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Businesses which are based outside of Vietnam (i.e. have no licensed presence in Vietnam), and provide goods and services in Vietnam, should be aware of the foreign contractor tax (FCT). FCT can be simply seen as a withholding tax in Vietnam, as Vietnamese-registered entities (including foreign-owned enterprises) pay FCT on behalf of foreign contractors by essentially withholding a certain amount of Vietnam-sourced payments from foreign contractors.
Business entities without a permanent establishment in Vietnam, and foreign business individuals, irrespective of whether they are residents or non-residents in Vietnam, are subject to FCT. Foreign contractor tax is not a distinctive tax but rather a framework for withholding taxes. FCT concerns primarily two types of taxes: value-added tax (VAT) and income tax. In case of foreign individual contractors, they will pay VAT and personal income tax (using an applicable personal income tax rate of Vietnam), while foreign corporate contractors will pay VAT and corporate income tax (CIT).
In addition, it is important to understand what will be subject to VAT and income tax, in respect to foreign contractor tax. All services, or services in connection with goods, that are provided by foreign contractors or sub-contractors (under contracts or sub-contracts), and that are enjoyed in Vietnam, will be subject to Vietnamese VAT. As for CIT and personal income tax, income that is generated from providing goods, services, and services in connection with goods in Vietnam, which is received under a contract between a foreign contractor and a Vietnamese party, will be subject to Vietnamese income tax.
Foreign entities which are subject to FCT and have no permanent establishment in Vietnam cannot pay the relevant taxes themselves as they are not subject to Vietnamese taxation and are not registered taxpayers in Vietnam. Therefore, domestic entities will pay FCT to the tax authorities on behalf of the foreign contractors. FCT is seen as a withholding tax in this case. The applicable rates are stipulated in the Circular No. 103/2014/TT-BTC, which was issued by the Ministry of Finance in 2014. These rates may be affected by Double Taxation Agreements that are in place between Vietnam and countries worldwide.
To sum up, foreign contractor tax is not a separate tax, but rather is considered a mechanism to apply corporate income tax, personal income tax, and value added tax, towards foreign business entities deriving revenue from the Vietnamese market, but without a legal entity in Vietnam.
For financial transactions to be transparent and accurate, entities need to have a clear understanding of foreign contractor tax. Please feel free to contact us atinfo@phcadvisory.comfor more information.
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