In the context of global economic integration, the business activities of foreign investors in Vietnam not only create new opportunities but also pose many requirements for legal compliance and tax obligations. Among these obligations, foreign contractor tax (“FCT”) is an important aspect that requires a deep understanding of legal regulations and implementation procedures. Through this article, we will share with you the key points to consider regarding the FCT obligations of foreign investors when generating revenue from business activities in Vietnam.

1. Foreign contractor tax (“FCT”) and FCT subject

Foreign contractor tax is a tax policy applicable to foreign contractors and foreign subcontractors doing business in Vietnam or having income arising in Vietnam. FCT specifically applies to the following subjects:

• Foreign business organizations with or without a permanent establishment in Vietnam; foreign business individuals who are or are not residents of Vietnam (hereinafter collectively referred to as “Foreign Contractors” or “Foreign Subcontractors”) who do business in Vietnam or have income arising in Vietnam on the basis of contracts, agreements, or commitments between Foreign Contractors and Vietnamese organizations or individuals or between Foreign Contractors and Foreign Subcontractors to perform a part of the Contractor Contract.
• Foreign organizations and individuals that supply goods in Vietnam under the form of on-the-spot import-export and have income arising in Vietnam based on contracts signed between foreign organizations and individuals with Vietnamese enterprises (except for the case of processing and exporting goods to foreign organizations and individuals) or distributing goods in Vietnam or supplying goods under the delivery conditions of international trade terms – Incoterms where the seller bears the risk of the goods entering Vietnamese territory.
• Foreign organizations and individuals that carry out all or part of their business activities of distributing goods and providing services in Vietnam, where the foreign organizations and individuals remain the owners of the goods delivered to Vietnamese organizations or are responsible for the costs of distribution, advertising, marketing, quality of services, quality of goods delivered to Vietnamese organizations, or set the selling price of goods or the price of providing services; including the case of authorizing or hiring Vietnamese organizations to perform a part of distribution services, other services related to the sale of goods in Vietnam.
• Foreign organizations or individuals acting through Vietnamese organizations or individuals to negotiate and sign contracts in the name of the foreign organizations or individuals.
• Foreign organizations and individuals performing the right to export, import, distribute in the Vietnamese market, purchase goods for export, and sell goods to Vietnamese traders in accordance with the law on trade.

2. Types of taxes applicable to foreign contractor tax obligations

For foreign contractors, and foreign subcontractors that are organizations, when they have revenue in Vietnam, depending on the specific case, they shall be subject to various taxes, including value-added tax (VAT) and corporate income tax (CIT).

Foreign contractors, and foreign subcontractors who are foreign individuals engaged in business activities, are responsible for fulfilling Value Added Tax (VAT) and Personal Income Tax (PIT) obligations.

2.1 Value-Added Tax Subjects

• Services or services related to goods that are subject to VAT and provided by foreign contractors or subcontractors under contractor contracts or subcontract contracts for use in production, business, and consumption in Vietnam, including:

Services or services related to goods that are subject to VAT and provided by foreign contractors or subcontractors in Vietnam and consumed in Vietnam;

Services or services related to goods that are subject to VAT and provided by foreign contractors or subcontractors outside Vietnam and consumed in Vietnam.

• In cases where goods are provided under a contract in the following forms: the point of delivery of the goods is located within the territory of Vietnam (except for the cases specified in Clause 5 Article 2 Chapter I of Circular No. 103/2014/TT-BTC); or the provision of goods is accompanied by services performed in Vietnam such as installation, testing, warranty, maintenance, replacement, and other services accompanying the provision of goods (including cases where the accompanying services are free of charge), even if the provision of the above-mentioned services is or is not included in the value of the goods supply contract, the value of the goods shall only be subject to VAT at the import stage, and the value of services shall be subject to VAT according to the guidance in Circular No. 103/2014/TT-BTC. In cases where the value of goods and the value of their accompanying services cannot be separated (including cases where accompanying services are free of charge), VAT shall be calculated on the entire contract.

2.2 Corporate Income Tax Subjects

The taxable income for CIT of foreign contractors and foreign subcontractors is the income arising from the activities of supplying, and distributing goods; providing services, and services related to goods in Vietnam on the basis of Contractor Contracts and Subcontractor Contracts. (except for cases specified in Article 2 Chapter I of Circular No. 103/2014/TT-BTC).

Income arising in Vietnam of foreign contractors and foreign subcontractors: This refers to any income received in any form under a contractor agreement or a subcontractor agreement (except for cases specified in Article 2 Chapter I of Circular No. 103/2014/TT-BTC), regardless of the location where the foreign contractor or foreign subcontractor perform their business activities.

In cases where goods are provided in the following forms: the point of delivery of the goods is located within the territory of Vietnam (except for the cases specified in Clause 5 Article 2 Chapter I of Circular No. 103/2014/TT-BTC); or the provision of goods is accompanied by services performed in Vietnam such as marketing-advertising services, trade promotion activities, after-sales services, installation, testing, warranty, maintenance, replacement, and other services accompanying the provision of goods (including cases where the accompanying services are free of charge), even if the provision of the above-mentioned services is or is not included in the value of the goods supply contract, the taxable income under CIT of foreign contractors and foreign subcontractors is the entire value of the goods and services.

Taxable income of foreign contractors and foreign subcontractors in some specific cases as follows:

• Income from the transfer of ownership and use rights of property; assignment of rights to participate in economic contracts/projects in Vietnam; assignment of property rights in Vietnam.
• Royalty income is any income received in any form for the right to use, transfer of intellectual property and technology transfer, software copyright (including amounts paid for the right to use, transfer of copyright and ownership rights of works; transfer of industrial property rights; technology transfer, software copyright).
• Income from the transfer or liquidation of assets.
• Income from loan interest: This refers to the income earned by the lender from any form of loan, regardless of whether the loan is secured by collateral or not, and whether or not the lender receives any other benefits from the borrower; income from interest on deposits (excluding interest on deposits of foreign individuals and interest on deposits arising from deposit accounts maintained operations in Vietnam of diplomatic missions, representative offices of international organizations, and non-governmental organizations in Vietnam), including any interest-related bonuses (if any); income from late payment interest as stipulated in contracts; income from interest on bonds, bond discounts (excluding tax-exempt bonds), and treasury bills; income from interest on certificates of deposit.

Interest on loans includes all fees that the Vietnamese Party must pay in accordance with the provisions of the contract.

• Income from the transfer of securities.
• Penalties and compensation received from a breaching contractual partner.

In addition, the regulations on taxable income are also open to other taxable income as prescribed by law. Investors shall be aware of this to make appropriate declarations for each period.

The above is some basic information on foreign contractor tax (FCT) in Vietnam. Methods for calculating FCT will be mentioned in the next article in this series.

Time of writing: 12/03/2024

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer  at  info@cdlaf.vn

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