Foreign Contractor Tax in Vietnam: A Complete Guide for 2022
Vietnam’s foreign contractor tax (FCT), often referred to as the withholding tax, is a tax that is applied to transactions conducted in Vietnam between a foreign company or sub-contractor and a Vietnamese company.
It is made up of two kinds of taxes. These are the value added tax (VAT) and, either personal income tax (PIT) for individuals, or corporate income tax (CIT) applicable to most foreign contractors that are registered as organizations.
What transactions does Vietnam’s foreign contractor tax apply to?
Vietnam’s foreign contractor tax is applicable when carrying out business in Vietnam under a contract signed with a Vietnamese party or signed with a foreign contractor. This includes the following transactions.
- A foreign entity’s sale of goods or commodities within Vietnam.This means goods delivered to places within the territory of Vietnam or whereby the foreign entity still controls the ownership, quality, pricing, or bears some costs related to the distribution of the goods in Vietnam;
- A foreign entity’s sale of goods or commodities which are associated with services to be performed in Vietnam. This includes but is not limited to: installation, commissioning, maintenance, and other types of services;
- A foreign entity’s provision of services in Vietnam. This includes online advertising and marketing, vehicles and machinery repair services, brokerage, training (except for online training), and shared telecommunications service charges. Note that there are certain exceptions stated in the regulations for tax exemption, including services performed and consumed completely outside Vietnam and a number of specific services performed outside Vietnam including advertising and marketing (not online);
- Other incomes receivable in Vietnam in any form. This is irrespective of the location where the business is carried out. It includes:
- income from asset transfers/assignments/liquidations;
- income from royalties and interest; and
- compensation from contractual breaches.
What is Vietnam’s foreign contractor tax not applied to?
Not all foreign contractors are subject to Vietnam’s FCT as the laws do provide a few non-FCT cases. For example, pure purchase contracts whereby a Vietnamese customer signs a contract with a foreign entity to purchase goods or commodities from a foreign country and imports the merchandise into Vietnam.
How do you declare foreign contractor tax in Vietnam?
There are three methods of declaring FCT. These are the: direct method, declaration method (also known as the Vietnam Accounting System (VAS) method), and the hybrid method.
Direct method (or withholding method)
This is the most common and practical method.
Using the direct method FCT is declared and paid by the Vietnamese party. The Vietnamese party is responsible for the registration of the contracts with the tax authority, and withholding and paying the applicable FCT to the local tax department. This must be done prior to making payment to the foreign contractor.
Under the declaration method, the taxable revenue will depend on the nature of the overseas payment which either includes tax (net) or does not (gross).
Net contracts
A contract whereby the Vietnamese party is responsible for and pays the FCT is a ‘net contract’.
In this case, the contract payment must be grossed up by the appropriate FCT rates in order to determine the contractor’s taxable revenue.
Gross contracts
Alternatively, a contract whereby the foreign party is responsible for and pays the FCT is a ‘gross contract’.
If the contract requires payment on a gross basis, the FCT is borne by the foreign contractor and withheld from total taxable revenue before making payment to said foreign contractor.
Tax rates using the direct method
There are different tax rates for different categories. Which category a transaction falls into will depend on the nature/scope of the payment/contract and several foreign contractor withholding tax rates may apply to more complex contracts.
For example, where both services and goods or equipment are supplied and separate scopes of work and separate prices are applied.
If it is not possible to separate the value of each type of work/service, the tax authorities apply the highest rate to the whole contract.
Under this method, the FCT must be declared and remitted to the tax authority within 10 days of making payment to a foreign contractor. If there are multiple payments made to a foreign contractor on a frequent basis, FCT can be declared and remitted monthly to the tax authority by the 20th of each month.
|
Business activity |
VAT |
CIT |
PIT |
|
Distribution and supply of goods including: raw materials, supply of goods, machinery and equipment.
Distribution and supply of goods including: raw materials, supply of goods, machinery and equipment attached to services in Vietnam, including those provided in the form of domestic exports, except for goods processed under processing contracts with foreign entities.
Supply of goods under Incoterms. |
N/A |
1% |
0.5% |
|
Services |
5% |
5% |
1.5% or 2% |
|
Restaurant/Casino management services |
5% |
10% |
N/A |
|
Machinery and equipment leasing and insurance |
5% |
5% |
5% |
|
Lease of aircraft, aircraft engines, aircraft spare parts and sea going vessels without individual controllers |
5% |
2% |
5% |
|
Construction and installation with supply of materials, machinery and equipment |
3% |
2% |
2% |
|
Construction and installation without supply of materials, machinery and equipment |
5% |
2% |
2% |
|
Production, transportation and service with supply of goods |
3% |
2% |
1.5% |
|
Transfer of securities, certificates of deposit, ceding reinsurance abroad, reinsurance commissions |
N/A |
0.1% |
0.1% |
|
Derivatives financial services |
N/A |
2% |
2% |
|
Loan interest |
N/A |
5% |
5% |
|
Income from royalties |
N/A or 5% |
10% |
5% |
|
Others |
2% |
2% |
1% |
Declaration method (also known as the VAS method)
Under this method, the foreign company or contractor is taxed in a similar manner to a Vietnamese company or contractor.
This means that, foreign contractors will be liable to declare and pay CIT at the applicable rate of 20% on their net profit earned from the project/contract. This is calculated by subtracting the total deductible expenses from total revenue. The foreign contractor, using the declaration method, must pay VAT on the difference.
In doing so, foreign contractors must undertake and comply with certain requirements with regard to accounting and tax filings that are required of Vietnamese companies. For example, they must register for a tax code for the project/contracts, issue VAT invoices to customers, collect VAT on their sales, claim input VAT credits, and pay CIT based on a declaration of revenue and expenses.
Adopting VAS for a project in Vietnam is entirely optional for foreign contractors. Deciding whether to do so will usually depend on whether the tax advantages outweigh the tax and administrative disadvantages.
Eligibility requirements
Foreign contractors that want to use the declaration method to calculate their foreign contractor tax obligations must meet the following criteria:
- They must have a permanent establishment in Vietnam or must be a resident for tax purposes.
- The execution of the project/contract in Vietnam lasts for 183 days or more, calculated from the effective date of the project/contract.
- They adopt the Vietnamese Accounting System (“VAS”), apply for tax registration and obtain a tax code (tax certificate) issued by the tax authority.
