What is Foreign Contractors Withholding Tax?
Vietnam’s Foreign Contractor Tax (FCT), frequently referred to as the withholding tax, is a levy imposed on transactions carried out within Vietnam between a foreign company or sub-contractor and a Vietnamese entity. This tax is particularly pertinent for foreign businesses engaged in trade or services in Vietnam, ensuring that they contribute to the national revenue system.
The FCT comprises two primary components: the Value Added Tax (VAT) and either the Personal Income Tax (PIT) for individuals or the Corporate Income Tax (CIT) typically applicable to most foreign contractors operating as organizations. This two-pronged approach helps the Vietnamese government maintain a balanced taxation system while monitoring foreign business activities.
For further regulatory specifics, one can refer to Circular No. 103/2014/TT-BTC.
When does foreign contractor tax apply?
The FCT comes into play during business operations in Vietnam under contracts established with either Vietnamese parties or foreign subcontractors. Key scenarios include:
- A foreign entity’s sale of goods or commodities within Vietnam: This applies when goods are delivered to locations within Vietnam, or when the foreign entity retains control over the goods — including ownership, quality, and pricing — while bearing certain distribution costs.
- A foreign entity’s sale of goods coupled with services performed in Vietnam: This includes installations, commissioning, maintenance, and various service types associated with sold goods.
- A foreign entity’s provision of services in Vietnam: This encompasses a wide array of services such as online advertising, marketing, machine repair, and training (excluding online training). Note that specific exemptions exist for services performed entirely outside Vietnam.
- Other income sourced in Vietnam: This category includes any form of income received in Vietnam, regardless of where the business is executed, covering asset transfer incomes, royalties, interest, and compensation for contractual breaches.
What are the FCWT rates and applicability?
Two main types of FCWT may apply depending on the nature of the payment involved. Here’s a summary of treatment rates categorized by business activities:
|
Business activity |
VAT |
CIT |
PIT |
|
Distribution and supply of goods (raw materials, machinery, equipment) |
Exempt |
1% |
0.5% |
|
Services |
5% |
5% |
1.5% or 2% |
|
Restaurant/Casino management services |
5% |
10% |
N/A |
|
Machinery and equipment leasing and insurance |
5% |
5% |
5% |
|
Construction and installation with supply of materials |
3% |
2% |
2% |
|
Construction and installation without supply |
5% |
2% |
2% |
|
Production, transportation, and service with supply of goods |
3% |
2% |
1.5% |
|
Income from royalties |
Exempt or 5% |
10% |
5% |
|
Others |
2% |
2% |
1% |
How are payments made for this withholding tax?
Foreign contractors have three methods for tax payments:
Deduction declaration method
Foreign contractors can file VAT and CIT payments similarly to local firms if they meet specific criteria:
- They hold a permanent establishment or resident status in Vietnam;
- The duration of business conduct in Vietnam under a contractor or subcontractor contract is 183 days or longer from the contract’s effective date;
- They apply the Vietnamese accounting system comprehensively, have completed tax registration, and received a Tax Identification Number (TIN) from the tax authority.
Hybrid method
- In this method, VAT is calculated using the deduction approach, while CIT follows direct method rates based on gross turnover. To qualify, foreign contractors must meet the same criteria outlined for the deduction declaration method.
Direct method
This is applicable when foreign contractors do not satisfy any of the above criteria. Here, VAT and CIT bases are derived from taxable revenue, and VAT on goods or services used to execute main contracts cannot be deducted.
FAQ: Vietnam’s Foreign Contractor Tax
Do I have to pay foreign contractor withholding tax?
The obligation to pay FCWT hinges on the nature of the business or contract involved. This tax is relevant for contractors engaged in business under a Vietnamese contract.
However, not all foreign contractors are liable for Vietnam’s FCT. Several exceptions exist, such as pure purchase contracts, where goods are bought from a foreign enterprise by a Vietnamese customer at the border of Vietnam, without related services in Vietnam.
Additionally, services that are performed and consumed outside Vietnam are generally exempt, alongside specific services conducted wholly outside Vietnam, including particular repairs and training activities.