Vietnam Foreign Contractor Tax: What Is It And How To Pay?

Let’s assume you’re running a company in a foreign jurisdiction but providing goods and services in Vietnam. Since your company is not a Vietnam local business, your company will likely be subject to Vietnam foreign contractor tax (FCT) for carrying out business activities in this country.

There are several methods to calculate and pay foreign contractor tax in Vietnam. For a better understanding, let’s walk you through a comprehensive overview in today’s article.

What is Foreign Contractor Tax in Vietnam?

Vietnam Foreign Contractor Tax (FCT) is a tax imposed on foreign companies that supply services or goods in this country. Generally, foreign contractor tax is regulated by Circular No. 103/2014/TT-BTC issued by the Vietnam Ministry of Finance in 2014.

In some cases, you can pay foreign contractor tax in the form of withholding tax in Vietnam. This is because there are 3 methods to pay FCT in Vietnam.

One of the methods is for Vietnamese parties to pay FCT on your behalf, by withholding a part of the Vietnam-sourced payment made to your foreign companies, hence “withholding tax in Vietnam”. The three methods will be further discussed in this article.

Business entities subject to Vietnam FCT

In general, if you’re a foreign entity that runs a business or earns an income within Vietnam’s territory, you will be subject to Vietnam foreign contract tax.

Specifically, a foreign entity in Vietnam includes:

• Foreign business organizations with or without permanent establishments in Vietnam, or
• Foreign business individuals, even though they are residents or non-residents in Vietnam.

Moreover, if you perform a part of the contract signed by other foreign contractors and a Vietnam entity, your income will also be subject to FCT.

Furthermore, your foreign entities are also subject to FCT if it:

• Engages in domestic exports or specific ways of goods distribution in Vietnam
• Negotiates and signs contracts via Vietnamese entities
• Fully or partially provides goods or services in Vietnam

Business entities not subject to Vietnam FCT

According to Article 2 of the Circular, your business is exempt from Vietnam FCT if it:

• Operates in Vietnam under the law on investment, the law on petroleum, and the law on credit institutions
• Supplies goods for Vietnamese entities without providing specific ancillary services in Vietnam (namely delivery at foreign or Vietnam’s border checkpoint)
• Earns income from services provided and used outside of Vietnam
• Provides services for fixing means of transportation or marketing, and these services are carried out outside of Vietnam
• Uses a 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

What types of taxes are collected when paying Foreign Contractor Tax in Vietnam?

Foreign contractor tax is not a new separate tax in Vietnam. It includes two tax components: Value-added tax (VAT) and Income tax.

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

As a foreign enterprise, you 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, you’ll 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 is 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 a 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)

What are the 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.

Declaration method

In summary, you can register for this method if your foreign entities meet the following conditions:

• Having a permanent establishment in Vietnam or being a resident of 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 a tax code (TIN) issued by the local tax authority

With this method, your 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)

Direct method (Vietnam Withholding tax)

If your foreign entities fail to satisfy any of the conditions for the declaration method, you can apply the direct method instead.

Specifically, Vietnamese entities will pay FCT to the local tax authority on your behalf, by withholding a part of the payment (according to fixed rates) made to your foreign entities. In this scenario, foreign contract tax is Vietnam withholding tax.

VAT calculation

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

To summarize, the VAT fixed rates vary depending on different business activities as follows:

• For services, lease of machinery and equipment, construction or installation without provision of materials, machinery, and equipment, the tax rates will be at 5%.
• For manufacture, transportation, services attached to goods, construction, or installation with the provision of materials, machinery, and equipment, the tax rate will be at 3%.
• For other business activities, the tax rates will be at 2%.

CIT calculation

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

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

• Trading: provision and distribution of goods, materials, machinery, equipment attached or not attached to services: 1%
• Services (excluding the two below), lease of machinery and equipment, lease of oil rig: 5%
• Restaurant, hotels, and casinos management services: 10%
• Financial derivatives services: 2%
• Lease of aircraft, aircraft engines, parts of aircraft or ships: 2%
• Construction, installation with or without provision of materials, machinery, and equipment: 2%
• Transfer of securities, deposit certificates, overseas reinsurance, a commission from reinsurance: 0.1%
• Earning income from loan interest: 5%
• Earning income from copyright: 10%
• Manufacture, transportation, and other business activities: 2%

Mix/ Hybrid method

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

To qualify for this method, your foreign enterprises must satisfy the following criteria:

• Having a permanent establishment in Vietnam or being a resident of 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

Key points to remember

In case you have any questions relating to taxes in Vietnam, feel free to drop a message via service@bbcincorp.com and get in touch with our team through the chatbox for practical advice!

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