Vietnam’s Double Taxation Avoidance for Foreign Investors

As of 2022, Vietnam has approximately 80 Double Taxation Avoidance Agreements (DTAAs) signed. The inclusion of DTAA treaties helps eliminate double taxation for individuals, legal entities, and businesses operating in Vietnam and the 80 countries that have DTAAs with Vietnam. Foreign investors in Vietnam will benefit from having a good understanding of the DTAAs and related provisions, to realize their benefits and optimize their earnings in the country.

Double taxation occurs when a party pay tax twice for the same taxable subject as income or assets. Such cases could easily happen to multinational companies having to deal with various countries’ tax systems. A company with cross-border businesses may be subject to taxes in both its residential country and the countries it operates in through foreign investments and provision of goods and services.

To help mitigate this obstacle, countries usually engage in Double Taxation Avoidance Agreements (DTAAs) to effectively attenuate double taxation, ensuring the rights of their citizens and investors.

As of 2022, Vietnam has approximately 80 DTAAs signed. DTAA treaties eliminate double taxation by identifying exemptions or reducing the amount of taxes payable in Vietnam. The agreements also help prevent tax evasion and contraband on income and property taxes.

Subjects Of Application

DTAAs apply to both individuals and corporations who are residents of Vietnam, residents of the country that Vietnam has signed a DTAA with, or both. Residents of the contracting state have to satisfy certain criteria as per the law of both the signatory countries.

Individuals in Vietnam have to satisfy one of the following criteria:

• Present in Vietnam for 183 days or more within one calendar year or 12 consecutive months from the first date of arrival;
• Obtained and registered for permanent residence status; or
• Rented a residence in Vietnam for at least 90 days within the tax assessment year. Applicable residences include hotels, boarding houses, rest houses, lodgings, and working offices.

Organizations will be deemed residents of Vietnam if they have established or registered for operations in Vietnam and operate under Vietnamese law. Examples include state companies, cooperatives, limited liability companies (LLCs), joint-stock companies (JSCs), and private enterprises.

Principles Of Application

Tax is handled on a case-by-case basis depending on the provisions of each DTAA. If there is a conflict between the provisions of the agreement and those of domestic tax laws, the provisions of the agreement will be applied.

The DTAAs will not create new tax obligations beyond those imposed by the domestic taxation law. However, when relevant tax obligations included in the DTAAs do not exist in Vietnam, or when tax rates in the agreements are higher than the domestic tax rates, the Vietnamese tax law will be applied. For example, Vietnam’s tax law prevails if a signatory country is entitled to impose a type of tax that Vietnam does not recognize.

Types of taxable income

DTAAs signed by Vietnam impact both corporate and personal income taxes.

Corporate income

For foreign-invested enterprises (FIEs), corporate income is what is earned from carrying out production and business activities in Vietnam. The tax obligations for FIEs are as follows:

• Legal entities (e.g., wholly foreign-owned enterprises or joint ventures) are taxed on incomes arising from business activities in accordance with the corporate income tax (CIT) laws. The standard CIT rate in Vietnam is 20%.
• Non-legal entities that operate without forming legal entities will be charged withholding tax or partially taxed if they own a permanent establishment (PE) in Vietnam, to which income can be indirectly or directly distributed.
  • A PE is a fixed place of business where operations are wholly or partially carried out. In Vietnam, PE must be permanently maintained at a specified place.

Dividends

Companies are required to fulfil their financial and tax obligations in Vietnam before remitting dividends to their parent companies overseas. Hence, the remitted dividends are after-tax profits that can be taxed again in other signatory countries. Most tax and revenue jurisdictions allow tax offset for tax paid in other countries on dividends.

Interest and loyalties

Interest and royalties are taxed at 5% and 10% respectively. Tax on the interest is usually exempt under most DTAA, while tax on royalties is often reduced.

Technical, management, and consulting services

Service fees are usually taxed at 10% in most cases, 5% of which is a value-added tax (VAT), and the other 5% is CIT. Under DTAAs, CIT is subject to an exemption.

Personal income

Residents of signatory countries are required to pay income taxes under Vietnam’s personal income tax laws. However, they may be exempted from taxation if they satisfy all of the following conditions:

• The resident is in Vietnam for fewer than 183 days over a 12-month period of any taxable year;
• The resident’s employer is not a resident of Vietnam; and
• The wages are not paid by the PE of the employer in Vietnam.

Income from the provision of independent services is also subject to CIT. Foreign individuals earning income in this way must pay the relevant income taxes. If individuals or companies provide independent services without a business license, they are also required to pay personal income taxes.

Double Taxation Elimination Methods

Depending on the specific treaty, Vietnam will apply one or a combination of the three following methods for elimination of double taxation:

Tax deduction method

For Vietnamese residents who have income from, and have paid tax in a signatory country to a DTAA with Vietnam, the tax deduction method will be applied when the resident makes an income tax declaration in Vietnam. The tax amount paid in the signatory country will be deducted from the tax amount payable in Vietnam.

Method of deduction of deemed tax

For residents of Vietnam who must pay tax in, and derive income from, a DTAA signatory country, Vietnam will apply a deduction of deemed tax. Deemed tax is the amount that residents deriving income from a DTAA signatory country must pay to that country, but is reduced as favoured treatment. The deemed tax amount will be deducted from the tax amount payable in Vietnam.

Method of deduction of indirect tax

For Vietnamese companies owning at least 10% of the voting stock of a company residing in a DTAA signatory country, and where CIT has already been collected by the signatory country, Vietnam will apply the deduction of indirect tax for residents of Vietnam. The indirectly paid tax amount in the signatory country will be deducted from the tax amount payable in Vietnam. However, in all cases, the tax amount deducted will not exceed the tax amount payable in Vietnam.

 

---

Read more about our market entry and expansion in sector or our other consulting services.