Vietnam — Tax Liabilities of Foreign Income

Nghiem Xuan Hong An, of Grant Thornton Vietnam, discusses the tax liabilities of foreign income and why a good understanding of the tax regulations will help to mitigate any potential tax risks.

If a foreign organization earns income in Vietnam through providing services, or selling goods together with services, or trading, its income will be subject to Withholding Foreign Contractor Tax (FCT).

Income earned by foreign individuals from rendering services in Vietnam is taxed in Vietnam regardless of their residence status. However, the tax implications are different depending on various factors: these are highlighted in this article to help foreign individuals to comply with the tax regulations in Vietnam as well as mitigate the risks of additional tax, penalties and interest on late tax payment.

Regulation on Residence Status in Vietnam

According to the current tax regulation, an individual is regarded as a Vietnamese tax resident if he/she is:

• present in Vietnam for a period of 183 days or more within one Western calendar year or 12 consecutive months from the date of first arrival in Vietnam; or
• has a registered place of “permanent residence” in Vietnam; or
• has a rented house (including hotels, guesthouses, motels, offices, etc.) with a lease term of 183 days or more in a tax year.

In addition, if an individual has a rented house in Vietnam for a rental period of 183 days or more and actually resides in Vietnam for less than 183 days in the tax year, but fails to prove his tax residence in any country, he is considered as a Vietnamese tax resident.

An individual who does not meet the above conditions for being a tax resident is a non-tax resident in Vietnam.

Type of Incomes and Tax Implications

Business Income

A foreign individual with a license or a practicing certificate, who renders services to organizations/individuals in Vietnam, is regarded as a business individual, and accordingly his income is taxed in Vietnam with the tax rates applied to business income.

It is important to note that to be treated as a business individual, the foreign individual’s activities must be licensed according to the regulations in the foreign country or the foreign individual must have documents issued under the foreign country’s laws to prove himself a business individual.

Tax Resident in Vietnam

Business income of a business individual being a tax resident in Vietnam is subject to value-added tax (VAT) and personal income tax (PIT).

VAT

VAT payable = Revenue subject to VAT x VAT rate

VAT rates are:

• services, leasing machinery and equipment, insurance; construction, installation excluding materials or machinery and equipment: 5%;
• production, transport, services accompanied by goods; construction, installation including materials or machinery and equipment: 3%;
• other activities: 2%

PIT

PIT payable = Revenue subject to PIT x PIT rate

PIT rates are:

• services, construction exclusive of building materials: 2%;
• manufacture, transport, provision of services associated with goods, construction inclusive of building materials: 1.5%;
• other activities: 1%

Non-tax Resident in Vietnam

VAT

Same as tax resident.

PIT

PIT payable = Revenue subject to PIT x PIT rate

PIT rates are:

• service provision: 5%;
• production, construction, transportation, and other activities: 2%

Income from Salary and Wage (Employment Income)

Tax Resident in Vietnam

When a foreign individual with an employment contract is regarded as a Vietnamese tax resident, his employment income is subject to Vietnamese PIT at progressive tax rates ranging from 5% to 35%. Tax relief including personal relief (9 million dong ($387) per person)) and family relief (3.6 million dong per qualified tax dependent) is applied.

Meanwhile, when a foreign individual—being a Vietnamese tax resident—enters into a service agreement, his employment income is subject to Vietnamese PIT rate of 10%.

Non-tax Resident in Vietnam

Employment income of a non-tax resident is taxed at a flat PIT rate of 20%.

Organizations paying income take responsibility for declaring and paying tax on behalf of the foreign individual. In the event of the business individual not being able to provide a license or practicing certificate or the provided documents not being properly legalized, the tax authority can deem the tax rates of employment income on the income of a business individual.

Tax Implications

Tax implications on income that a foreign individual earns from rendering services in Vietnam are summarized in the table.

Example: A foreign independent financial advisor (without qualified tax dependent) receives monthly income of 80 million dong.  In comparison with tax payable computed by tax rates applied to employment income, tax payable computed by tax rates applied to business income are more efficient:

Planning Points

When a foreign individual earns income from rendering services in Vietnam, his tax liabilities calculated by tax rates applied to business income are more efficient than the liabilities calculated by tax rates applied to employment income.

A thorough knowledge of the tax regulations and practical tax experience can help taxpayers to mitigate tax risks of additional tax payable, penalties and interests on late payment, and more importantly optimize tax efficiency.

Nghiem Xuan Hong An is a Tax Senior Manager at Grant Thornton Vietnam.

This article is of a general nature only and readers should obtain advice specific to their circumstances from professional advisers.