Investments in the not-so-far east Vietnam – Part 5: Tax Law for Businesses 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 5: Tax Law for Businesses in Vietnam
Vietnam’s tax legislation has often been the subject of far-reaching reforms over the past decade, specifically designed to make Vietnam attractive to investors from a tax point of view as a business location.
There are special features of corporate taxation with regard to various tax incentives for certain investments. Such incentives are provided by the Vietnamese Corporation Tax Law in the form of preferential tax rates and exemptions.
In this respect, the tax law of the emerging Southeast Asian economy is also closely linked to the recent developments in the investment law of Vietnam. Above all, current reform plans also focus on promoting small and medium-sized companies that want to gain a foothold in the Vietnamese market.
In particular, corporation tax plays a key role for foreign companies in Vietnam. This article gives an overview of the most important aspects of tax law and investment law. In particular, we are following up on the tax advantages for foreign investment in Vietnam already explained in Part 3 of this series of contributions and discussing further details of Vietnamese tax law for companies.
Corporate tax on corporate income
The legal basis for corporation tax can be found in particular in the Corporate Income Tax Act (No. 14/2008 / QH12), which came into force in 2009 and was amended with effect at the beginning of 2014, 2015 and 2016 (see Amending Laws No. 32/2013 / QH13 and 71/2014 / QH13).
Although there is often talk of a corporation tax or corporate income tax when it comes to the aforementioned tax rules. However, a closer look at the taxpayers and activities reveals that it is more a corporate and a profit tax rather than a tax specifically linked to certain types of legal entities – corporations. In principle, all organizations that produce goods and offer services or otherwise pursue business activities and thus generate income are taxable. This does not apply to natural persons, but otherwise to business-related institutions of any legal form (see Article 2 (1) and (2) (e)).
But then it is necessary to make a more detailed distinction between the different types of income or the source of the respective income. It essentially determines whether income is subject to Vietnamese corporate income tax and which tax rate applies. According to Art. 2, first of all, any income from the production of goods or the supply of services and other business activities is subject to corporation tax if that income is generated in Vietnam. Certain exceptions can be found in Article 4 of the Corporation Tax Act.
Foreign income must always be taxed by Vietnamese companies, foreign companies only if it is related to the business activity within Vietnam and the company has no permanent presence (ie no branch, no representative office and no other permanent representation or permanent establishment) in Vietnam Vietnam has.
In this regard, foreign companies that are considering undertaking business activities in Vietnam should ensure that corporation tax is applied even if no subsidiary is set up, for example, to open only a branch or representative office, as far as operational business is concerned ,
Vietnam has concluded double taxation agreements with numerous states in order to defuse the world income principle, which thus largely applies. Contracting states also include Germany, China and the USA.
Investment-friendly incentive system for corporate tax
The general corporate income tax rate has already been reduced in several steps since the 2009 Corporate Income Tax Act came into effect and currently amounts to 20%. For companies in the oil and gas sector, corporation tax is between 32% and 50%, depending on project location and specific conditions.
It also follows from Article 15 of the Vietnamese Investment Law that investment projects relating to specific sectors of the economy located in certain regions of Vietnam or having a certain size or investment volume may benefit from reduced rates. In part 3 of this series of contributions, we have already explained in detail under what material conditions an investment project can avail itself of these tax incentives.
The amount and duration of the different investment-related preferential tax rates also arise from Article 13 of the Corporation Tax Act. Moreover, temporary tax exemptions are mentioned in Art. 14. The standards mentioned contain numerous different regulations for different constellations with exceptions and redemptions. The legal situation is even more complicated because over the years various amendments to the law have had a considerable influence on Articles 13 and 14. In this specific case, an in-depth examination by a tax specialist is urgently required in order to determine the correct tax treatment of an investment project.
Basically, however, the following tax incentives are provided:
· A preferential tax rate of 10% with a term of 15 years can be used by companies especially in the areas of high-tech and software development, infrastructure expansion, companies with investment projects with difficult socio-economic conditions as well as certain major projects (see Article 13 (1) Corporation Tax Act ).
· In addition, companies without a life-cycle limit benefit from a 10% tax rate that seeks to operate in the fields of education, health, culture, sports and the environment (see Article 13 (2) Corporation Tax Act).
· An indefinite preferential tax rate of 15% applies since 2015 to agricultural projects in economically disadvantaged regions of Vietnam (see Art 13 (3a) Corporation Tax Act).
· Companies with a focus on mechanical engineering and heavy industry can now claim a preferential tax rate of 17% for a term of 15 years (see Art 13 (3) Corporation Tax Act).
· Under certain conditions, the limited-time preferential tax periods may also be extended for up to 15 years (see Art 13 (5) Corporation Tax Act). Likewise, depending on the individual case, the tax liability may be suspended for a few years or reduced by half (see Article 14 of the Corporation Tax Act).
Further benefits planned from 2019
According to the draft law, currently in the legislative process, from 2019 further favorable tax rates for small and medium-sized enterprises in Vietnam should apply. Regardless of the activity or planned location of the investment project, it is envisaged to grant a tax rate of 15% to small businesses and a 17% tax rate to mid-sized companies.
In particular, small and medium-sized companies, which currently account for around 95% of registered companies in Vietnam, should also be able to receive greater tax relief in the future. According to the Ministry of Finance, the proposed reform of the Corporation Tax Act is also aimed at not only easing the tax burden for large groups of companies with small subsidiaries, but also promoting the genuine investment propensity and economy of small and medium-sized enterprises, and further incentivising foreign direct investment from SMEs Small business sector in Vietnam.
Conclusion: entrepreneurial and investment friendly corporate tax system
On the whole, Vietnamese corporate tax law makes it particularly vivid to recognize the urge of the Vietnamese government to make the country attractive to companies. Nonetheless, due to the frequent changes in legislation and the close systematic integration of investment law and tax law, the matter remains rather confusing and difficult to handle.
However, a detailed examination of the available tax benefits and a corresponding corporate and operational structuring of an investment project in Vietnam, especially foreign investors can benefit greatly from Vietnamese tax law for companies.
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Written by Erik Ahrens from our partner Germela (https://www.germela.com/)