Valerie Teo and Nguyen Tan Tai, of Grant Thornton Vietnam, discuss the tax implications for foreign individuals who are assigned to work in Vietnam and the tax protection available under a double taxation agreement.
In the globalization of Vietnam’s economy, many international business organizations have been carrying on doing cross-border business in Vietnam without establishing a subsidiary. Under some business structures, an international company enters into a service provision contract with a Vietnamese party where they assign their expatriate employees to Vietnam to execute the contract. These expatriates have no employment relationship with the Vietnamese party to which they are assigned to perform services.
Apart from foreign contract withholding tax imposed on the income earned by foreign companies in Vietnam through providing services, employees who are foreigners assigned to render such services therein Vietnam can be liable for personal income tax (PIT) in Vietnam.
Personal Income Tax Implications
According to Vietnamese regulations, individuals are subject to PIT based on their tax residency status in Vietnam.
Individuals will be considered as tax residents of Vietnam if they meet one of the following conditions:
- present in Vietnam for 183 days or more in a calendar year or in 12 consecutive months from the first day they arrive in Vietnam; or
- have a permanent place of residence in Vietnam, particularly:
- the place which has been registered and reflected on the permanent residence card or temporary residence card;
- with a leased house or similar, i.e. hotels, guest houses, location of offices in Vietnam with a total lease term of 183 days or more in a tax year and not being a tax resident of another jurisdiction.
As a tax resident of Vietnam, the individual’s worldwide income is taxed in Vietnam. Employment income is taxed on at progressive tax rates ranging from 5% to 35%. In addition, other income (including business income, income from capital investment, capital assignment, real estate transfers, inheritances and gifts, etc.) is also taxed in Vietnam at a range of different rates. Worldwide income is defined as the total income that an individual earned or received both within and outside of Vietnam from personal exertion.
Foreigners who do not meet the above-mentioned conditions are considered as a non-resident of Vietnam. A non-resident of Vietnam is taxed in Vietnam only on their Vietnam-sourced income. Vietnam-sourced income is the income earned or received in relation to the employment and the performed transaction of that foreign individual in Vietnam regardless of the origin or country where the remuneration is paid.
Vietnamese PIT declaration and payment is applied on a withholding basis. Vietnam regulations encompass the concept of tax deduction at source, and legalize this by specifying that employers are required to deduct PIT at source prior to paying income to their employees. If an overseas organization has no legal office established in Vietnam, the foreigner should apply for issuance of his/her individual tax code and directly file the tax declaration and pay tax to the Vietnam tax authority.
Tax Protection under a Double Taxation Agreement
Foreign employees can seek tax protection under a double taxation agreement (DTA) provided that an effective DTA signed between their home country and Vietnam is available.
Under the domestic laws of Vietnam on DTAs, an individual who is a resident of a contracting state to a tax treaty concluded with Vietnam and derives income from his/her employment in Vietnam, will pay PIT in Vietnam in accordance with Vietnam PIT regulations.
If an individual concurrently and fully satisfies the following conditions, his/her remuneration from the employment in Vietnam shall be exempt from PIT in Vietnam:
- the individual has a certificate of tax residence in his/her home country;
- the individual is present in Vietnam for less than 183 days in a 12-month period starting or ending within the taxable year concerned;
- the employer is not a resident of Vietnam, regardless of whether that remuneration is directly paid by the employer or through the employer’s representative;
- this remuneration is not borne and paid by the Vietnam-based permanent establishment (PE) set up by the employer.
In cases where the above conditions are met, the employees are exempt from Vietnamese PIT.
It is worth mentioning that the fourth condition above should be carefully considered and justified, i.e., whether the foreign company which employs and pays income for the assigned foreign employees has a PE in Vietnam or not.
Permanent Establishment Exposure and Implications
The creation of a PE in Vietnam is determined by application of the Vietnamese domestic laws, relevant tax treaties entered into by the countries, and recently released BEPS Actions.
Current Vietnamese regulations stipulate that the following conditions must be met to identify whether the foreign company’s business activities constitute a PE in Vietnam:
- a business establishment is maintained (e.g. branches, executive offices, plants and a location in Vietnam where natural resources are exploited, or construction sites, installation or assembly works, establishments providing services, agents, and representatives, buildings, vehicle, machinery or equipment or merely a specific place without an identifiable management system, etc.;
- the business establishment must be fixed. This means that it must be established at a specified place in Vietnam and/or maintained on a permanent basis. However, the definition of “fixed” does not necessarily mean that such establishment must be located in a specific place for a specific time;
- the business activities in Vietnam are partly or wholly conducted by a foreign company through this establishment.
Definitions of PE may differ between Vietnam domestic tax laws and the DTAs. In the event of different provisions, the definition under the DTA shall prevail the domestic regulations.
Under the general understanding of the tax laws, a PE may be difficult to identify; however, the nature of a business structure will be a deciding factor and this should be carefully considered.
Failure to qualify as non-PE status can result in inability to optimize tax efficiency or even be subject to tax penalties if the application for DTA protection is rejected by the tax authority. Having said that, foreign companies should pay attention to the following points.
Potential Risk of DTA Application Being Rejected
The following situations may occur that could contribute to the creation of a PE of a foreign company and accordingly lead to a failure of a tax protection application under a DTA for the foreign employee:
- the foreign company may fail to prove a non-PE position because the nature of its business structure in Vietnam qualifies for PE definitions under Vietnam domestic laws and/or a DTA;
- the foreign company may maintain an operation office, a site or a place in Vietnam as a “fixed place” for the purpose of management of the projects conducted in Vietnam territory;
- the foreign employee may be unintentionally given the authority to “habitually exercise management functions,” including, but not limited to, entering into contracts on behalf of his/her employer company in Vietnam;
- services rendered in Vietnam by the foreign employees belong to a related project or projects that lasts for a period or periods exceeding 183 days in each 12-month period;
- the foreign employee fails to obtain a tax resident certificate in the home country;
- as the determination of PE status must be based on evidentiary findings from the activities of the foreign company and their employees in Vietnam, relevant documents attributing to a non-PE status may not be available at the time of the tax authority’s request.
DTA Application—Points to Consider
- The tax exemption under DTAs is conducted on a self-assessment and self-declaration basis without the opinion of the tax authorities at the time of submitting the DTA application dossier.
- Application dossiers should be filed with the tax authority within 15 days prior to performing the work in Vietnam. Within 15 days prior to the completion of the work in Vietnam or the end of each tax year, whichever comes first, the foreign employee shall send the certificate of residence of that tax year to the Vietnamese party for submission.
- If the foreign employee fails to submit the above notifications in a timely manner, they must pay tax but the refund may still be claimed (with three years depending on the relevant DTA). Refund procedures are normally more time-consuming and challenging.