Withholding Tax in Vietnam

Foreign Contractor Withholding Tax (‘FCWT’) applies to payments of interest, royalties, licence fees, foreign contractors’ fees, cross-border leases, insurance/reinsurance, airline and express delivery charges to a foreign entity.

FCWT includes a value-added tax (’VAT’) element and a CIT element and generally applies to payments derived from Vietnam. Pure supply of goods, services performed and consumed outside Vietnam, and various other services performed wholly outside Vietnam (e.g. certain repairs, training, advertising, promotion etc.) are exempt from FCWT.

Dividends

No withholding or remittance tax is imposed on profits paid to foreign corporate shareholders.

Interest

An interest withholding tax of 5% applies to interest paid on loans from foreign entities. Offshore loans provided by certain Government or semi-government institutions may be eligible for an exemption from the interest withholding tax where a relevant DTA or inter-governmental agreement applies.

Interest earned from bonds (except for tax-exempt bonds) and certificates of deposit are subject to 5% withholding tax. Sales of bonds and certificates of deposit are subject to deemed tax rate of 0.1% of the gross sale proceeds.

Royalties, licence fees, etc.

A 10% royalty withholding tax applies to payments made to a foreign party for transfers of technology, which is a very broadly defined category.

Freight & transportation services

Foreign entities performing outbound  transportation services are subject to FCWT.

Payments to foreign contractors

FCWT applies to payments to foreign contractors where a Vietnamese contracting party (including foreign-owned enterprises) contracts with a foreign party that does not have a licensed presence in Vietnam.

Foreign contractors can choose between three methods for FCWT, which are as follows:

Method One
– Deduction/Declaration Method

Foreign contractors can register for VAT and follow the conventional VAT deduction method, provided they meet the requirements below

•  they have a permanent establishment (’PE’) or are tax resident in Vietnam

•  the duration of the project in Vietnam is more than 182 days; and

•  they adopt the full Vietnamese Accounting System (’VAS’).

If the foreign contractor carries out many projects, and applies the deduction method for one project, the contractor is required to apply the same  method for all other concurrent projects.

The foreign contractor will pay CIT at 25% on its net profits.

Method Two – Direct Method

Under the direct (or withholding) method foreign contractors do not register for VAT. VAT and CIT will be withheld by the Vietnamese contracting party at deemed percentages of the taxable turnover. Various rates are specified according to the nature of the services performed.

The VAT withheld by the Vietnamese contracting party is generally an allowable input credit in the Vietnamese contracting party’s VAT return.

Method Three – Hybrid Method

The hybrid method allows foreign contractors to register for VAT and accordingly pay VAT based on the conventional method (i.e. output VAT less input VAT), but with CIT continuing to be subject to the deemed rates (opposite).

Foreign contractors wishing to adopt the hybrid method must:

•  Have a PE in Vietnam or be tax resident in Vietnam;

•  Operate in Vietnam under a contract with a term for more than 182 days; and

•  Maintain accounting records in accordance with the accounting regulations and guidance of the Ministry of Finance.

The FCWT includes VAT and CIT rates are summarised below:

   ^* Provided that import VAT is paid

 ^** VAT may apply to interest on loans from foreign lenders which are not credit institutions

***Certain types of insurance are exempt from VAT (e.g. life insurance)