “VAT”) and corporate income tax (the “CIT”) for foreign organization, or personal income tax (the “PIT”) for foreign individuals.
- Scope of application
Payments for foreign parties subject to FCT include royalties, loan interests, service fees, transportation services, rents, insurance premiums, securities transfers, and goods supplied in Vietnam or accompanying services provided in Vietnam.
Cases where FCT is not applied include pure supply of goods for Vietnamese entities without ancillary services in Vietnam in form of delivery at the foreign border checkpoint or a Vietnam’s border checkpoint, services performed and consumed outside Vietnam and various other services performed wholly outside Vietnam (e.g. certain repairs, advertising, promotion, training, etc.).
- Payment method
As for the PIT, there is only one (01) payment method being direct method, meaning the PIT is withheld and paid by the Vietnamese parties.
As for the VAT and CIT, there are three (03) payment methods for the foreign contractor to select, including:Direct method: CIT and VAT are withheld and paid by the Vietnamese parties at prescribed rates from the payments made to the foreign contractor; Deduction method: This method allows the foreign contractor to apply tax deduction and file CIT and VAT returns in the same way as a local entity does.
The foreign contractor must satisfy the following conditions to apply this method (i) having a permanent establishment in Vietnam or being a tax resident in Vietnam; (ii) the duration of the project in Vietnam is 183 days or more; and (iii) applying the Vietnam Accounting System, completing tax registration and being granted a tax code; and
Hybrid method: Paying the VAT under deduction method and CIT under direct method. The foreign contractor must satisfy the following conditions to apply this method (i) having a permanent establishment in Vietnam or being a tax resident in Vietnam; (ii) the duration of the project in Vietnam is 183 days or more; and (iii) maintaining accounting records in accordance with the accounting regulations and guidance of the Ministry of Finance.
- Tax rate
Subject to the type of business, the applicable tax rates are as follows:
PIT rate: 1% – 5%;
CIT rate: 0.1% – 10%; and
VAT rate: 2% – 5%.
This article was written by:
Mr. Nguyen Danh Cong
Partner of DIMAC Law Firm
Email: [email protected]
Phone: (+84) 985 820 703