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Guide to the method of paying Foreign Contractor Tax (“FCT”)

Foreign Contractor Tax (FCT) is applicable to foreign organizations and individuals doing business or earning income in Vietnam based on contracts or agreements with Vietnamese entities (including foreign-invested companies in Vietnam). FCT is not a separate tax but includes Value Added Tax (VAT) and Corporate Income Tax (CIT), or Personal Income Tax (PIT) for individual income.


FCT applies to certain types of payments, including interest on loans, loyalties, service fees, rent, insurance premium, transportation services, securities transfers, good supplied in Vietnam, or services performed in Vietnam.


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Foreign Contractor Tax (FCT)

Additionally, certain distribution agreements in which foreign organizations directly or indirectly participate in the distribution of goods or provision of services in Vietnam also fall within the scope of FCT. For example, when a foreign organization still owns the goods, bears distribution costs, advertising and marketing expenses, takes responsibility for the quality of goods and services, determines pricing policies, or authorizes/hires Vietnamese companies to carry out part of the distribution activities and supply services in Vietnam.


Exemptions from FCT include payments for the provision of purely goods (e.g., delivery with responsibility, costs, and risks related to goods transferred before or at the Vietnam border gate, without accompanying services performed in Vietnam), for services provided and consumed outside of Vietnam, and some other services performed entirely outside of Vietnam (e.g., certain repair, training, advertising, marketing services, etc.).


Dividends/ Profits dividends

Dividends/profits dividends/profits paid to foreign shareholders/investors are not subject to FCT or any other profit transfer taxes.


Interest on loans

Interest on loans paid to foreign organizations is subject to FCT at o tax rate of 5% under FIT. However, interest rates on loans from certain foreign governments or government organizations may be exempt from FCT if they meet the conditions of a Double Taxation Avoidance Agreement between governments.


Interest on bonds (excluding tax-exempt bonds) and certificates of deposit issued to foreign organizations is subject to FCT at a tax rate of 5%.


Copyright fees

Royalties FCT is applicable to payments made for the use or transfer of intellectual property rights (including copyright and industrial property rights), technology transfer, or software transfer to foreign organizations.


Taxes on e-commerce activities

According to the 2019 Tax Management Law and the guiding Decree, for transactions where individuals in Vietnam purchase goods and services from foreign businesses engaged in e-commerce and digital platform-based businesses ("foreign e-commerce operators"), banks and intermediary payment service providers must:


  • Monthly deduct and remit taxes on behalf of foreign e-commerce operators if these operators are not registered for tax in Vietnam. The General Department of Taxation will collaborate with relevant authorities to identify the identity and website address of foreign e-commerce operators not registered for tax in Vietnam and notify banks and intermediary payment service providers.

  • Monthly monitor payments made to foreign e-commerce operators and provide this data to the General Department of Taxation if individuals in Vietnam use payment methods where deduction cannot be executed (e.g., credit card payments).

Method of submitting Foreign Contractor Tax (FCT)

Foreign contractors can choose one of the following three methods for submitting FCT: deduction method, fixed rate method, and mixed method.


Method 1 - Deduction Method

Under this method, foreign contractors are required to register, declare and pay VAT, and submit their corporate income tax (CIT) and VAT returns similar to Vietnamese companies. FCT can apply the deduction method if they meet the following conditions:

  • Have a permanent establishment in Vietnam or are tax-resident entities in Vietnam.

  • The duration of their business activities in Vietnam under the contract of the foreign contractor or subcontractor is 183 days or more.

  • Apply Vietnamese accounting standards, complete the tax registration form, and obtain a tax identification number.

In Vietnam, the local tax authority must be informed in writing by the Vietnamese party regarding the foreign contractor's intention to pay taxes using the deduction method within 20 working days from the date of signing the contract.


If a foreign contractor conducts multiple contracts simultaneously, and one of the contracts meets the conditions for using the deduction method as prescribed, the foreign contractor must apply the same tax payment method to the other contracts.


Foreign contractors will pay corporate income tax at a tax rate of 20% on their net profit.


Method 2 - Fixed Rate Method:


Under this method, foreign contractors pay taxes based on a predetermined fixed rate. They are not required to register or submit VAT and CIT returns, Instead, VAT and CIT will be withheld and deducted by the Vietnamese party based on the predetermined rates applied to the taxable turnover. These rates vary depending on the activities carried out by the foreign contractor. The VAT withheld by the Vietnamese party is generally considered as input VAT that can be offset in their VAT return.


The method of paying FCTs based on fixed rates is regulated separately for foreign contractors providing goods and services for oil and gas exploration, exploitation, and production activities.


Method 2 - Mixed Method:

The mixed method allows foreign contractors to register and pay VAT using the deduction method (i.e., deducting output VAT from input VAT), while also paying CIT at fixed rates directly on the total taxable turnover.

Foreign contractors wishing to apply the mixed method must meet the following conditions:

  • Have a permanent establishment or be a tax resident in Vietnam.

  • The contract period for contractor or subcontractor services is 183 days or more.

  • The organization adopts accounting principles according to Vietnamese accounting regulations and the Ministry of Finance's guidelines.

Here are some summarized tax rates for foreign contractors under the mixed method:


Some foreign contractor tax rates are summarized below:

Activity

VAT rate

CIT rate

Supplying goods in Vietnam or providing services in Vietnam (including on-site import and export activities, distributing goods in Vietnam, or delivering goods under Incoterms conditions where the seller remains responsible for the risk of goods in Vietnam)

Tax-free

1%

Management services for restaurants, hotels, and casinos

5%

5%

Construction and installation without supplying raw materials or machinery and equipment

5%

2%

Construction and installation with the supply of raw materials or machinery and equipment

5%

2%

Transportation

3%

2%

(1) VAT will be exempted when goods and services are exempt from FCT-VAT when VAT has been paid at the importation stage.

(2) Goods and services provided by foreign contractors in the oil and gas sector are subject to a 10% VAT rate. Some goods and services may apply a 5% VAT rate or be exempt from VAT.

(3) The VAT rate for international transportation is 0%.

(4) Copyrights for computer software, technology transfer, and intellectual property rights (including copyrights and industrial property rights) are exempt from VAT. Other types of copyrights may be subject to VAT.


Double Taxation Avoidance Agreements (DTAA)

CIT of foreign contractors, as described above, can be reduced or exempted under relevant DTAAs. For example, the 5% CIT rate for services provided by foreign contractors can be exempted based on DTAA if the foreign contractor does not have a permanent establishment in Vietnam.


Vietnam has signed DTAA agreements with nearly 80 countries, and negotiations are ongoing for additional agreements. Please refer to Appendix I - List of DTAA Agreements. It's noteworthy that Vietnam has signed a DTAA agreement with the United States, although this agreement is not yet in effect.


There are many guidelines on the application of DTAA agreements, including regulations on beneficiaries and general provisions on preventing tax evasion. According to these regulations, tax exemptions or reductions based on DTAA agreements will not be accepted if the main purpose of a contract is to benefit from tax exemptions or reductions, or if the proposer is not the beneficiary. The guidelines also provide provisions on considering substance over form when determining beneficiaries and outline factors to consider, including:

  • The proposer has an obligation to distribute over 50% of their income to a third-country company within 12 months of receiving the income.

  • The proposer has little or no significant business activities.

  • The proposer has little or no control rights and bears little risk related to the received income.

  • Agreements in which the proposer provides services/lending include conditions and terms in a different agreement with a third party that the proposer is the recipient of services/loans.

  • The proposer is a resident of a low-tax country.

  • The proposer is an intermediary company or agent.


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JUNE 2024 NEWS SUMMARY

DECREE NO. 64/2024/ND-CP ON EXTENDING THE DEADLINE FOR PAYING TAXES AND LAND RENT IN 2024 Issued by: Gorverment Issued date: 17 June 2024 Effective date: 17 June 2024 Expiration date: 31 December 2024

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