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vietnam-foreign-contractor-tax

Let’s assume your company is based in a foreign jurisdiction but provide goods and services in Vietnam. Since your enterprise is not deemed as a local business, it cannot be taxed the same way as other local companies in Vietnam. In such case, your company will be subject to Vietnam foreign contractor tax (FCT) for carrying business activities in this country.

There will be different methods to calculate and pay foreign contractor tax in Vietnam. For better understanding, BBCIncorp will provide you with a thorough guide to this kind of tax so that you have more insight into how it works in Vietnam.

1. How is Foreign Contractor Tax Defined in Vietnam?

Foreign contractor tax (FCT), is a tax imposed on overseas goods or services in Vietnam supplied by foreign business entities. The basis of this tax is regulated by Circular No. 103/2014/TT-BTC issued by the Ministry of Finance in 2014 on tax liability of foreign entities doing business in Vietnam.

Under certain circumstances, foreign contractor tax can be seen as withholding tax in Vietnam. This is because of the fact that there are 3 methods for foreign companies to pay FCT in Vietnam. And one of the methods is Vietnamese parties paying FCT on behalf of foreign companies by withholding a part of the Vietnam-sourced payment made to those foreign companies, hence “withholding tax in Vietnam”. The three methods will be further discussed later in this article.

vietnam-withholding-tax

Business entities subject to Vietnam foreign contractor tax

In general, foreign business entities that do business or earn an income within Vietnam’s territory under contracts, agreements or commitments between them and Vietnamese entities are subject to FCT. In particular, those foreign business entities can be:

  • Foreign business organizations with or without permanent establishments in Vietnam, or
  • Foreign business individuals, regardless of the fact that they are residents or non-residents in Vietnam.

Income earned under a contract between a main foreign contractor and a foreign sub-contractor to perform a part of the main contract signed by the foreign contractor and a Vietnamese entity will also be taxed on.

Furthermore, the following entities are also subject to foreign contractor tax:

  • Certain foreign entities that engage in domestic exports or specific ways of goods distribution in Vietnam;
  • Foreign entities that negotiate and sign contracts via Vietnamese entities;
  • Foreign entities that fully or partially provide goods or services in Vietnam which they fully own and take full responsibility when supplying to Vietnamese organizations;

Note:

Whether a foreign entity is a Vietnam resident or has a permanent establishment in Vietnam will be determined in accordance with the law on Corporate income tax or the law on Personal income tax.

However, in case Vietnam has signed a Double Taxation Agreement with the jurisdiction where the foreign entity is located, such agreement will be applied to determine whether that foreign entity is a Vietnam resident or has a permanent establishment in Vietnam.

Business entities not subject to Vietnam foreign contractor tax

According to Article 2 of the Circular, the followings are exempt from Vietnam FCT:

  • Foreign entities doing business in Vietnam under the law on investment, law on petroleum and law on credit institutions;
  • Foreign entities supplying goods for Vietnamese entities without providing specific ancillary services in Vietnam (namely delivery at foreign or Vietnam’s border checkpoint);
  • Foreign entities earning income from services provided and used outside of Vietnam;
  • Foreign entities providing services for fixing means of transportation or marketing, and these services are carried out outside of Vietnam;
  • Foreign entities using bonded warehouse or Inland Container Depot (ICD) as a warehouse for international transportation, goods transit or goods storage for later processing done by other businesses.

2. What Types of Taxes Are Collected When Paying Foreign Contractor Tax in Vietnam?

Foreign contractor tax is not a new separate tax in Vietnam. In fact, it includes the two tax components: Value-added tax (VAT) and income tax.

tax-collection-for-foreign-contractor-tax

Particularly, foreign individuals will pay VAT and personal income tax according to the law on Personal Income Tax in Vietnam.

As for foreign enterprises, they will have to pay VAT* along with corporate income tax (CIT)** according to the regulations in Circular No. 103/2014/TT-BTC (which will be discussed in the next section).

In case there are any other arising taxes or fees, foreign entities have to pay them according to current related laws on those taxes or fees.

*Products that are subject to VAT include:

Services or services attached to goods subject to VAT that are provided inside or outside Vietnam by foreign contractors and foreign sub-contractors (under main contracts and sub-contracts) and consumed in Vietnam.

**Income that is subject to corporate income tax (CIT) includes:

  • Income generated from the provision of goods, services or services attached to goods in Vietnam under a main contract and subcontract between a foreign company and Vietnamese entity;
  • Any other kinds of income under a main contract and subcontract between a foreign company and Vietnamese entity, regardless of that foreign company’s location (e.g. income from transfer of rights to own or use property in Vietnam, transfer of rights to taking part in project/business contracts in Vietnam, copyright, assets transfer or liquidation and loan interest)

3. Methods for Foreign Contractor Tax Calculation and Payment in Vietnam

To calculate and pay FCT in Vietnam, foreign enterprises can choose one of the given three options: declaration method, direct method (withholding tax), or mix method.

3.1 Declaration Method

Foreign entities meeting the following conditions can register for this method:

  • Having a permanent establishment in Vietnam or being a resident in Vietnam;
  • Having an operation period under contract for 183 days or more in Vietnam;
  • Adopting Vietnam’s accounting practices, registering for Vietnam tax and having tax code (TIN) issued by the local tax authority.

vat-credit-method-in-vietnam

With this method, foreign entities will be the ones that directly pay tax and the FCT is calculated as follows:

  • VAT is calculated according to the credit method regulated in the law on Vietnam VAT;
  • Corporate income tax is calculated according to the law on Corporate income tax (normally taxed at the rate of 20% on profits)

3.2 Direct Method (Vietnam Withholding tax)

This method applies to all foreign entities that fail to satisfy any of the conditions for declaration method. As aforementioned, with direct method, Vietnamese entities will be the ones that pay FCT to the local tax authority on behalf of foreign entities by withholding a part of the payment (according to fixed rates) made to those foreign entities. In this scenario, foreign contract tax is Vietnam withholding tax.

withholding-tax-in-vietnam

VAT Calculation

[Payable VAT = Revenue subject to VAT x VAT fixed rate]

Note:

Revenue that is subject to VAT is the total revenue from the provision of goods and services that foreign contractors/sub-contractors receive, without offsetting any payable tax or any costs paid by Vietnamese parties on behalf of foreign entities.

VAT fixed rates vary depending on different business activities, described as follows:

Business activitiesRates
Services, lease of machinery and equipment, construction or installation without provision of materials, machinery and equipment5%
Manufacture, transportation, services attached to goods, construction or installation with provision of materials, machinery and equipment3%
Others2%

CIT Calculation

[Payable VAT = Revenue subject to CIT x CIT fixed rate]

Note:

Revenue that is subject to CIT is the total revenue exclusive of VAT received by foreign entities without offsetting any payable tax or any costs paid by Vietnamese parties on behalf of foreign entities.

CIT fixed rates vary depending on different business activities, described as follows:

Business activitiesRates
Trading: provision and distribution of goods, materials, machinery, equipment attached or not attached to services1%
Services (excluding the two below), lease of machinery and equipment, lease of oil rig5%
Restaurant, hotels, and casinos management services10%
Financial derivatives services2%
Lease of aircraft, aircraft engines, parts of aircraft or ships2%
Construction, installation with or without provision of materials, machinery and equipment2%
Transfer of securities, deposit certificates, overseas reinsurance, commission from reinsurance0.1%
Earning income from loan interest5%
Earning income from copyright10%
Manufacture, transportation and other business activities2%

Important note: The above tax rates can change to comply with the Double Taxation Agreement signed by Vietnam and the jurisdiction where the foreign entity is located.

3.3 Mix/Hybrid method

With mix method, foreign enterprises need to register with the local authority to pay VAT according to credit method. Meanwhile, CIT will be calculated and paid according to fixed rates (similar to direct method).

hybrid-method-for-vietnam-foreign-contractor-tax

In order to qualify for this method, foreign enterprises must satisfy the following criteria:

  • Having a permanent establishment in Vietnam or being a resident in Vietnam;
  • Having an operation period under contract for 183 days or more in Vietnam;
  • Complying with Vietnam’s law on accounting and following the guidelines of the Ministry of Finance in Vietnam.

4. Key Points to Remember

  • Foreign enterprises and individuals doing business in Vietnam are subject to foreign contractor tax (with some exceptions).
  • Vietnam foreign contractor tax comprises two types of taxes: VAT and income tax.
  • Foreign individuals pay VAT and personal income tax according to the laws on personal income tax.
  • Foreign enterprises can choose among 3 methods to calculate and pay FCT in Vietnam: declaration method, direct method and mix method (subject to certain conditions).
  • With direct method, foreign contractor tax can be seen as withholding tax in Vietnam since Vietnamese parties are responsible for withholding a part of payment made to foreign enterprises and later submitting the amount to the local tax authority.

For other types of taxes in Vietnam, you can visit our blog on An overview of taxation in Vietnam.

Or should you have any questions relating to taxes in Vietnam, feel free to drop us a message! We will respond as soon as possible! BBCIncorp is always willing to help!

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