Overview On Withholding Tax In Vietnam

Under Vietnam’s domestic tax regulations, payments made by a resident entity to a non-resident (commonly referred to as a “foreign contractor”) are subject to Corporate Income Tax (CIT) and Value-Added Tax (VAT). Collectively, these are known as Foreign Contractor Tax (FCT), which consists of a deemed CIT and a deemed VAT, generally applied at flat rates on the gross value of the contract. Such payments are typically categorized as dividends, royalties, interest, or contractor payments, and the related taxes are referred to as dividend withholding tax, interest withholding tax, royalty withholding tax, and foreign contractor tax.

Dividend Withholding Tax

Vietnam abolished dividend withholding tax in 2004. Accordingly, the current domestic tax rate is 0%. If a tax treaty sets a higher rate, the domestic rate will prevail.

Interest Withholding Tax

Debt financing is common among foreign-invested companies in Vietnam, typically through loans from offshore shareholders, affiliates, or banks. A 5% withholding tax applies to interest and related charges paid to offshore lenders. This tax is solely a CIT component, as interest is exempt from VAT. Some tax treaties, however, provide exemptions for loans from foreign governments or semi-governmental institutions.

Royalty Withholding Tax

Payments for the right to use or license intellectual property, patents, trademarks, copyrights, technical know-how, or other forms of technology transfer are subject to a 10% royalty withholding tax. This tax is also solely a CIT component, as royalties are exempt from VAT. Where tax treaties stipulate a lower rate, the treaty rate applies. Technology transfers made as capital contributions to a Vietnamese company may be exempt from this tax.

Foreign Contractor Tax (FCT)

FCT applies to foreign entities conducting business or entering into transactions with Vietnamese parties without establishing a legal entity in Vietnam. By default, FCT is collected via withholding by the Vietnamese contracting party.

However, foreign contractors may register for tax in Vietnam and choose one of the following methods:

• Pay CIT and VAT as a domestic taxpayer; or
  
  

• Apply a hybrid method, where CIT is paid at deemed rates while VAT is calculated under the standard credit method.
  
  

To qualify, the foreign contractor must meet certain conditions, such as having a permanent establishment in Vietnam, conducting business for 183 days or more, and adopting Vietnamese Accounting Standards (VAS).

Exemptions from FCT include:

• Payments to local contractors (Vietnamese residents).
  
  

• Payments for goods supplied without services performed in Vietnam (under specified Incoterms delivery conditions).
  
  

• Income from services rendered and consumed entirely outside Vietnam.
  
  

• Offshore services such as repairs, advertising (except online), investment promotion, training (except online), certain telecom services, and bonded warehouse operations.
  
  

Domestic Withholding Tax Rates

The applicable deemed VAT and CIT rates depend on the type of business or transaction. Examples include:

• Services, leasing machinery/equipment, insurance: 5% VAT, 5%/2% CIT
  
  

• Construction with supply: 3% VAT, 2% CIT
  
  

• Construction without supply: 5% VAT, 2% CIT
  
  

• Trading/distribution of goods: 1% VAT, 1% CIT
  
  

• Interest: Exempt VAT, 5% CIT
  
  

• Royalties: Exempt VAT, 10% CIT
  
  

• Other specified activities: varying rates
  
  

VAT is creditable to the Vietnamese contracting party but cannot be reduced under tax treaties, whereas CIT may be exempted or reduced under applicable treaties.

Domestic Withholding Taxes vs Tax Treaties

Tax treaties may reduce or exempt the CIT component of FCT but not the VAT component, as indirect taxes are not covered by treaties. Key principles include:

• Where domestic law conflicts with a tax treaty, the treaty prevails.
  
  

• A treaty cannot create new or higher tax obligations compared to domestic law.
  
  

• Undefined terms in treaties are interpreted under domestic tax law, or through mutual agreement between contracting states.
  
  

• Treaty benefits may be denied if claims are retrospective beyond 3 years, primarily tax-driven, or if the applicant is not the beneficial owner of the income.

General notes:

• The above is summarised from the current legislations and practices for internal reference only.

• This document cannot be relied upon by any other parties nor included in any submissions, reports, documents or letters required by the relevant regulatory bodies without our prior written consent and/or subject to our approval on the appropriate form and contents; and

• Please kindly noted that SP&A is not a legal firm, our comments provided under this document may include reviewing regulatory documents to be identified as general management consultancy, therefore, should not be considered, nor intended to be, a legal advice.