Understanding Double Tax Avoidance Agreements (DTA) in Vietnam

Introduction

Navigating the complex web of taxation can be a daunting experience, especially for global investors. One of the greatest challenges they face is the risk of double taxation — being taxed twice on the same income by two different countries. This typically occurs when a company is taxed in its home country and also in a foreign country where it has operations or generates income. Fortunately, countries often sign Double Tax Avoidance Agreements (DTAs) to alleviate this burden.

DTAs are treaties between two countries designed to eliminate double taxation by either exempting certain taxable income or reducing the tax rates applicable. For expatriates and foreign investors in Vietnam, understanding the relevant DTAs that exist between Vietnam and their home countries is crucial. As of 2024, Vietnam has signed DTAs with around 80 countries and territories, making it essential for those involved in international business to familiarize themselves with these agreements.

Who Do DTAs Apply To?

DTAs generally apply to individuals and corporations from countries that are signatories of these agreements with Vietnam. To be considered a resident under these treaties, a person or organization must meet specific criteria outlined by their home country.

For individuals, residency might be determined by various factors including:

• Ownership of residential property.
• Duration of stay in the country.
• Complying with other residency criteria specified by the home country.

A DTA also applies if someone is a resident of both their home country and Vietnam, per the criteria set by each country.

To establish residency in Vietnam, individuals or organizations must meet at least one of the following conditions:

• Stay in Vietnam for 183 days or more within a calendar year.
• Obtain permanent residency.
• Lease a residence in Vietnam for 183 days or more within the tax assessment year.

Organizations qualify as residents if they have a business presence in Vietnam operating under Vietnamese laws. This includes various entities such as Limited Liability Companies (LLCs), joint-stock companies, and cooperatives.

List of Double Tax Avoidance Agreements

Vietnam’s list of DTA partners includes many countries, each with specific stipulations regarding taxation rates on income, royalties, and interests. For instance, the agreement with Australia specifies a tax rate of 10% on both interest and royalties. Other countries like France benefit from a special provision where there’s no withholding tax on dividends.

Here’s a sample from the list:

How Do DTAs Apply?

DTAs in Vietnam influence both corporate and personal income tax situations. The practical application of these agreements includes:

Principles of Application

• Conflict Resolution: If there’s a clash between domestic tax laws and DTA provisions, the terms in the DTA generally take precedence.
• Exclusions: If a DTA provision does not exist under Vietnamese law or if the tax rate stipulated is higher than that of Vietnam’s domestic laws, the latter will apply.

Exceptions for Diplomats

Interestingly, DTAs do not affect the rights or immunities of diplomatic personnel, a stipulation that aligns with various international treaties Vietnam adheres to.

Types of Taxable Income Covered by DTAs

Personal Income

Individuals from DTA signatory countries earning income in Vietnam must adhere to local personal income tax laws. However, they may be exempt from taxation in their home countries depending on DTA stipulations. For a complete exemption in Vietnam, they must meet specific conditions—staying fewer than 183 days in Vietnam, being employed by a foreign company, and not receiving wages from a permanent establishment in Vietnam.

Income from Independent Services

Foreign nationals providing independent services in Vietnam face distinct tax obligations:

• Earnings through licensed services are generally subject to corporate income taxes.
• Those without a business license must pay personal income taxes.

Corporate Income

Entities with a permanent establishment, like foreign-invested enterprises (FIEs), must comply with Vietnam’s corporate tax laws. A permanent establishment is defined as a fixed business site where operational activities take place. Tax obligations for FIEs are categorized by:

• Legal Entities: Subject to corporate income tax regulations based on their business activities.
• Non-Legal Entities: Encounter withholding tax if they have a permanent establishment.

Foreign Contractors Withholding Tax

Entities engaging in contracts with Vietnamese organizations or individuals are liable for paying withholding taxes as per local regulations.

Other Income Sources

Dividends

Dividends typically do not benefit from DTA provisions, as Vietnam imposes no withholding tax on them. Companies must fulfill their tax obligations in Vietnam before distributing dividends, often leading to double taxation in the signatory countries, where these dividends might be taxed again.

Interest & Royalties

Interest payments are often exempted under most DTAs, whereas royalty income usually incurs taxation ranging from 5% to 15%, offering potential savings for foreign enterprises.

Technical, Management, and Consulting Services

Fees for these services are generally subject to a 10% withholding tax, which includes a portion for value-added tax (VAT) as well. Due to DTA stipulations, only the corporate income tax aspect may be eligible for exemptions.

This detailed understanding of Double Tax Avoidance Agreements not only aids expatriates and foreign investors in navigating their tax obligations but also fosters smoother international business operations in Vietnam.