capital assignment tax vietnam

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The legal framework of Vietnamese taxation policies is shaped mainly by the Law on Corporate Income Tax 2008 (last amended in 2020), Law on Personal Income Tax 2007 (last amended in 2014), the Law on Value Added Tax (last amended in 2016), the Law on Tax Administration 2019 and many other tax laws and guidelines issued by the Ministry of Finance, General Department of Taxation, and by local tax authorities. 

On February 9, 2022, Vietnam became a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which, upon entering into force for Vietnam, will amend several of Vietnam’s tax treaties to be consistent with the scope of implementation of the MLI. At the time of writing, Vietnam has not deposited its instrument of ratification, acceptance or approval.

In this chapter

Legal system, taxation authorities, business vehicles, financing a corporate subsidiary, corporate income tax, cross-border payments, payroll taxes, indirect taxes, other relevant taxes.

Vietnam operates under a civil law system. The Vietnamese legal system is often considered to be a continental European legal system, with written law or legal normative documents being the main sources of law. In Vietnam, the laws of the National Assembly, decrees of the government, and Minister circulars are the most important normative legal documents.

Tax policies of Vietnam are implemented by the Ministry of Finance and its affiliated authorities nationwide, with the most important authority being the General Department of Taxation. Vietnam’s local tax authority system includes the Provincial Tax Departments and District-level Tax Departments. Most tax administration matters are managed by the Provincial Tax Departments or District-level Tax Departments, which are the managing tax authorities of taxpayers. Since Vietnam currently has 63 provinces and central cities, with different tax authorities for each province and central city, there may be, in practice, inconsistencies in the interpretation, guidance and implementation of tax laws and regulations among different tax offices.

Taxpayers can seek private tax rulings (i.e. tax official letters) from tax authorities regarding their tax liabilities. In principle, the private tax rulings are not applicable or bound to all taxpayers as they are not statutory legal documents. However, these official letters play an important role in guiding and clarifying tax obligations of particular taxpayers which help them to avoid the risks of arrears, administrative fines, and late payment interest. Under the prevailing tax administration law, taxpayers will not be subject to penalties and overdue interest in cases where they assess and declare their tax obligations in accordance with the tax rulings issued to them.

Foreign investors can choose from various options to conduct business in Vietnam, including establishing a commercial presence (i.e., a company, a representative office, or a branch), and/or investing through contractual arrangement in the form of a Business Cooperation Contract or Public and Private Partnership Contracts.

There are three types of companies for foreign invested enterprises:

Limited Liability Company (LLC)

An LLC can be established by one member (being an individual or organization), which is known as a single-member LLC (SMLLC); or it can be established by two or more members, but not exceeding fifty, which is known as a multi-member LLC (MMLLC). For LLCs, the liabilities of its members are limited to the charter capital (for SMLLCs) or their portion of contributed capital (for MMLLCs). Under the Vietnam Law on Enterprises 2020, SMLLCs and MMLLCs cannot issue shares, but can issue bonds.

Joint Stock Company (JSC)

A JSC, which is also known as a shareholding company, is established by having at least three shareholders (who may be individuals and/or organizations). There is no restriction on the maximum number of shareholders a JSC may have. JSCs are similar to LLCs in terms of limited liability as shareholders of a JSC are only responsible for the debts and liabilities of the JSC to the extent of their portion of shares. In accordance with Vietnamese Law on Enterprises 2020, JSCs are permitted to issue shares, bonds and other kinds of securities.

Partnership Company

A partnership is a company set up by at least two individual partners who assume unlimited liability for the partnership’s debts and liabilities (these partners are called “unlimited liability members”). In addition to unlimited liability members, investors can also join as “limited liability members” who are only responsible for the partnership’s debts and liabilities to the extent of their contributions to the company’s charter capital. Compared to LLCs and JSCs above, partnerships are a less common type of business vehicle for foreign investors.

Representative office

Representative offices set up by foreign entities are only allowed to conduct market research, act as a liaison office and undertake promotion activities for the business of its parent company. Under Vietnamese laws, representative offices of foreign investors are not allowed to engage in activities that generate revenue or enter into contracts. Foreign investors may choose to establish a representative office in Vietnam as an initial step to gain a better understanding of the Vietnamese market before committing to a more substantial business presence in Vietnam.

For foreign investors, establishing a branch in Vietnam is less common than establishing a representative office and, in accordance with Vietnam’s World Trade Organization commitments, is only permitted in a few sectors. Branches of foreign companies are different from representative offices in that branches are permitted to conduct commercial activities and generate revenue in Vietnam from the provision of services.

Contractual arrangements

Business cooperation contract (bcc).

If foreign investors wish to implement an investment project in Vietnam without establishing a new legal entity, they can choose to enter into a BCC with at least one Vietnamese partner. During the implementation of the BCC, parties to the BCC can mutually agree on the allocation of liabilities incurred and the sharing of revenue, products or after-tax profits arising from such BCC. As a common practice in Vietnam, investment under a BCC is usually applied in the fields of telecommunications, oil and gas and real estate.

Public-Private Partnership (PPP)

A PPP is a form of investment on the basis of a contract between an investor and a Vietnamese competent State authority to execute, operate and manage an infrastructure development project or to provide public services to the extent required by law. Types of PPP contracts include Build-Operate-Transfer (BOT), Build-Transfer (BT), Build-Transfer-Operate (BTO), Build-Own-Operate (BOO), Build-Transfer-Lease (BTL), Build -Lease-Transfer (BLT) and Operate-Manage (O&M) Contracts.

Debt financing

Under Vietnamese tax laws, interest on debt is generally a deductible expense for corporate income tax (CIT) purposes.

However, Vietnamese tax regulations also provide certain restrictions on the deductibility of interest expense for CIT purposes, such as in the case of related party debt transactions. Specifically, Vietnam tax regulations provide that, in respect of a related party debt transaction, the amount of interest expense (after being offset with deposit interest and loan interest incurred in the relevant tax period) that is deductible for CIT purposes shall not exceed 30% of EBITDA. Moreover, as a matter of practice and for loan transactions with related parties, relevant interest expenses can also be challenged by tax authorities and treated as non-deductible for CIT purposes if such tax authorities deem that the relevant interest rate is not within the arm’s length range, when compared to the interest rates of commercial banks announced by the State Bank of Vietnam. Current regulations do not provide restrictions regarding debt-to-equity ratio.

Interest expenses incurred that correspond to the portion of charter capital that has not been contributed in accordance with the relevant registered schedule, are treated as non-deductible. Moreover, offshore loans that are subject to the requirement of registration with the State Bank of Vietnam must be properly registered/notified to the State Bank of Vietnam in order for interest expenses related to those offshore loans to be deductible for CIT purposes.

Notwithstanding the above, interest is not deductible for CIT purposes if the rate of interest exceeds 150% of the prime lending rate quoted by the State Bank of Vietnam as at the borrowing date.

Equity financing

Equity of a corporate vehicle in Vietnam may be financed by investors by way of contributing capital to establish a new enterprise or by injecting capital or buying capital portions/shares in an existing enterprise. In the case of a capital increase through the issuance of additional shares and acceptance of new investors/contributors, surplus equity may result from new contributors who acquire their equity portion by paying a higher price than the par value of the shares (for JSCs) or a higher price than the price paid by existing investors (for LLCs). In such a case, such surplus equity shall not be seen as taxable income for CIT or VAT calculation purposes; however, there is one uncommon exception in respect of LLCs, based on one official guidance from the General Department of Taxation, where investors must declare and pay income tax on any equity surplus that arises in respect of the raising of equity and acceptance of new contributors where all investors agree that such equity surplus belongs to such investors.

Corporate Income Tax (CIT) computation

Enterprises established under the laws of Vietnam are subject to CIT imposed on their worldwide income. CIT payable is determined based on taxable income and the CIT rate. Taxable income is equivalent to turnover minus deductible expenses, exempted income and loss carried-forward from previous periods plus other taxable income (including income derived overseas).

The standard CIT rate is 20%. Preferential CIT rates may apply to enterprises entitled to certain CIT incentives.

Expenses are deductible for CIT calculation purposes if those expenses are: (i) actually incurred and related to the business activities of the enterprises; (ii) supported by legitimate invoices and supporting documents in accordance with regulations; (iii) supported by the non-cash payment voucher if the amount is VND20 million or above; and (iv) not prescribed on the list of non-deductible expenses under current tax regulations (e.g., staff welfare expenses exceeding statutory cap; depreciation expenses not in accordance with tax regulations; and expenses that are not matched with taxable income).

Losses incurred in a financial year may be carried forward for a maximum of five years. However, losses are not allowed to be carried back to be offset against profits in earlier tax years. Moreover, Vietnam provides no tax grouping regime; losses cannot be offset between companies within the same group of companies.

Capital Assignment Tax (CAT)

Pursuant to current Vietnamese CIT regulations, gains derived by a foreign entity from the assignment or transfer of capital or shares in a Vietnamese LLC or JSC shall be subjected to CAT at the rate of 20%.

The gain (or the taxable income) from capital assignment is determined as follows:

Taxable income = Assignment/transfer price – Purchase price of the transferred capital – Assignment/transfer expenses

Where both the transferor and transferee are foreign residents, the Vietnamese company that has capital to be transferred shall be responsible for declaring and paying the CAT to the local tax authority on behalf of the foreign transferor.

The statutory deadline for the CAT declaration and CAT payment are both within ten days from the date the tax liability arose.

Although current Vietnam tax regulations provide no clear guidance on the CAT implications related to indirect capital transfers (i.e., capital transfer related to a multi-tiered holding structure where offshore holding companies directly or indirectly assign their capital or shares, which may affect its indirect ownership of capital or shares and/or assets in Vietnamese subsidiaries), the General Department of Taxation and some local tax authorities are of the view that CAT shall be imposed on such offshore indirect transfers by applying the same tax mechanism as a direct capital transfer to determine CAT liabilities and declaration obligations.

Transfer pricing

Transfer pricing (TP) rules have been implemented in Vietnam for over 15 years and have become a sector of high tax risk in Vietnam recently. Vietnamese TP rules are broadly based on the OECD Transfer Pricing Guidelines which require contemporaneous documentation for transactions between related parties.

Transfer Pricing rules apply to both domestic and cross-border transactions. A related party relationship is deemed to exist where:

• One party is directly or indirectly involved in the administration, control, capital contribution or investment in any form of the other party; or
• Both parties are directly or indirectly managed or controlled by a third party or both parties make capital contributions or invest in any form in a third party.

Local corporate taxpayers that have transactions with related parties are required to comply with TP compliance and TP documents. TP compliance includes preparation of TP forms for submitting to the tax authorities on an annual basis. The documents generally include standard forms and local files, master files and country–by-country reports.

A TP audit may be conducted separately or along with a general tax audit by the tax authorities. Any TP reassessments made by the tax authorities after the audit will subject relevant taxpayers to tax reassessment and penalties.

Withholding tax (Foreign Contractor Tax)

Withholding tax is levied in the form of the Foreign Contractor Tax (FCT), which includes a CIT element and a VAT element that might be imposed on foreign organizations’ income arising in Vietnam with or without a permanent establishment in Vietnam (Foreign Contractors).

In terms of tax computation, there are three methods, including: (i) the direct method; (ii) the deduction method; and (iii) the hybrid method. The direct method is the most common method and provides that the Vietnamese contracting party shall withhold, declare and pay FCT (which is determined based on CIT and VAT taxable revenues and the respective deemed CIT and VAT ratios) where such Vietnamese contracting party makes a payment to a Foreign Contractor. Depending on the nature of goods and services provided by the Foreign Contractors, deemed CIT and VAT ratios for FCT purposes vary, ranging from 0.1% to 10% for CIT purposes and from 2% to 5% for VAT purposes. On the other hand, if a Foreign Contractor satisfies certain requirements, it is allowed to use the deduction method and declare and pay the CIT and VAT elements in a similar manner as a Vietnamese taxpayer. Under the hybrid method, a Foreign Contractor that meets the requirements for the hybrid method to apply declares and pays the CIT element based on the direct method and the VAT element based on the deduction method.

Multilateral Instrument

International tax reform.

As of December 16, 2022, Vietnam, along with 137 other countries, committed to a two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalization” project. As a part of this plan, Pillar Two introduces rules that establish a global minimum effective corporate tax rate of 15% for large multinational enterprises whereas Pillar One covers the allocation of taxing rights over large multinationals to jurisdictions where profits are generated.

To date, Vietnam has not yet officially enacted any laws or adopted any amendment to its domestic legislation for the implementation of such measures. However, recently, the National Assembly and the Government of Vietnam made steps toward the rollout a global corporate minimum tax rate under Pillar Two.

Specifically, in 2022, pursuant to Decision No. 55/QĐ-TTg, the Prime Minister established the Prime Minister’s Special Working Group on research and proposals for solutions legislation relating to the OECD's global minimum tax rate; and on April 14, 2023, Vice Prime Minister Le Minh Khai signed Decision No.22/QĐ-TCTĐB on the issuance of the establishment and operation of such Special Working Group.

Additionally, on April 17, 2023, the Standing Finance Committee of the National Assembly had a meeting with the Ministry of Finance on the progress of the enactment of laws on taxation. Following such meeting, in Document No. 2186/TB-TTKQH, the Secretary-General of the National Assembly announced the conclusion of the Standing Committee of the National Assembly on the tentative agenda of law enactment in 2024 in which the Government was urgently requested to focus on researching and addressing the content related to the application of the global minimum tax to propose amendments and supplements to the Law on Corporate Income Tax, ensuring timely implementation for the corporate income tax period in 2024.

Personal Income Tax (PIT)

According to the withholding mechanism that Vietnam applies, enterprises are required to withhold, declare and pay PIT liabilities on the wages and salaries that they pay to their employees or non-employee individuals.

PIT is imposed based on tax residency status. For employment income, Vietnam tax residents are subject to PIT on their worldwide income at progressive tax rates ranging from 5% to 35%; whereas, non-residents are subject to a flat rate of 20% on their Vietnam-sourced income.

IFor tax residents, employment income assessable for PIT purposes can be reduced by way of certain tax relief measures and deductions, such as personal and dependent relief, compulsory insurance contribution, voluntary pension fund, and contributions to certain charitable, humanitarian, and educational promotion funds.

For non-residents, employment income received in respect of work performed in Vietnam, regardless of the source of the income, is assessable for PIT purposes without any reduction for tax relief measures or deductions.

Value-added tax (VAT)

VAT is imposed on goods and services used for the purpose of manufacturing, trading or consumption within Vietnam, except where a VAT exemption applies.

There are applicable VAT rates that apply depending on the nature of the goods and services:

• 0% VAT rate applies to export goods and services, international transportation and goods and services exempted from VAT when being exported, except for (i) technology transfers, transfer of intellectual property abroad; (ii) reinsurance abroad; (iii) credit services abroad; (iv) capital transfer abroad; (v) derivative financial services; (vi) telecommunications and postal services; (vii) products being resources or minerals that are not processed into other products; (viii) products, which are processed from resources and minerals, in which the total value of resources, minerals and energy cost account for 51% or more of such products.
• 5% VAT rate applies to essential goods and services for public welfare and other industries such as education, health, agriculture, science and technology;
• 10% VAT rate applies to all goods and services not subject to the tax rate of 0% or 5%.

Land use tax

Land use tax or real estate tax applies to the land value of non-agricultural land used for residential or business purposes. Tax rates range from 0.03% to 0.15%.

Business license fee (BLF)

BLF is a tax that ranges from VND1 million to VND3 million per year and is calculated on the registered charter capital of an enterprise. If the total charter or investment capital of an enterprise is more than VND10 billion, then the highest BLF level of VND3 million per year shall be applied.

Customs duties

Customs duties refers to import duty and export duty which are levied on exported and imported goods.

Import duty is assessed on an ad valorem (on value) basis. Import duties fall into three categories: ordinary rates, preferential rates, and special preferential rates.

Preferential rates are applicable to imported goods from countries that have the "Most Favored Nation" (MFN) status with Vietnam. As Vietnam is a member of the WTO, the MFN rates are in accordance with WTO rules and are applicable to goods imported from other WTO members.

Special preferential tariffs apply to goods imported from countries that have a special preferential agreement with Vietnam, such as the ASEAN Trade in Goods Agreement (ATIGA), ASEAN Free Trade Agreement (AFTA) and agreements between ASEAN and South Korea, Japan, Australia, New Zealand and China.

Export duties are imposed on only a few items which consist mainly of natural resources such as minerals, forestry products and scrap metal. Export duty rates range from 0% to 40%

Excise tax applies to the production, import and trading of certain luxury goods and services or goods and services that are discouraged for consumption in Vietnam. Products subject to excise tax include tobacco and cigarettes, wine, beer, automobiles having less than 24 seats, motorcycles with a cylinder capacity above 125cm 3 , airplanes, boats, petrol of all kinds, air-conditioners (having not more than 90,000 BTU), playing cards, and votive paper. Services that are subject to excise tax include discotheques, massages, karaoke, casinos, video games with prizes including jackpot games, slots and the like, entertainment with betting, golf (including membership card sales), golf tickets, and lotteries.

The aforementioned goods shall not be subject to excise tax if such goods fall into one of the exceptions prescribed by law.

Tax rates range from 10% to 150% for goods and from 15% to 40% for services.

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Important Notice

Understanding Vietnam Tax System (2024 Update)

• Corporate income tax
• Foreign Contractor Withholding Tax (FCWT)
• Value-added tax (VAT)
• Special Sale Tax (SST)
• Import and export duties
• Vietnam Personal Income Taxes (PIT)
• Capital Assignment Profits Tax (CAPT)
• Property taxes
• Natural resources tax (NRT)
• Environment protection tax (EPT)
• Transfer pricing in Vietnam
• Double Taxation Agreements (DTAs)

When starting a business in Vietnam, it’s crucial to grasp the intricacies of the country’s tax system, as it can significantly influence your business operations.

This article is designed to offer valuable insights to assist you in navigating Vietnam’s dynamic business environment more efficiently.

Overview of Vietnam tax system

The Vietnam Tax System encompasses a range of taxes that most companies and foreign investors operating in the country are obligated to comply with.

The major taxes in Vietnam consist of the following types:

• Foreign Contractor Withholding Tax
• Capital Assignment Profits Tax
• Value-added tax
• Special Sale Tax
• Natural resources tax
• Environment protection tax
• Vietnam Personal Income Taxes

To help you understand Vietnam’s tax system better, we will go into detail about each of the categories below.

In Vietnam, Corporate Income Tax (CIT) is a mandatory tax applied to the earnings of companies and businesses operating within the country.

The standard corporate income tax rate in Vietnam is 20%, which applies to the majority of businesses.

However, there are certain situations in which tax rates can vary, either higher or lower, depending on specific industries and sectors.

For example, industries like oil, gas, and other extractive sectors may be subject to tax rates ranging from 32% to 50%.

For small and medium-sized enterprises (SMEs), there are opportunities for preferential or reduced tax rates in various industries, including:

High-tech and software development

• Environmental protection
• Scientific research
• Agricultural and aquatic product processing
• Renewable energy
• Infrastructure development

These industries may qualify for special tax rates and incentives, making them attractive options for investment and business development in Vietnam.

CIT calculation formula

The calculation of CIT involves 3 steps below:

Step 1: Determine taxable income

Start by calculating your company’s taxable income, which is based on the profit earned during the tax period (usually a fiscal year). The formula is as follows:

Taxable Income = Total revenue – Deductible expenses – Deductions

• Total revenue includes all income generated by the business, such as sales revenue, interest income, rental income, and other forms of revenue.
• Deductible expenses are legitimate business expenses that can be deducted from the total revenue. Common allowable expenses include costs related to production, salaries and wages, rent, utilities, and depreciation.
• Deductions your business may qualify for based on specific industries, regions, or projects.

Step 2: Determine applicable tax rate

The standard corporate income tax rate in Vietnam is typically 20%. However, as mentioned earlier, certain enterprises may be eligible for lower tax rates or tax incentives based on government policies and industry type.

Step 3: Calculate the tax liability

To calculate the CIT liability, you can use the formula as follows:

CIT liability = Applicable tax rate x Taxable Income

FCWT applies to foreign organizations or individuals who operate a business or earn income in Vietnam based on a contract or an agreement with a Vietnamese party (as a main foreign contractor) or another foreign contractor to implement a part of the contractual scope of works (a foreign subcontractor).

Vietnam Foreign Contractor Tax comprises both Corporate Income Tax (CIT) and Value Added Tax (VAT), but in some cases, may also include Profits Income Tax.

Scope of application

FCWT applies to a broad range of income types, including various financial transactions and business activities. These income categories subject to FCWT in Vietnam include:

• Services : This includes income generated from services provided or consumed within Vietnam.
• Goods : FCWT is applicable to income derived from the supply of goods that may be accompanied by related services or when the delivery point for goods is within Vietnam.
• Construction and Installation
• Penalty/ Compensation
• Income from transportation activities
• Securities transfer

FCWT declaration methods

There are three methods for the FCWT declaration including the Deemed method, Hybrid method, and Declaration method.

• Deemed or direct method : This is the most commonly used method for FCWT declaration. Under this method, FCWT is withheld at the source by the Vietnamese entity making payments to foreign contractors at prescribed rates. Importantly, this method does not require any specific conditions to be met by the foreign recipient of the income.
• Declaration method : To utilize this method, foreign organizations are required to register for VAT in Vietnam and follow the same VAT and CIT filing procedures as local businesses. Essentially, foreign organizations are treated similarly to domestic ones in terms of tax compliance.
• Hybrid method : The hybrid method allows foreign organizations to register for VAT in Vietnam and adhere to the same VAT filing procedures as local entities. However, for CIT purposes, they calculate and pay taxes based on the Deemed Method rates, which are determined by gross turnover.

The Hybrid method and Declaration method require foreign contractors to satisfy the following conditions:

• Maintaining a contract duration of 183 days or more
• Having a Permanent Establishment (PE) in Vietnam, (e.g a Project Office) and
• Applying the Vietnamese Accounting System

Double Taxation Agreements (DTAs) effect on FCWT

DTAs can significantly influence the application of FCWT. In cases where a foreign contractor’s income originates from a country that has a DTA with Vietnam and the contractor does not have a Permanent Establishment (PE) in Vietnam, it may be possible to avoid income tax.

In simpler terms, DTAs play a crucial role in preventing double taxation through two main mechanisms: tax exemption or reduction and the availability of foreign tax credits. Up to the present time, Vietnam has established nearly 80 DTAs with numerous trading partners, further enhancing its tax treaty network.

Value-Added Tax (VAT) in Vietnam is a consumption tax that is imposed on the value added to goods and services at each stage of their production or distribution. VAT is a significant source of revenue for the Vietnamese government and is applied to a wide range of goods and services.

VAT is imposed on both domestically produced and imported goods and services, irrespective of whether they are intended for production, trade, consumption, or any other purpose. The tax rates vary depending on the type of goods or services:

• Exported goods and services and international transportation are zero-rated (subject to 0% VAT)
• Essential goods and services, as well as specific categories of goods and services as defined by regulations, are taxed at a 5% VAT rate.
• For Standard rate for goods and services: 10%
• The standard VAT rate for most goods and services is set at 10%.
• Certain goods and services, as specified by relevant regulations, are exempted from VAT entirely.

Zero-rated vs VAT-exempted goods and services

In Vietnam, there are distinctions between zero-rated goods and services and those that are exempt from VAT.

• Zero-rated goods and services are not subject to VAT when they are sold to customers. Businesses that deal with zero-rated goods and services can claim a credit for the VAT they have paid on their inputs from the government (e.g., purchases, expenses, and costs related to producing these goods and services).
• VAT-exempted goods and services : Similar to zero-rated items, the government does not impose VAT on the sale of exempt goods and services. However, the key difference is that businesses cannot offset the VAT they paid on inputs against their VAT liability.

VAT calculation methods

There are two calculation methods:

• Deduction method : applicable to business establishments maintaining accounts, invoices, and documents in accordance.
• Direct method : applies to business establishments with annual revenue subject to VAT of less than VND1 billion; individuals or business households; businesses engaging in gold, silver, and precious stones trading.

SST applies to the manufacturing or import of certain goods and the provision of certain services.

Tax credits

Whereas a good is subject to SST and is manufactured with raw materials that were also subject to SST, the manufacturer can claim credit for the SST on those raw materials. The same goes for importation where the taxpayer has to pay for SST on both the selling price and importation.

Tax rate and Applicable goods and services

Please note that a reduction in the excise tax on electric vehicles was enacted by the National Assembly in March. The tax rate on battery-powered electric cars with 9 seats or less will be 3% from March 1, 2022, to February 28, 2027 (reduced from 15% rate).

Tax rates will increase to 11% after March 2027.

Import and export duties are taxes imposed by the Vietnamese government on the importation and exportation of goods between the domestic market and non-tariff zones.

Certain items are exempted from the standard import/export duty regulations, including:

• Goods in transit : Goods passing through Vietnam en route to another destination without being intended for domestic consumption are exempt from import/export duties.
• Items exported from non-tariff zones to foreign countries : When products are sent from non-tariff zones in Vietnam to foreign countries, they are not subject to standard import/export duties.
• Goods imported into non-tariff areas for exclusive use : Items brought into non-tariff zones from foreign nations for exclusive use within those zones are not subjected to import/export duties.
• Items transferred between non-tariff zones : Goods moved between different non-tariff zones within Vietnam are exempt from standard import/export duty regulations.

Import duties

Import duties in Vietnam refer to the taxes and fees imposed by the Vietnamese government on goods and products that are imported into the country. These import duties comprise various types of fees, including customs duties, value-added tax (VAT), and special consumption tax (SCT).

The rates of import duties can vary based on the nature of the product, its value, and its origin sources (whether it’s from a country with which Vietnam has a free trade agreement or not). Import duty rates in Vietnam are categorized into three main groups

• Ordinary rates : Applicable to goods not eligible for preferential or special preferential rates.
• Preferential rates : Applicable to goods originating from countries that have a most-favored-nation (MFN) status with Vietnam.
• Special preferential rates : Applicable to goods imported from countries that have entered into a free trade agreement (FTA) with Vietnam.

Export duties

Most goods and services intended for export from Vietnam are exempt from taxes. Export duties are imposed on a limited set of items and can range from zero percent to 45 percent. These duties are calculated based on the free-on-board (FOB) price of the goods.

Export duties are primarily levied on natural resources, including minerals, forest products, and scrap metal. Most other export items are not subject to export duties, but it’s essential for businesses engaged in international trade to verify the specific regulations and exemptions relevant to their products.

Vietnam Personal Income Tax (PIT) is a tax imposed on the income earned by individuals and entities in Vietnam.

Tax residency

Tax residency determines who is subject to PIT in Vietnam. If you are a tax resident, you are obligated to pay PIT on your worldwide income. On the other hand, non-tax residents are only taxed on the income they earn within Vietnam.

An individual is considered a tax resident if they meet one of the following conditions:

• They have lived in Vietnam for at least 183 days during a 12-month period; or
• They have a permanent establishment or a significant presence in the country for tax purposes.

In Vietnam, the tax year coincides with the calendar year, running from January 1st to December 31st. However, for individuals who spend less than 183 days in Vietnam during a given year, their tax year will extend for 12 months from the date of their arrival in the country.

Tax rates on employment income

Tax rates for employment income in Vietnam differ based on residency status and income type.

For tax residents, the PIT follows a progressive scale, ranging from 5% to 35% . As one’s employment income increases, the tax rates also increase accordingly. Business income, on the other hand, is subject to varying tax rates based on the specific type of income.

Non-tax residents, however, face a flat rate of 20% on their employment income, with different rates applying to various categories of business income.

Taxable employment income includes all forms of compensation and benefits, except for expenses related to business trips, telephone charges, stationery costs, office attire, overtime premiums, and similar items.

Non-employment income subject to taxation comprises business income, investment income, proceeds from the sale of shares, gains from real estate transactions, and similar sources of income.

Non-taxable Income

Non-taxable income includes but is not limited to the following:

• Interest income comes from credit institutions or banks, compensation from life, or non-life insurance policies
• Retirement pensions from Social Insurance Law (or equivalent)
• Income from direct family members as properties, inheritances, gifts
• And so forth.

CAPT is not a standalone tax; it is a portion of the corporate income tax that results from the sale of shares in a Vietnamese company. It represents the profit generated from these share sales.

CAPT is calculated by subtracting the associated costs and transfer expenses from the profit obtained through the sale of shares.

Foreign entities involved in the transfer of securities, such as bonds or shares in a listed joint-stock company, may be subject to a specific tax rate of 0.1%. This rate is applied to the entire sales proceeds of these securities.

Property tax in Vietnam is a type of tax imposed on individuals or organizations who own real estate properties, including land and buildings. This tax is applicable to both Vietnamese citizens and foreigners who own properties in the country.

The rules governing property tax are consistent for both Vietnamese and foreign property owners, and it is collected by local authorities in accordance with the Land Law and other relevant Vietnamese regulations.

Here are some key points about property tax in Vietnam:

• Taxable properties : Property tax covers various types of real estate, such as residential houses, apartments, commercial buildings, agricultural land, and non-agricultural land.
• Taxpayer responsibility : Property owners are responsible for paying property tax to local tax authorities. It is essential for property owners to register properties and meet tax obligations.
• Tax rate : Property tax rates in Vietnam can vary based on factors like the property’s location, type, and intended use. Local government authorities determine these rates, and they may change over time. Generally, residential properties tend to have lower tax rates compared to commercial or industrial properties.

Natural resources tax (NRT) in Vietnam is imposed on industries that exploit and utilize the country’s natural resources. It is applied to various sectors and activities involving the extraction or utilization of natural resources, including but not limited to petroleum, minerals, natural gas, forestry products, and natural water.

The tax rates for NRT vary depending on the type of natural resource being exploited, with rates ranging from 1% to 40%. These tax rates are applied to the production output at a specified taxable value per unit.

Additionally, there are exemptions for certain uses of natural water, such as for agriculture, forestry, fisheries, salt industries, and cooling purposes, provided that specific conditions are met. It’s worth noting that crude oil, natural gas, and coal gas are subject to progressive tax rates based on the daily average production output.

The Environment Protection Tax (EPT) in Vietnam is a tax imposed on activities that are known to have a negative impact on the environment including the production and import of goods that are deemed environmentally harmful, such as fossil fuels (e.g., gasoline, diesel, and coal), plastics, chemicals, and luxury goods that have a significant environmental impact.

The primary purpose of this EPT is to encourage businesses and individuals to reduce environmental footprint by taxing activities that generate pollution or consume natural resources.

The tax rates vary depending on the type of activity and the environmental impact of the product. For example, higher tax rates are applied to products with greater pollution potential.

Transfer pricing in Vietnam refers to the practice of determining the prices at which goods, services, or intellectual property are exchanged between related entities, typically within a multinational corporation or group of companies.

The main objective of transfer pricing regulations in Vietnam, as in many other countries, is to ensure that transactions between related parties are conducted at arm’s length prices, meaning prices that would be charged between unrelated parties in an open market.

Vietnam’s Transfer Pricing is based mostly on the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development (OECD) and Base Erosion and Profit Shifting (BEPS) Action Plan. The rules are also applied to domestic-related transactions.

Related parties

Transfer pricing applies to transactions between entities that are considered related parties. This often involves companies within the same group of companies where one entity may be in Vietnam, and the other could be in another country.

Related parties typically have a significant level of common ownership or control, often defined as 25% or more.

Arm’s length principle

The core principle of transfer pricing is to ensure that the prices set for transactions between related parties are consistent with what would be charged between unrelated parties under similar circumstances. This principle is crucial in preventing profit shifting and tax avoidance.

Documentation requirement

Entities engaged in related-party transactions in Vietnam are required to maintain detailed documentation supporting the prices they use in those transactions.

This documentation is crucial to demonstrate compliance with the arm’s length principle and may include financial data, comparable transactions, and other relevant information.

Transfer pricing documentation follows a three-tiered structure:

• Master file
• Country-by-country report

Transfer pricing exemption

Entities are exempt from disclosing transfer pricing information if they meet all of the following criteria:

• Engage in transactions involving Vietnamese parties.
• Are subject to the same corporate tax rate.
• Neither party is eligible for tax incentives during a specific tax period.

In certain cases, entities are required to declare transfer pricing information but are not obligated to provide documentation if they fall into one of the following categories:

• Gross revenue is less than VND 50 billion (approximately $2 million), and all related-party transactions do not exceed VND 30 billion (approximately $1.2 million).
• They have entered into an Advance Pricing Agreement (APA) and are submitting an annual report for APA purposes.
• They have no revenue/expenses related to intangible assets, gross revenue is less than VND 200 million (approximately $8 million), and their operating profits before interest and taxes exceed prescribed rates for specific sectors.

Double Taxation Agreements (DTAs), also known as Tax Treaties, are bilateral agreements between two countries that are designed to prevent double taxation of income for individuals and businesses that operate in both countries.

Vietnam has entered into more than 80 DTAs to promote international trade and investment.

• Reduction of withholding taxes : DTAs often reduce or eliminate withholding taxes on cross-border payments. For example, if a Vietnamese company pays dividends to a foreign shareholder in a country with which Vietnam has a DTA, the treaty may reduce the withholding tax rate or exempt the payment from withholding tax altogether.
• Exchange of information : DTAs often include provisions for the exchange of tax-related information between the tax authorities of the two countries. This helps ensure compliance and prevent tax evasion.
• Permanent Establishment (PE) : DTAs often define what constitutes a permanent establishment in the other country. This is important for determining whether a business has a taxable presence in the foreign country and how its income should be taxed.

The information provided above offers a broad overview of the Vietnam tax system, based on the current taxation regulations and practices in the country. If you need a more in-depth understanding of tax-related matters in Vietnam, please feel free to contact us at [email protected] or engage in a live chat with our support team.

Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.

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Income tax implications on the assignment of capital in cross-border transactions.

Articles , M&A Consulting

A. Direct Capital Transfer in Viet Nam

Where the assignor is an entity , gains derived from the assignment of capital in a Vietnamese company are subject to corporate income tax ( CIT ) rate of 20%. This is generally referred to as capital assignment profits tax (CAPT). The taxable gains are determined as the excess of the sale proceeds less cost (or the initial value of contributed charter capital for the first transfer) less expenses relating to the transfer. 

Where the assignor is a foreign entity, a Vietnamese assignee is required to withhold the tax due from the payment to the assignor and account for this to the tax authorities. Where the assignee is also a foreign entity, the Vietnamese company in which the capital is transferred is responsible for conducting the CAPT obligations on behalf of such foreign assignor. The CAPT declaration and payment are required within 10 days from the date of official approval of the assignment of capital by a competent body or, where approval is not required, 10 days from the date the involved parties reach the agreement on the assignment of capital.

For individual assignees , tax implications on the assignment of capital will be different subject to the tax resident rule . 

Tax-residents are those individuals meeting one of the following criteria: 

• Residing in Vietnam for 183 days or more in either the calendar year or the period of 12 consecutive months from the date of arrival.
• Having a permanent residence in Vietnam (including a registered residence that is recorded on the permanent/temporary residence card or a rented house in Vietnam with a lease term of 183 days or more in a tax year in case of foreigners) and unable to prove tax residence in another country.

Individuals not meeting the conditions for being tax residents are considered tax non-residents in Vietnam.

Base on the above, residents transferring capital shall declare tax upon each transfer. Gains from capital assignment are determined as the excess of the sale proceeds less the initial value of contributed charter capital for the first transfer and expenses relating to the transfer. Personal income tax (PIT) will be calculated at the rate of 20%. On the other hand, non-residents, when transferring capital, will pay PIT at the rate of 0.1% of the transfer price of each transaction.

Vietnamese tax authorities have the right to adjust the transfer price for CAPT/PIT purposes where the price is not proper with arm’s length principle or where the price is not stipulated in the capital transfer agreement.

Recently, Vietnamese tax authorities challenge not only the capital transfer in a Vietnamese entity, but also the capital transfer transactions of an overseas parent entity who hold the (direct or indirect) capital in Vietnamese entities.

Below is the summary of tax implications on the assignment of capital in Vietnam:

B. Indirect Offshore Capital Transfer

Currently, there have not been any specific regulations on the taxing mechanism regarding the offshore capital transfer leading to the indirect transfer of the ownership of a Vietnamese company. Consequently, many foreign investors with offshore capital acquisitions leading to the indirect transfer of the Vietnamese enterprise do not declare any tax in Vietnam.

So far, the taxing mechanism on the case of indirect transfer of capital is non-officially guided by official letters of tax authorities. Basically, the main rules are similar to that applied in case of direct capital transfer, as follows:

• the income derived from the assignment of capital of a transferor will be subject to corporate income tax and personal income tax respectively;
• if both transferor and transferee are non-tax resident, the indirect transferred Vietnamese companies are responsible for declaring and paying tax imposed on such offshore transfer of capital on their behalf;

Regarding the determination of the transfer price and the profit of the transaction, despite of the unclear regulations, there are some solutions which have been applied on this matter in practice:

• The transfer price could be allocated separately among the indirect transferred Vietnamese entity and other subsidiaries within its group based on either (i) the ratio of capital contribution of the transferred foreign company to the indirect transferred Vietnamese entity; or (ii) the ratio of total assets of the indirect transferred Vietnamese entity and other subsidiaries according to the audited report for capital gains tax computation.
• The gain may be determined based on (i) the difference between the business valuation and the contributed capital of the transferred Vietnamese entity; or (ii) the difference between the possible transfer price and its contributed capital. It is worth noting that the tax authority can reassess the transfer price as being made at market value for tax purposes even if the indirect transfer is made without creating gain for any relevant parties.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam. This article is for general information only and is not a substitute for legal advice.

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The ministry plans to tax one percent on gross sales instead of 20 percent on capital gains as currently applied in accordance with Decree 12. The taxation will be applied to all capital assignment deals of foreign enterprises, regardless of resident status in Vietnam. Ta Hong Thai from KPMG Vietnam commented that with the new taxation method, MOF would be relieved of the burden of examining the profits enterprises make in capital assignment deals. “The market prices fluctuate all the time, therefore, it is difficult to determine the profits the parties of the deals gain,” he explained. A senior official of the HCMC Taxation Agency admitted that enterprises tend to declare wrong prices and it is very difficult to inspect the taxable amount of capital gains because of various reasons, including the lack of information. Bao Viet Securities said that taxation based on revenue will make it easier to implement the tax law and MOF will be able to collect tax from all capital assignment deals.

In principle, the new taxation method will make it unfair for those who cannot make profits with their capital assignments, because they will have to pay tax, regardless of whether they make a profit or take a loss. However, this is not a matter of complaining for foreign investors. Dau Tu quoted Oliver Massmann, general director of Duane Morris LLP, as praising the new scheme as a great effort by the government to unify different tax schemes applied in the world. Bao Viet Securities also said that the new taxation method would have certain impact on the Vietnamese M&A market, but the impact will be ‘inconsiderable’. The securities company’s analysts believe that the capital assignment tax isn’t the decisive factor that will affects investor decisions on whether to invest in Vietnam. The investor climate in Vietnam and the health and prospects of the businesses they plan to invest in are most important “Regarding the taxation policy, what foreign investors want is a transparent, stable and predictable policy. This is a key point the government needs to pay attention to if it wants to attract foreign capital into the M&A market,” said the report of Bao Viet Securities. M&A deals with the participation of foreign investors account for 77 percent of total M&A value.

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Capital Transfer Tax In Vietnam – An Overview For Investors

Trường Lăng

December 7, 2022

Table of Contents

The transfer of contributed capital and securities is becoming more widely used by both domestic and foreign investors as the tax environment for mergers and acquisitions (M&A) in Vietnam evolves. As a result, most shareholders who want to invest in or divest from a Vietnamese company consider compliance with regulations and tax efficiency to be top priorities. This is a guide from Viettonkin Audit to help interested investors become acquainted with the tax environment, particularly the capital transfer tax in Vietnam.

Capital Transfer Tax and Income Tax from Capital Transfer

In general, capital transfer tax can be described as the levy on the profit that an investor makes from the sale of an investment. The profit gained from the transfer of capital is classified as taxable income under Vietnamese law. 

According to Section 1(1) of Decree No. 12/2015/ND-CP, taxable incomes earned in Vietnam by foreign enterprises, as prescribed in Article 2 of the Law on Corporate Income Tax 2007 amended in 2012, are derived in Vietnam from the provision of services, provision and distribution of goods, grant of loans, payment for copyrights for Vietnamese entities or foreign entities doing business in Vietnam, or from the transfer of capital , projects of investment, right to contribute capital, right to participate in projects of investment, and right to mineral exploration, extraction, and refinement of minerals, regardless of the location of business premises.

For further clarification, Section 14(1) of Circular No. 78/2014/TT-BTC also states that an enterprise’s income from capital transfer is income earned from the transfer of part or the whole of the capital amount the enterprise has invested in one or many other organizations or individuals (including the sale of the whole enterprise).

Although most assets in Vietnam are subject to VAT upon being transferred, according to Article 4. 8 (d) of Circular No. 219/2013/TT-BTC, business establishments are not required to declare and pay VAT in a number of capital transactions. These include “the transfer of part of or the whole capital invested in another business organization (regardless of the creation of a new legal entity); securities transfer; transfer of the right to contribute capital; and other forms of capital transfer prescribed by law, including business acquisition in which the acquirer inherits all rights and obligations of the acquired company.”

How to Calculate Capital Transfer Tax?

Taxed income from capital transfer shall be determined as follows: 

Taxed income = Transfer price – Purchasing price of the transferred capital – Transfer expenses

• Transfer price : price paid to the seller as shown in the relevant share/capital contribution purchase agreement;
• Purchasing price of the transferred capital , which can be either of: (a) paid-up equity if the seller has participated in establishing the target company; or (b) transfer price of the previous transaction for the rest
• Transfer expenses : actual payments directly relating to the capital transfer and supported by legitimate documents/invoices including statutory fees required for transfer of that type, transaction, negotiation, execution expenses and other expenses (e.g. – attorney fees) with supported documents.

Corporate Income Tax (CIT) Declarations Related to Capital Transfer

According to Article 16.7 of Circular No. 151/2014/TT-BTC, any company that receives income from capital transfers must calculate and record the corporate transfer tax (CIT) in its annual declaration forms.

CIT shall be declared whenever it is incurred by any foreign organization that does business in Vietnam or earns income in Vietnam (hereinafter referred to as a foreign contractor) from capital transfer but its operations do not comply with regulations of the Law on Investment or the Law on Businesses.

The capital transferee shall determine, declare, deduct, and pay the CIT payable on behalf of the foreign organization. If the transferee is also a foreign organization that does not comply with the Law on Investment and the Law on Enterprises, the company established under The foreign organization must declare and pay any CIT owed under Vietnamese law on its behalf when investing capital in Vietnam.

Capital transfer tax can be quite a tricky issue when it comes to foreign investors and how they conduct their business, especially mergers and acquisitions (M&A), in Vietnam. It would take a considerable time for the continued development of the rules to converge with international norms. Still, investment and enterprise regulations and licensing procedures play a significant role in the acquisition process in Vietnam and should be reviewed carefully.

Understanding the tax-related challenges that businesses may face, Viettonkin Audit offers a series of services that guarantee accuracy and quick results. With our team of experts in the field of taxes in Vietnam, Viettonkin Audit is confident in handling even the most sophisticated tasks, from determining capital transfer tax to completing CIT declaration dossiers. By letting us take care of these time-consuming processes, our clients have more time to concentrate on other major duties and are more confident in their ongoing and future investments in Vietnam. For more information on our services, contact us now.

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INSIGHT: Indirect Offshore Capital Transfer and Potential Capital Gains Tax in Vietnam

By Lac Boi Tho and Nguyen Hung Du

Many foreign investors have been investing into Vietnam through a holding company or subsidiaries of their group located overseas, not only aiming to achieve convenience in their internal business management but also tax efficiency for their future exit plan. Foreign investors have been able to take advantage of unclear regulations on the taxing mechanism of offshore acquisitions leading to the indirect transfer of the Vietnamese enterprise over the past few years.

However, the ownership transfer of the group’s top company carried out overseas without declaring tax in Vietnam has recently drawn the attention of the Vietnamese tax authorities.

Potential Tax Implications

The Vietnam government issued Decree No. 12/2015/ND-CP ( Decree 12 ) (effective from January 1, 2015) to verify whether the offshore capital transfer is subject to Vietnamese tax; in particular, the income derived from transferring capital of foreign investors in Vietnam will be regarded as taxable income earned in Vietnam irrespective of where the transactions take place.

However, as there have not been any specific regulations on the taxing mechanism regarding the offshore capital transfer leading to the indirect transfer of the Vietnamese enterprise, i.e. computation mechanism and tax filing mechanism, the relevant parties therefore have no guidance on which party will be responsible for the tax declaration or on how to determine the profits to be taxed and applicable tax rates. Consequently, many foreign investors with offshore capital acquisitions leading to the indirect transfer of the Vietnamese enterprise do not declare any tax in Vietnam.

The Vietnamese tax authorities are therefore attempting to impose tax on the offshore capital transfer by providing official letters to reaffirm that the indirect transfer of capital in a Vietnamese enterprise is subject to capital gains tax in Vietnam, and to guide the taxing mechanism and computation mechanism as follows:

• the income derived from the capital transfer of an organization/individual transferor will be subject to capital gains tax in Vietnam based on principles of corporate income tax (CIT) and personal income tax (PIT) respectively;
• if both transferor and transferee are non tax resident in Vietnam, the indirect transferred Vietnamese enterprise is responsible for declaring and paying capital gains tax imposed on such offshore transfer of capital on their behalf;
• the indirect transferred Vietnamese entity is required to submit the documents related to the assets investment to itself to the local tax authorities for their inspection and assessment, including transfer price, purchase price of the transferred capital, its shares structure prior to the capital transfer, the relationship/allocation among the transferred and branches/subsidiaries including the Vietnamese entity (i.e. capital, manufacturing and business activities, assets, human resources, etc.);
• in the event of not being provided with the supporting documents, the tax authorities have rights to carry out a tax inspection as well as cooperating with other local competent authorities (e.g. Department of Planning and Investment, Management of industrial zones, etc.) in order to clarify the relationship and provide a proper approach for capital gains tax calculation.

Approaches to Determine Capital Gains Tax

Similar to the direct capital transfer, capital gains taxes vary by taxpayers and types of gains.

Foreign Corporate Transferor

• The gains derived from the indirect transfer of capital contributed in a limited liability company (LLC) will be taxable at 20% CIT.
• Income from the indirect transfer of securities (e.g. bonds, shares) in a joint stock company (JSC) will be taxed at 0.1% CIT.

Non-Vietnamese Individual Transferor

• A Vietnamese tax resident will be subject to 20% PIT on his/her gain generating from the indirect transfer of capital in a Vietnamese LLC, or 0.1% PIT on the proceeds upon selling securities in a Vietnamese JSC.
• A Vietnamese non tax resident is subject to PIT on the basis of 0.1% on the selling price for both transfer of capital and securities.

The key concern is how to determine the selling price and the gain of the indirect capital transfer due to the unclear regulations; as we have seen in practice there are some approaches which have been applied on this matter:

• The transfer price/gain could be allocated separately among the indirect transferred Vietnamese entity and other subsidiaries within its group based on either (i) the ratio of capital contribution of the transferred foreign company to the indirect transferred Vietnamese entity; or (ii) the ratio of total assets of the indirect transferred Vietnamese entity and other subsidiaries according to the audited report for capital gains tax computation.
• Also, the gain is able to be determined based on (i) the difference between the business valuation and the contributed capital of the transferred Vietnamese entity; or (ii) the difference between the possible transfer price and its contributed capital.

We would like to note that the tax authority can reassess the transfer as being made at market value for tax purposes even if the indirect transfer is made without creating gain for any parties within the group.

Planning Points

Despite the fact that the offshore capital transfer is difficult to determine, as well as current regulations being unclear on capital gains tax imposed on such transactions, it is recommended that the Vietnamese entity carefully reviews and has sufficient information/documentation about the offshore shares acquisition for tax prudence purposes.

Capital gains tax may have a significant impact on the transfer price of the acquisition (i.e. reduction on the transfer price due to the capital gains tax imposed on the seller); a ruling letter addressed to the Vietnamese tax authority is highly recommended for seeking specific guidance on the tax filing obligation and tax computation, in order to mitigate the tax risk prior to carrying out the transaction or making the payment to the seller.

Lac Boi Tho is a Tax Director and Nguyen Hung Du is a Tax Partner at Grant Thornton Vietnam.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Procedures for DTA Exemption / Reduction under New Circular in Vietnam

On 28 February 2011, the Ministry of Finance issued Circular 28/2011/TT-BTC (“ Circular 28 ”) to provide guidance on the Law on Tax Management, and superseded Circular 60/2007/TT-BTC (“ Circular 60 ”). Circular 28 details various changes on tax administration, e.g. tax declaration procedures, deadlines, form, supporting documents, etc.

In this Tax Pointer, we discuss procedures and dossiers under Circular 28 to apply for a tax exemption/reduction under a double taxation agreement (“ DTA ”) to which Vietnam is a signatory.

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Circular 28 provides for more detailed guidance on the procedures for tax exemption under the DTA. The specific changes to Circular 60 that are now included in Circular 28 are DTA exemption procedures for capital assignment and tax declaration procedures for re-insurance (see our previous Tax Pointer on this issue). With respect to capital assignment, the capital transferor will now apply the procedures guided under the new Circular 28 rather than Circular 133/2004/TT-BTC (dated 31 December 2004) as previously required.

In the scope of this Tax Pointer, we focus on the DTA procedures for a foreign contractor’s business and other incomes and such foreign contractor who applies the withholding method for tax declaration in Vietnam:

Procedure to apply for DTA exemption/reduction

According to Circular 28, in order to enjoy tax exemption under the DTA (which applies to capital assignment among other transactions), the Vietnamese party (in the case that the Withholding Method under the FCT regulation is used) shall submit the following documents to the tax authorities 15 days before the deadline of tax declaration to notify for the exemption/reduction under DTA:

– Notice of eligibility for tax exemption/reduction (form No. 01/HTQT);

– Original certificate of residence granted by a tax agency of the country of residence (regarding the prior year) which is legalized;

– Copy(ies) of the business registration certificate and/or the tax registration certificate granted by the country of residence;

– Copy(ies) of contracts signed with Vietnamese organizations and individuals which are certified by the taxpayer;

– In the case of a capital assignment: copies of assignment contracts, certificate of investment of Vietnam company (target company) which is certified by the taxpayer. Where the securities transactions without contracts of such transactions, tax payer can submit certificate of deposit account of stocks or bonds confirmed by Depository Bank or Securities company as per set form 01/TNKDCK.

The foreign contractor must send to the Vietnamese party the legalized certificate of residence of the current year 15 days before the termination of the contract or the end of tax year. We also note that this certificate must be submitted in the case of termination of the contract in Vietnam.

We note that the new Circular 28 does not require the original certificate of residence to state clearly the year of residence while this content was required under the prior Circular 60 In addition, Official Letter 2160/TCT-HTQT (dated 24 June 2011) sent to Ho Chi Minh City Tax Department states that the certificate of residence does not need to state the year of residence as long as a certificate of residency (“ COR ”) shows the duration of the year in which the resident receives such income.

Translation of documents

Circular 28 also emphasizes that the supporting documents be in Vietnamese. If the documents are in a foreign language (i.e., contract, agreement, tax return, etc.), such documents must be translated into Vietnamese by the taxpayer upon submission of the dossier. The taxpayer will sign and stamp on the translation for the accuracy of the translation. If the documents are more than 20 pages, taxpayers are advised to submit an official letter to local tax authority to have the permission of translating only main content, terms and conditions pertaining to tax liabilities determination.

The content to be translated will vary on a case-by-case basis and on the requirements of the tax authorities.

Tax treatment in case a DTA exemption dossier is submitted after the due date

Currently, taxpayers are allowed to self-declare their DTA exemption by going through DTA exemption notification steps as per the regulations. An issue that arises is what will happen if the taxpayer and/or the Vietnamese party did not declare or delayed the procedures. Does the taxpayer lose the right to claiming a tax exemption?

The General Department of Taxation has issued Official Letter 473/TCT-HTQT (dated 09/02/2011) to clarify this issue, and the ruling was sent to all local tax authorities for consistent implementation. Notable points under the ruling include:

– In case any penalty is triggered due to late submission of tax registration or tax declaration, the eligibility of DTA exemption does not exempt or reduce the penalty liability for the taxpayer.

– If the taxpayer fails to submit the DTA exemption notification properly in accordance to the regulations, the Vietnamese party still needs to withhold and declare taxes as per the regulations. The taxpayer may still submit the DTA exemption procedure, and the tax authority is required to consider the DTA exemption eligibility of the taxpayer provided that the submission does not exceed three years from the date the income was triggered.

Thus, even if the taxpayer fails to submit the initial DTA exemption notification, the taxpayer may still go through the exemption procedure to obtain a tax refund on taxes that were withheld and paid by the Vietnamese party to the state budget subject to statute of limitations of three years.

Although the new Circular 28 does not provide significant changes in the procedures of DTA application, overall, certain cumbersome requirements have been removed (such as certified translation documents, strict requirement on the form, and the content of the COR). Circular 28 allows the tax payer to explain any pending concerns that may arise in the preparation of the dossiers. In short, Circular 28 has simplified the administrative requirements, which would allow the foreign contractors to have a higher chance of obtaining DTA benefits.

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Foreign Exchange Management in Vietnam: Circular 6

• Circular 6 governs foreign exchange management for FDI activities in Vietnam.
• The circular provides a clear definition of FDI enterprises and offers some less cumbersome procedures for remitting profits.
• FDI enterprises are required to open a direct investment capital account to conduct transactions.

Vietnam’s Circular 6 ( Circular No 06/2019/TT-NHNN ) on foreign exchange was introduced last year and business entities had until September 6 of this year to implement the changes as per the regulations.

Circular 6 governs foreign exchange in foreign investment activities in the country.  

As per Vietnam law, any transaction that is related to direct or indirect investment transaction by a foreign investor must be implemented by an investment capital account opened in a licensed bank which is permitted to trade and supply foreign exchange.

Foreign direct invested enterprise

FDI in Vietnam means the transfer of capital for investment and participation to manage investment activities in Vietnam as defined by Circular 19/2014/TT-NHNN . This includes residents that are entities and receive direct foreign investment, non-residents involved in a business cooperation agreement (BCC), and non-residents who are foreign investors of FDI entities.

To conduct FDI activities, investors are required to open their foreign currency and Vietnamese Dong account at a licensed bank.

According to the new Circular 6, the definition of ‘foreign directed invested enterprise’ has been broadened. This now includes:

• An enterprise or company that is established by a foreign investor required to obtain an investment registration certificate (IRC);
• An enterprise or company with a foreign investor owning 51 percent or more of charter capital in an M&A transaction or has been established by specialized laws like insurance and law firms; and
• Project enterprises or companies established by foreign investors to implement PPP project as per the investment law.

FDI enterprises are required to open a Direct Investment Capital Account (DICA). A DICA is a current account in either a foreign currency or the local Vietnamese Dong. A DICA is typically in the name of the FDI entity, the foreign investor in a business cooperation contract or private partnership contract (PPP).

DICA requirements

As per Circular 6, if a transaction of share transfer in an FDI entity is between a non-resident and resident, the transfer of funds must be done through a DICA. The same applies to fund transfers for investment project transfers.

A DICA can be used for:

• Receiving capital contribution;
• Making payment of loans including foreign; and
• Remitting profits to foreign investors

The new regulations also allow for further flexibility for foreign investors that want to transfer funds using a DICA. The regulations now allow them to remit funds for pre-establishment costs before obtaining the IRC. This can be done directly from the foreign country into Vietnam to contractors or third parties.

In addition, payments for capital transfer between a foreign seller and foreign purchaser as well as between a local seller and local purchaser do no need to be done via a DICA.

As per Circular 6, any of the below documents can be used to open a DICA. These are:

• Investment Registration Certificate (IRC);
• Establishment and operation certificate;
• M&A approval;
• PPP contract signed with authorized state body; and
• Any other documents showing that the investment by the foreign investor is permitted.

As per the Circular, in an M&A, transactions have to be done through a DICA if done between a foreign investor and a domestic investor. Further, capital cannot be transferred directly to the party’s overseas account but has to be done through the DICA account. Businesses that do not open a DICA, risk being subject to the capital assignment tax (CAT) in Vietnam, which would amount to 20 percent of the transaction.

In addition, foreign loans have to be paid using a DICA except for specific exceptional cases.

Indirect investment capital accounts

Foreign-invested enterprises (FIEs) that have ownership of less than 51 percent due to an M&A transaction or are registered with a stock exchange must close their DICA if they have one. However, if the DICA is being used for the payment of loans it can continue to operate.

Once they close their DICA, non-resident foreign investors are required to open an Indirect Investment Capital Account (IICA) to continue investment activities in Vietnam. IICAs are used for indirect investments such as purchasing shares or sale of bonds in Vietnam. Profits that are obtained from indirect investment activities must also be remitted to the foreign investor using the IICA.

Foreign indirect investment means that foreign investors make an investment into Vietnam by buying securities, capital and purchase of shares, and investment funds without direct participation in the management of investment activities. Transaction related to indirect investments must be done through an IICA at a licensed bank in Vietnamese Dong.

Implementation necessary for compliance

Business entities should have already implemented the changes as per the regulations if not already done so.

While not perfect, the new regulations give business enterprises clearer regulations on FDI and the type of account required when investing in Vietnam. This will allow for a more transparent business environment in Vietnam allowing foreign investors, banks, and individuals to understand compliance requirements for foreign investment activities.

Note: This article was first published in September 2019, and has been updated to include the latest developments.

Vietnam Briefing is produced by Dezan Shira & Associates . The firm assists foreign investors throughout Asia from offices across the world , including in Hanoi and Ho Chi Minh City . Readers may write to [email protected] for more support on doing business in Vietnam.

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Individual - Taxes on personal income

Tax residents are subject to Vietnamese personal income tax (PIT) on their worldwide taxable income, wherever it is paid or received. Employment income is taxed on a progressive tax rates basis. Non-employment income is taxed at a variety of different rates.

Non-residents are subject to PIT at a flat tax rate on the income received as a result of working in Vietnam/on Vietnam-related income in the tax year, and at various other rates on their non-employment income. However, this will need to be considered in light of the provisions of any double taxation agreement (DTA) that might apply.

Personal income tax rates

Tax residents: employment income.

* Vietnamese dong

Tax residents: Non-employment income

Tax residents: business income*.

* Individuals earning business income from VND 100 million per calendar year and below shall not be subject to PIT on their business income.

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