Investments in the not-so-far east Vietnam – Part 6: Special Tax Law in Vietnam
While European companies are eagerly awaiting the entry into force of the Vietnam-EU Free Trade Agreement, the legal framework for foreign investment in Vietnam is steadily improving. With improved and clearer regulations for investment and entrepreneurship in Vietnam, the country is becoming increasingly interesting for international investors, especially as Vietnam is already one of the most sought after FDI locations in the region.
Step by step and with a special focus on the concerns of companies interested in investing, we will explain the key legal bases in Vietnam under the title “Investments in the not-so-far east”.
Part 6: Special Tax Law in Vietnam
- In addition to Vietnamese corporate tax law, which is strongly focused on investor interests and influenced by the Investment Law of 2015, foreign companies in Vietnam should also focus on other peculiarities of local tax law.
- Further tax specificities arise with regard to the registration obligation for foreign companies, with regard to certain VAT benefits for export transactions, as well as with regard to the so-called Foreign Contractor Tax.
In Part 3 and Part 5 of our series of contributions, we have already shown you how Vietnam’s investment law merges with Vietnam’s corporate tax law and can offer various commercial and tax benefits to foreign investors. This article builds on this by addressing other peculiarities in Vietnamese tax law that should be on the minds of foreign investors when thinking about entrepreneurial engagement in Vietnam.
Companies wishing to do business in Vietnam must generally register with the Vietnamese tax authority. This registration must take place immediately upon commencement of the respective business activity. There is a period of 10 working days from the issuance of a company formation certificate, the granting of an operating license or an investment license; but at the latest since the actual commencement of business activity or from the time when a company not subject to corporate and investment law is obliged to pay VAT for the first time or is entitled to claim VAT refunds.
It should be pointed out in particular that the tax liability for VAT amounts collected does not depend on the registration, but the entitlement to pay VAT amounts paid by way of the so-called tax-credit method already applies. The tax registration is therefore of great importance in order to avoid an unnecessary tax burden. This is all the more true for companies with heavy purchasing costs after founding and start-ups with high set-up costs.
VAT in Vietnam
The payment and transfer of VAT in Vietnam is governed by Law No. 13/2008 / QH12, which entered into force at the beginning of 2009, and Amendment Law No. 31/2013 / QH13, which entered into force at the beginning of 2014.
In principle, all transactions involving the purchase of goods or the use of services in Vietnam, ie in the territory and in the jurisdiction of Vietnam, are subject to VAT. It does not matter whether the goods and services are intended for production, trade or consumption. The only decisive factor is the transaction location. In the case of goods transactions, the place at which the shipment begins to the buyer or at which the buyer receives the power over the goods is decisive. For services, the place of physical delivery is relevant.
Value added tax is payable by organizations of any legal form and by natural persons in the course of buying or using services, while companies registered for tax purposes have to pay the VAT amounts collected, much as in Germany.
Certain products and services enjoy a VAT exemption. The exemptions are described in detail in Regulation No 209/2013 / ND-CP. These include, in particular, services provided by foreign companies which are wholly-owned abroad, the transfer of securities, foreign currency and various collateral, as well as numerous credit services.
The VAT rates are between 0% and 10%, depending on the type of business. Basically, the standard tax rate of 10% applies. On the other hand, many agricultural, technical, scientific and cultural goods as well as everyday services enjoy a reduced tax rate of 5%.
In addition, a 0% rate will benefit those businesses that have an international reputation. These transactions include, in particular, all exports of goods and services, international transport services as well as manufacturing and installation services for manufacturing and exporting companies in Vietnam. A prerequisite for the use of the advantageous zero tax rate is again that the respective taxable company does not have its own branch in Vietnam, so it is a completely foreign company.
As stated above, companies that have a subsidiary or other tax registered establishment in Vietnam are required to pay corporate income tax and VAT locally. In the absence of tax registration, on the other hand, companies that do not have such a presence in Vietnam but are nevertheless able to carry out taxable business activities in Vietnam can not be taxed.
In this constellation, the system generally refers to the so-called Foreign Contractor Tax (FCT), sometimes called the Foreign Contractor Withholding Tax. The FCT is largely explained in the Circular of the Ministry of Finance no. 103/2014 / TT-BTC of 06.08.2014.
On the tax basis of the FCT, the foreign company must pay both corporation tax and VAT to the Vietnamese state. The Vietnamese business partner must withhold and pay the applicable tax amounts for the foreign company. Therefore, in these cases a close and precise tax-related agreement between foreign and Vietnamese companies is necessary.
However, within the framework of the FCT, special tax rates deviating from the standard will apply. The VAT rate is either:
· 5% for services within Vietnam, for construction, manufacturing or installation services that are not related to machinery and for the rental of machinery,
· 3% for logistics and transport services as well as for construction, manufacturing or installation services associated with the sale of materials, machinery and equipment,
· or 2% for other stores.
The additional corporation tax, if any, is also either
· 10% for hotel, restaurant and casino operations as well as royalties from the commercialization of copyright,
· 5% for rental of machinery and equipment, insurance and loan interest,
· 2% for other construction, manufacturing or installation services, transport services, trading in financial derivatives and aircraft leasing,
· 1% for most sales and distribution of goods, raw materials, machinery and equipment,
· or 0.1% in connection with the transfer of securities and collateral.
For contracts with different trade and service components, it may be useful to simplify tax handling by dividing the respective individual transactions into isolated contract components because of the sometimes different FCT taxation.
Exceptions to the FCT exist according to Art. 2 (2) of the Circular in a few, relatively narrowly defined cases. These include, in particular, cases where goods are delivered only to the border of either Vietnam or another country and buyers and / or sellers in each case only the liability and the risk for the delivery and the transport in their own country or up to the relevant border carry. Likewise, the FCT does not apply if services are provided and claimed entirely outside of Vietnam. Likewise, there are no recorded cases in which the business relates only to the further processing of materials in Vietnam and the subsequent return to foreign companies.
In this specific case, foreign companies should be provided with the best legal advice so as not to ignore their own tax obligations when dealing with Vietnam and, on the other hand, to design the relevant project in the most advantageous form of tax law possible.
The basic principles of tax and investment law in Vietnam, which are discussed here and in parts 3 and 5 of this series of contributions, show one thing very clearly: in the business activities of foreign companies in Vietnam, different legal areas and regulatory matters are interlinked in many different ways.
On the one hand, this does entail some risk, in that there is a danger that central aspects and even tax obligations will be overlooked. On the other hand, prudent and skillful structuring of the business activity in question also makes it possible to exploit many existing investment and tax advantages.
Written by Erik Ahrens from our partner Germela (https://www.germela.com/)
Read more: Part 5: Tax law for businesses in Vietnam