Taxation is a crucial aspect to understand for any investor before implementing a market entry strategy. Vietnam has a unique taxation system that encompasses several significant taxes. Most companies established in Vietnam will be subject to the majority of the taxes outlined below.
Corporate Income Tax (CIT)
Corporate Income Tax (CIT) in Vietnam is imposed at a rate of 20% on a company’s annual profit. However, there can be exceptions, with the Vietnamese government occasionally granting tax breaks, such as a 30% deduction in 2020 due to the impact of the COVID-19 pandemic.
Furthermore, certain industries eligible for tax incentives, such as high-tech, biotech, material technology, automation, scientific research, and social enterprises, may enjoy CIT exemption or a reduced CIT rate, typically ranging from 5% to 10%. CIT in Vietnam is calculated based on a company’s annual financial performance, and the tax liability is settled by the end of the fiscal year.
Value Added Tax (VAT)
Value Added Tax (VAT) is a significant indirect tax in Vietnam, and it is levied at one of three rates: 0%, 5%, or 10%, depending on the product or service involved. Most goods sold within Vietnam are subject to a 10% VAT. However, when it comes to importing and exporting goods, there can be variations. Importing and exporting may be subject to a 0% or 5% VAT, with 0% VAT typically applied to exports provided that the product or service is used or implemented outside of Vietnam.
For instance, if an Australian company contracts Iris International to set up an affiliate or branch in Vietnam, since the service is performed within Vietnam’s territory, it is subject to the standard 10% VAT, even if the client is a foreign entity.
Conversely, if the same Australian company engages Iris International to develop software exclusively for its use in Australia or by users outside of Vietnam, this could be considered a service export, which is subject to a 0% VAT rate.
Additionally, certain special businesses may be exempt from VAT, meaning they do not need to collect VAT from their customers for the services or products they provide.
Companies in Vietnam can adopt one of two VAT taxation strategies: deductible VAT taxation or direct VAT taxation. The majority of companies in Vietnam prefer the deductible approach.
VAT in Vietnam requires quarterly reporting and payment, with a finalization at the end of the fiscal year.
Personal Income Tax (PIT)
Personal Income Tax (PIT) in Vietnam is imposed at different rates depending on the source and nature of income. Irregular earnings from work are subject to a 10% PIT rate for local Vietnamese and a 20% PIT rate for resident foreigners. On the other hand, regular income received on a monthly basis is taxed on a progressive scale, with varying tax rates applied to different portions of the income, ranging from 5% to 35%.
The Vietnamese PIT system is complex due to its incorporation of multiple factors such as self-deductions, insurance contributions, minimum wages, taxable income thresholds, and more. Any changes in these factors can impact the PIT amount owed.
For regular employment income, the company is responsible for deducting PIT from employees’ salaries and remitting it to the government on the employees’ behalf. Additionally, at the end of the year, the company must conduct a PIT finalization process for its employees. This process involves reporting how much tax has been paid on behalf of each employee and whether any tax refunds are due to individuals. Failing to pay PIT on time or accurately may result in penalties and potential legal liabilities for the company.
Foreign Contractor Tax (FCT)
Cross-border service contracts in Vietnam are subject to the Foreign Contractor Tax (FCT). When an offshore company provides goods or services to a Vietnamese company, the foreign company is obligated to pay this tax. However, it is the responsibility of the Vietnamese entity to collect the FCT and remit it to the Vietnamese government on behalf of the foreign service provider.
The specific rate of the FCT tax varies, with rates of 2%, 3%, or 5% depending on the nature of the service being provided. This tax can sometimes deter companies in Vietnam from engaging the services of foreign entities, and they may encourage their international partners to establish a branch or entity in Vietnam to simplify the tax process.
Business License Tax (BLT)
In Vietnam, all businesses are obligated to pay a business license tax in the first month of the fiscal year. The amount of this tax is determined by the level of capital investment, with the lowest amount being 1 million VND (approximately $45/year) and the highest amount being 3 million VND (approximately $140/year). It’s important to note that this business license tax does not apply to offshore companies’ Representative Offices in Vietnam.
While the business license tax amount may seem insignificant, failing to pay it by the deadline can lead to substantial fines, the suspension of the business license, or even the blocking of the tax code.
Vietnam’s tax and accounting systems can be complex and subject to frequent changes in the law, which can pose challenges for foreign investors. As a result, many foreign investors opt to seek local assistance with tax compliance to ensure they meet all deadlines and avoid penalties.
Iris International is proud to be the most effective business solution firm, providing the best services in-term of tax consultation, tax reporting and filing services for offshore business established in Vietnam. We have experience in many industries with a deep understanding about the Vietnamese tax system to help your business have smooth and seamless operation and compliance with tax regulations in Vietnam.
Moreover, Iris International provides the offshore formation services in Vietnam to assist you with on-stop effort establishing your corporation in Vietnam and many other countries. We also provide services like payroll, EOR, bookkeeping and accounting, office set-up services to help your offshore business in Vietnam operate in effective and efficient manners.
Contact us for more information.
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