Foreign Contractor Tax (“FCT”)

      FCT applies to certain payments to foreign parties including interest, royalties, service fees, leases, insurance, transportation, transfers of securities and goods supplied within Vietnam or associated with services rendered in Vietnam, and certain distribution arrangements. It normally comprises a combination of CIT and VAT at varying rates but can also include PIT for payments to foreign individuals.
 Dividends No withholding or remittance tax is imposed on profits paid to foreign corporate shareholders.
 Interest Withholding tax of 5% applies to interest paid on loans from foreign entities. Offshore loans provided by certain Government or semi-government institutions may obtain an exemption from interest withholding tax where a relevant double taxation agreement or inter-governmental agreement applies.
 Interest paid on bonds (except for tax exempt bonds) and certificates of deposit issued to foreign entities are subject to 5% withholding tax. Sales of bonds and certificates of deposits are subject to deemed tax of 0.1% of the gross sales proceeds.
 Royalties and Licence Fees FCT at 10% applies to payments to a foreign entity for the right to use, transfer intellectual property or for transfers of technology or software license.
 Payments to Foreign Contractors A withholding tax on payments to foreign contractors applies where a Vietnamese party (including foreign owned companies) contracts with a foreign entity that does not have a licensed presence in Vietnam.
 This FCT generally applies to payments derived from Vietnam, except for the pure supply of goods (i.e. where the responsibility, cost and risk relating to the goods passes at or before the border gate of Vietnam and there are no associated services performed in Vietnam), services performed and consumed outside Vietnam and various other services performed wholly outside Vietnam (e.g. certain repairs, training, advertising, promotion, etc.).
 In addition, certain distribution arrangements where foreign entities are directly or indirectly involved in the distribution of goods or provision of services in Vietnam are subject to FCT – e.g., where the foreign entity retains ownership of the goods, bears distribution, advertising or marketing costs, are responsible for the quality of goods or services, make pricing decisions, or authorises/hires other Vietnamese entities to carry out part of the distribution of goods/provision of services in Vietnam.
 Foreign contractors can choose between three methods for tax payment - the deduction method, the direct method and the hybrid method.
 Method One – Deduction Method This entails the foreign contractor registering for VAT purposes and filing CIT and VAT returns in the same way as a local entity.  Foreign contractors can apply the deduction method if they meet all of the requirements  below:
 ·       They have a PE or are tax resident in Vietnam;·       The duration of the project in Vietnam is more than 182 days; and·       They adopt the full Vietnam Accounting System (“VAS”), complete a tax registration and are granted a tax code.
 The Vietnamese customer is required to notify the tax office that the foreign contractor will pay tax under the deduction method within 20 working days from the date of signing the contract.
   If the foreign contractor carries out many projects in Vietnam and qualifies for application of the deduction method for one project, the contractor is required to apply the deduction method for its other projects as well.
 The foreign contractor will pay CIT at 22% on its net profits.
 Method Two – Direct Method Foreign contractors adopting the direct (or withholding) method do not register for VAT purposes nor file CIT or VAT returns. Instead CIT and VAT will be withheld by the Vietnamese customer at prescribed rates from the payments made to the foreign contractor. Various rates are specified according to the nature of the activities performed. The VAT withheld by the Vietnamese customer is generally an allowable input credit in its VAT return.
 Separate requirements for FCT declarations under this method are provided for foreign contractors providing goods and services for exploration, development and production of oil and gas.
 Method Three – Hybrid Method The hybrid method allows foreign contractors to register for VAT and accordingly pay VAT based on the deduction method (i.e. output VAT less input VAT), but with CIT being paid under the direct method rates on gross turnover.
 Foreign contractors wishing to adopt the hybrid method must:
 ·       Have a PE in Vietnam or be tax resident in Vietnam;·       Operate in Vietnam under a contract with a term of more than 182 days; and·       Maintain accounting records in accordance with the accounting regulations and guidance of the Ministry of Finance. The FCT rates are summarised below:
 Rates 

Industry	Deemed VAT rate (3)	Deemed CIT rate
Supply of goods in Vietnam or associated with services rendered in Vietnam (including in-country import-export and imports, distribution of goods in Vietnam or delivery of goods under Incoterms where the seller bears risk relating to goods in Vietnam)	1% (1)	1%
Services	5%	5%
Services together with supply of machinery and equipment (2)	3%	2%
Restaurant, hotel and casino management services	5%	10%
Construction, installation without supply of materials, machinery or equipment.	5%	2%
Construction, installation with supply of materials, machinery or equipment.	3%	2%
Leasing of machinery and equipment	5%	5%
Leasing of aircraft and vessels	Exempt (4)	2%
Transportation	3% (5)	2%
Interest	Exempt	5%
Royalties	Exempt (6)	10%
Insurance	Exempt/5% (7)	5%
Re-insurance, commission for re-insurance	Exempt	0.1%
Transfer of securities	Exempt	0.1%
Financial derivatives	Exempt	2%

   (1)      VAT will not be payable where goods are exempt from VAT or where import VAT is paid(2)     Where the contract does not separate the value of goods and services(3)     The supply of goods and/or services to the oil and gas industry are subject to the standard 10% VAT rate. Certain goods or services may be VAT exempt or subject to 5% VAT.(4)     Where aircraft and vessels cannot be manufactured in Vietnam(5)     International transportation is subject to 0% VAT(6)     Software licenses, transfer of technology, transfer of intellectual property rights are VAT exempt(7)     Certain types of insurance are exempt from VAT (see “Exempt Goods and Services” in VAT section).
 Double Taxation Agreements (“DTAs”) The CIT withholding taxes may be affected by a relevant DTA. For example, the 5% CIT withholding on services supplied by a foreign contractor may be eliminated under a DTA if the foreign contractor does not have a PE in Vietnam.
 Vietnam has signed up to more than 65 DTAs and there are a number of others at various stages of negotiation. Please see the summary at Appendix I. Notably absent is a DTA with the United States of America.
 Additional guidance has been introduced on the application of DTAs and became effective in 2014. The most notable and interesting changes relate to beneficial ownership and general anti-avoidance provisions. DTA entitlements will be denied where the main purpose of the arrangements is to obtain beneficial treatment under the terms of the DTA (treaty shopping) or where the recipient of the income is not the beneficial owner. The guidance dictates that a substance over form analysis is required for the beneficial ownership and outlines the factors to be considered:
 -           Where the recipient is obligated to distribute more than 50% of the income to an entity in a third country within 12 months;-           Where the recipient has little or no substantive business activities;-           Where the recipient has little or no control over or risk in relation to the income received;-           Back to back arrangements;-           Where the recipient is resident in a country with a low tax rate;-           The recipient is an intermediary or agent.

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