With the increasing trends in economic integration, it is normal that overseas organisations and foreigners generate income from doing business in another country rather than their home countries. In Vietnam, if a foreign organisation earns income in Vietnam through providing services, or selling goods together with services, or trading, its income will be subject to Vietnamese Withholding Foreign Contractor Tax (“FCT”).  How about tax liabilities of a foreigner earning income through providing services in Vietnam?  

Foreigners earning incomes from providing services in Vietnam, what are their tax liabilities?

Income earned by foreigners from rendering services in Vietnam is taxed in Vietnam regardless of their residence status. However, the tax implications are different depending on various factors that are specified in this article to help the foreigners to comply with the tax regulations in Vietnam as well as mitigate the risks of additional tax, penalties and interests 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:

Being 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

Having a registered place of “permanent residence” in Vietnam; or

Having a rented house (including hotels, guesthouses, motels, offices) 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 does not meet the aforementioned conditions for being a tax resident is a non-tax resident in Vietnam.

Type of incomes and tax implication

Business Income

A foreigner with a license or a practicing certificate, who renders services to organisations/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 business individual, the foreigner’s activities must be licensed according to the regulations in foreign countries or the foreigner must have documents issued under the foreign countries to prove himself as 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”)

Value Added Tax:

VAT payable = Revenue subject to VAT x VAT rate

In which, VAT rates are as below:

- Services, leasing machinery and equipment, insurance; construction, installation excluding materials or machinery and equipment: 5 per cent;

- Production, transport, services accompanied by goods; construction, installation including materials or machinery and equipment: 3 per cent;

- Other activities: 2 per cent.

Personal Income Tax:

PIT payable = Revenue subject to PIT x PIT rate

In which, PIT rates are as below:

- Services, construction exclusive of building materials: 2 per cent;

- Manufacture, transport, provision of services associated with goods, construction inclusive of building materials: 1.5 per cent;

- Other activities: 1 per cent.

Non-tax resident in Vietnam

Value Added Tax: same as tax resident

Personal Income Tax:

PIT payable = Revenue subject to PIT x PIT rate

In which, PIT rates are as below:

- Service provision: 5 per cent;

- Production, construction, transportation, and other activities: 2 per cent.

Income from salary and wage (employment income)

Tax resident in Vietnam

In case a foreigner with a labour contract is regarded as a Vietnamese tax resident, his employment income is subject to Vietnamese PIT at progressive tax rates ranging from 5 per cent to 35 per cent. Tax relief including personal relief (VND9 million/person) and family relief (VND3.6 million/qualified tax dependent) is applied.

Meanwhile, a foreigner, being a Vietnamese tax resident enters into a service agreement, his employment income is subject to Vietnamese PIT at the tax rate of 10 per cent.

Non-tax resident in Vietnam

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

Of note, the organisations paying income take responsibility for declaring and paying tax on behalf of the foreigners. Additionally, in practice, in the event if the business individuals cannot provide the license or practicing certificate or the provided documents are not properly legalised, the tax authority can deem the tax rates of employment income on the income of business individuals.

Analysis of the above-mentioned tax implications

Tax implications on incomes that a foreigner earns from rendering services in Vietnam are summarised in the below table:

Taxation

Business Income

Employment Income

VAT

2 per cent, 3 per cent or 5 per cent on revenue

Not Applicable

PIT

• Tax resident:

1 per cent, 1.5 per cent or 2 per cent on revenue

• Non-tax resident:

2 per cent or 5 per cent on revenue

• Tax resident:

- with labor contract: progressive tax rates from 5 per cent to 35 per cent on assessable income

- with service agreement: 10 per cent on assessable income

• Non-tax resident:

20 per cent on assessable income

Supporting documents

Legalised license/practicing certificate according to foreign laws

Labour contract or service agreement

Example: A foreign independent financial advisor (without qualified tax dependent) receives monthly income of VND80 million (3,500). 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:

Taxation

Business Income

Employment Income

VAT

5 per cent x VND80 million = VND4 million ($174)

Not Applicable

PIT

• Tax resident:

2 per cent x VND80 million = VND1.6 million ($70)

• Non-tax resident:

5 per cent x VND80 million = VND4 million ($174)

• Tax resident:

- with labor contract:

(VND80 million – VND9 million) x 30 per cent - VND5.85 million = VND15.45 million ($672)

- with service agreement:VND80 million x 10% = VND8 million ($348)

• Non-tax resident:

VND80 million x 20 per cent = VND16 million ($695)

Planning point

In conclusion, where a foreigner 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. It is obvious that a thorough understanding of tax regulations will bring significant benefits to the taxpayers.

To be specific, good knowledge of tax regulations and practical tax experience can help the taxpayers to mitigate tax risks of additional tax payable, penalties and interests on late payment and more importantly optimise tax efficiency.

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

By Grant Thornton Vietnam

VIR