What is Foreign Contractors Withholding Tax?
Parties that conduct business under a contract and make monetary payments to a Vietnamese organization or individual are subject to paying withholding taxes according to foreign contractor withholding tax regulations.
Also, foreign entities that earn income in Vietnam under a contract with a Vietnamese company for the local provisioning of goods through domestic export, or in some cases for distribution or provisioning of goods in Vietnam under an agreement where the seller was had exported the goods into Vietnam, and the goods are not intended for re-export out of Vietnam.
Note: The Foreign Contractor Withholding Tax (FCWT) is detailed in Circular No. 103/2014/TT-BTC.
When does foreign contractor tax apply?
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 are the FCWT rates and applicability?
Two types FCWT (Withholding Tax) may apply in various cases:
- VAT (Value added tax);
- CIT (Corporate Income Tax); and,
- PIT (Personal Income Tax).
Below is a summary of treatment rates by type or purpose of payment being made.
|
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 (International Commercial Terms). |
Exempt |
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 |
Exempt |
0.1% |
0.1% |
|
Derivatives financial services |
Exempt |
2% |
2% |
|
Loan interest |
Exempt |
5% |
5% |
|
Income from royalties |
Exempt or 5% |
10% |
5% |
|
Others |
2% |
2% |
1% |
How are payments made for this withholding tax?
Foreign contractors have three options for tax payments:
Deduction and declaration method
VAT and CIT payments will be filed in the same manner and tax rates as local companies; foreign contractors will be allowed to follow the ordinary method if they satisfy the following conditions:
- They have a permanent establishment or resident status in Vietnam;
- Their duration of conducting business in Vietnam under a contractor or sub-contractor contract is 183 days or more from the effective date of the contract; and
- They apply the Vietnamese accounting system to their business comprehensively, complete the tax registration and are issued a TIN by a tax authority.
Hybrid method:
- VAT is calculated based on the deduction method, while CIT is determined under the direct method rates on the gross turnover. In order to adopt the hybrid method, foreign contractors and subcontractors must meet the following conditions:
- They have a permanent establishment or resident status in Vietnam;
- Their duration of conducting business in Vietnam under a contractor or sub-contractor contract is 183 days or more from the effective date of the contract; and
- They maintain the accounting system according to Vietnamese accounting regulations and guidance of the Ministry of Finance.
Direct method:
This method is applicable when the foreign contractors do not meet one of the conditions mentioned above; the base for calculating VAT and CIT is the taxable revenue. VAT on goods or services used to execute main contracts and subcontracts must not be deducted.
How to calculate FCWT rates
Calculation of VAT – Value-Added Tax:
The added value of services or services accompanying VAT-liable goods is the turnover for VAT calculation multiplied by the percentage (%) of the added value to turnover.
Payable VAT amount = Revenue subject to VAT x VAT rate
The added value of services or services accompanying VAT-liable goods is the turnover for VAT calculation multiplied by the percentage (%) of the added value to turnover (see chart below).
Calculation of CIT – Corporate income tax
The CIT amount payable is the turnover for CIT calculation multiplied by the CIT rate (%) based on turnover for CIT calculation.
Payable CIT amount = Revenue subject to CIT x CIT rate
FAQ:Vietnam’s foreign contractor tax
What is the difference between foreign contractor tax and withholding tax?
There is no difference between foreign contractor tax and withholding tax. There are one and the same, but often used interchangeably.
Do I have to pay foreign contractor withholding tax?
The applicability of FCWT depends on the business or contract type.
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.
However, not all foreign contractors are subject to Vietnam’s FCT. There are a few exceptions, such as pure purchase contracts, whereby a Vietnamese customer signs a contract with a foreign entity to purchase goods/commodities from a foreign country (i.e. where the responsibility, cost and risk relating to the goods passes at or before the border gate of Viet Nam and there are no associated services performed in Viet Nam), services performed and consumed outside Viet Nam and various other services performed wholly outside Viet Nam (e.g. certain repairs, training, advertising, promotion, etc.).
What specific law covers Vietnam’s foreign contractor tax?
Vietnam’s foreign contractor tax is covered by Circular 103/2014/TT-BTC which was issued by the Ministry of Finance in 2014.
