With the aim of promoting the development of intellectual property and high technology, particularly in the current context of globalization, the Vietnam government provides incentives through a variety of tax treatments on royalty transfers. Organizations/individuals having relevant income in this regard should understand the incentives that Vietnam currently offers, as well their tax implications, to make the most of the opportunities available.
Classification of Income Being Royalty
Intellectual property rights (IP rights) means the rights of an organization or individual to intellectual assets comprising copyright and copyright related rights, industrial property rights and rights to plant varieties.
Copyright means the right of an organization or individual to works which such organization or individual created or owns, and copyright related rights means the rights of an organization or individual to performances, audio and visual fixation, and broadcasts and satellite signals carrying coded programs.
Industrial property rights means the rights of an organization or individual to inventions, industrial designs, designs of semi-conducting closed circuits, trade secrets, trademarks, trade names and geographical indications which such organization or individual created or owns, and the right to prevent unfair competition.
Technology means solutions, processes and know-how, whether attached or unattached to tools/devices and facilities, used to turn resources into products. Technology transfer means transfer of the right to own technology or of the right to use technology from the party with the right to transfer such technology to the technology transferee.
Royalties may be represented in many different industries, but they serve a similar purpose in all uses. Royalties are granted by agreement, and they allow others to use the property, giving the owner the benefit of an income from this use.
Tax Treatment of Income being Royalties
Income being royalties subject to corporate income tax (CIT) is income being paid in any form for the use right or for the transfer of IP rights (including payments for the use right and for transfers of rights of an author and rights of the owner of a work, transfers IP rights), for technology transfer or for software copyright.
The revenue derived from technology transfers pursuant to the Law on Technology Transfers, and IP transfers pursuant to the Law on Intellectual Property, would not be subject to value-added tax (VAT). In the case of contracts for technology transfer or IP transfer accompanied by a transfer of machinery and equipment, only the value of the transferred technology or IP shall not be subject to VAT: where such value cannot be separated, the value of technology or IP transferred with machinery and equipment shall also be subject to VAT.
Tax treatment and tax rates imposed on the transfers varies, as it is subject to the nature of the rights to be transferred and the interpretation of the local tax departments, as well the taxpayer, who may be either an individual or organization, entity/organization established in Vietnam or overseas.
From a tax perspectives, income from royalties could be classified into four categories with corresponding different tax treatments:
(i) transfer of the use of (the rights to use) subjects of IP rights;
(ii) transfer of technology and the ownership of IP rights;
(iii) transfer of software copyright; and
(iv) software-related services.
For income derived in Vietnam under (ii), (iii) and (iv) by an overseas entity/organization, the foreign withholding tax rate of 10% on CIT shall be imposed, while it is not subject to VAT; whereas payment related to (i) would include both CIT and attract VAT.
Additionally, if the software copyright is contained in a storage tool (e.g. a USB) or accompanied by a transfer of machinery and equipment, an additional tax shall be imposed on the storage tool/equipment respectively including CIT and VAT (if the value of such tool/equipment can be separately stated).
If the transferor is an individual/s, the transferor (either tax resident or non-tax resident) will be subject to personal income tax (PIT) at the flat tax rate of 5% on the amount exceeding 10 million Vietnamese dong ($434) of the contract value. This non-employment income is required to be withheld at source or self-declared on an event basis.
Regarding the royalty transaction transferred by a Vietnamese enterprise, if the transaction’s nature falls into categories (i), (ii), (iii), (iv) above, this shall not be subject to VAT, and it is possible to apply for CIT incentives if the business activities relate to (iii) and also meet certain other conditions related to software production.
Import duties maybe imposed on royalties if the royalty payment is associated with imported goods and regarded as a term and condition under a trading contract/agreement and not calculated in the price which was actually paid or will be paid.
Possibility to Apply Double Taxation Agreement
Vietnam has concluded more than 80 double taxation agreements (DTAs) with various countries; a number of other DTAs are also in stages of negotiation.
Although each DTA concluded by Vietnam has specific terms and may differ from one country to another, the scope of royalties as determined in most DTAs signed between Vietnam and other jurisdictions typically includes payments of any kind being received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
The methods of relieving double taxation are provided either under a country’s domestic tax laws or under the tax treaties. The available methods in Vietnam are tax exemption or reduction and foreign tax credit. In addition, in many DTAs the limits of withholding tax rates applied to royalties within the DTAs are higher than domestic withholding taxes, therefore domestic rates can also apply to reduce the tax burden.
The taxpayer may consider applying a DTA on income which is particularly stipulated in each DTA to eliminate or reduce the CIT portion of FCT and PIT if the taxpayer does not have any permanent establishment (PE) nor is tax resident in Vietnam. Tax exemption or reduction under a DTA is not automatically granted but needs to be self-assessed by the taxpayer and submitted by a dossier of notification of eligibility for tax exemption or reduction under the DTA to the local tax department 15 days before commencing an assignment or contract in Vietnam.
With respect to the PE risk, PE is defined as “a fixed place of business through which a foreign enterprise carries out part or the whole of its business or production activities in Vietnam.” In general, most DTAs stipulate that when a foreign company with a PE in Vietnam derives income from its home country and has paid tax under the provisions of the tax treaty and under its home country’s domestic laws, Vietnam may still tax such income which is attributed to the PE in Vietnam.
From the variance of the definition of IP rights as well as technologies, taxpayers should take into consideration the nature of transactions as well as the supporting documents to justify the transaction. For prudence, it is recommended that the transferor should seek a confirmation from the competent authorities (e.g. the Ministry of Science and Technology) to determine into which category such transferred transaction could be classified.