Let’s assume you’re running a company in a foreign jurisdiction but provide goods and services in Vietnam. Since your company is not a Vietnam local business, your taxation will be different from local companies. Particularly, your company will be subject to Vietnam foreign contractor tax (FCT) for carrying 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 of how this tax works in Vietnam.
1. How is Foreign Contractor Tax Defined in Vietnam?
Foreign contractor tax (FCT), is taxation for overseas goods or services in Vietnam supplied by foreign business entities.
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 later in this article.
There are different aspects of the Vietnam Tax System that you might want to consider, so it’s worth taking a look at other articles for more information!
1.1. Business entities subject to Vietnam FCT
In general, if you’re foreign entities that run a business or earn an income within Vietnam’s territory, you’ll need to pay foreign contract tax.
Specifically, a foreign entity in Vietnam include:
- Foreign business organizations with or without permanent establishments in Vietnam, or
- Foreign business individuals, regardless of the fact that they are residents or non-residents in Vietnam.
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; and
- Fully or partially provides goods or services in Vietnam.
determine your residential status
Whether your foreign entity is a Vietnam resident or has a permanent establishment in Vietnam will be determined by the law of Corporate income tax or Personal income tax.
In case there is a Double Taxation Agreement between Vietnam and your home country, your entity residential status will be determined by such agreement.
1.2. 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 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 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.
To get free consulting on suitable business entities in Vietnam, simply visit our Vietnam Company Formation page!
2. What Types of Taxes Are Collected When Paying Foreign Contractor Tax in Vietnam?
Foreign contractor tax is not a new separate tax in Vietnam. In fact, it includes the two tax components: Value-added tax (VAT) and Income tax.
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 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)
For more information on how value-added tax works, simply check out our guideline on Vietnam VAT: What You Need to Know!
3. What Are Methods for Foreign Contractor Tax Calculation and Payment in Vietnam?
To calculate and pay FCT in Vietnam, foreign enterprises can choose one of the given three options: declaration method, direct method (withholding tax), or mix method.
3.1 Declaration Method
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 in Vietnam;
- Having an operation period under contract for 183 days or more in Vietnam;
- Adopting Vietnam’s accounting practices, registering for Vietnam tax, and having 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)
If you want to see how Vietnam corporate tax could potentially affect your business, simply check out our Guide to Corporate Tax in Vietnam for Foreigners.
3.2 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]
Note
Revenue subject to CIT – the total revenue exclusive of VAT received by your foreign entities without offsetting any payable tax or any costs paid by Vietnamese parties on behalf of your foreign entities.
To summarize, the VAT fixed rates vary depending on different business activities as follows:
| Business activities | Rates |
|---|---|
| Services, lease of machinery and equipment, construction or installation without provision of materials, machinery, and equipment | 5% |
| Manufacture, transportation, services attached to goods, construction, or installation with the provision of materials, machinery, and equipment | 3% |
| Others | 2% |
CIT Calculation
[Payable VAT = Revenue subject to CIT x CIT fixed rate]
Note
Revenue subject to CIT – the total revenue exclusive of VAT received by your foreign entities without offsetting any payable tax or any costs paid by Vietnamese parties on behalf of your foreign entities.
In specific, CIT fixed rates vary depending on different business activities as follows:
| Business activities | Rates |
|---|---|
| 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% |
important note!
The above tax rates can change to comply with the Double Taxation Agreement signed by Vietnam and the jurisdiction where the foreign entity is located.
3.3 Mix/Hybrid method
With the mix method, your foreign enterprises need to 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).
In order to qualify for this method, your foreign enterprises must satisfy the following criteria:
- Having a permanent establishment in Vietnam or being a resident in Vietnam;
- Having an operation period under contract for 183 days or more in Vietnam;
- Complying with Vietnam’s law on accounting and following the guidelines of the Ministry of Finance in Vietnam.
4. Key Points to Remember
Key points
- Foreign enterprises and individuals doing business in Vietnam are subject to foreign contractor tax (with some exceptions).
- Vietnam foreign contractor tax comprises two types of taxes: VAT and income tax.
- Foreign individuals pay VAT and personal income tax according to the laws on personal income tax.
- Foreign enterprises can choose among 3 methods to calculate and pay FCT in Vietnam: declaration method, direct method, and mix method (subject to certain conditions).
Should you have any questions relating to taxes in Vietnam, feel free to drop a message and get in touch with one of our friendly consultants for practical advice!
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. BBCIncorp would like to inform readers that we make no representation or warranty, express or implied. Feel free to contact BCCIncorp’s customer services for advice on specific cases.
Get helpful tips and info from our newsletter!
Stay in the know and be empowered with our strategic how-tos, resources, and guidelines.
