For foreign investors, knowing where and how to invest in Vietnam goes hand in hand with knowing and understanding the different tax obligations. Taxes affect investment returns, operating costs, and even pricing and planning. Vietnam is famous for its very competitive Corporate Income Tax (CIT) and very beneficial investment incentives. However, businesses still must deal with VAT, withholding taxes, and customs duties and other requirements.
Fortunately, Vietnam’s taxation system is quite transparent with benefits for specific sectors and investment projects. This document aims to provide foreign clients with a brief summary of taxation in Vietnam with a focus on Corporate Income Tax, Value Added Tax, tax incentives, and relevant considerations and concerns in regard to taxation in Vietnam.
Overview of Vietnam’s Business Taxation System
For foreign investors, the Vietnam local tax system is one of the most critical for doing business in the country. Taxes influence pricing, profits, and even the structure of the investment. While Vietnam tax obligations are fairly on par with its neighboring countries, businesses still need to comply with several corporate taxes, indirect taxes, and employee-related taxation.
The tax system of Vietnam is run by the General Department of Taxation (GDT), which is under the Ministry of Finance. Most businesses in Vietnam will encounter several key taxes, which include Corporate Income Tax (CIT), Value Added Tax (VAT), Withholding Tax (WHT), Foreign Contractor Tax (FCT), and Personal Income Tax (PIT).
The Corporate Income Tax, Value Added Tax, Tax Administration Law, and relevant regulations constitute the principal components of the legal framework. Collectively, these laws establish the mechanisms for the calculation of taxable income, the deductibility of expenses, the applicable rates of tax, and the requirements for tax returns.
Vietnam has a calendar-year tax system, with the financial year from January 1 to December 31. Companies may apply for an alternative financial year to the relevant authorities.
For foreign-owned companies, viewing tax compliance as simply a reporting requirement is a serious oversight. Tax planning from the beginning aids the alignment of business operations with available incentives and reduces the likelihood of tax audits.
Corporate Income Tax
Corporate Income Tax (CIT) is, without a doubt, one of the most important taxes for foreign businesses operating in Vietnam. CIT also has significant implications for the assessability of dividends and reinvestment dividends, as well as for the financial evaluation of Vietnam as an investment destination.
The standard corporate income tax rate in Vietnam is 20%. This applies to most businesses, irrespective of the ownership structure. In comparison to a number of developed markets, this is a relatively competitive tax rate for foreign investors establishing a presence in the region.
Some industries have specific taxing privileges with higher tax rates. For instance, companies with oil and gas exploration activities may have CIT rates from 25% to 50%. In comparison, some natural resource extraction activities may be taxed from 40% to 50% project specifically and according to the respective provisions.
Taxable Income and Deductible Expenses
Corporate Income Tax is paid on a company’s taxable income. Taxable income is generally total revenue less expenses and other eligible adjustments.
However, as a matter of practice, arriving at taxable income is more complex than the simple computation of accounting profits. Under Vietnamese tax laws, companies have the burden of differentiating deductible and non-deductible expenses.
In order for an expense to be deemed deductible, the following conditions must be satisfied:
- The expenses must be directly related to the business activities of the company.
- The expenses must be evidenced by valid invoices.
- The expenses must conform with the provisions of laws and must be paid.
Expenses of salaries, office rents, professional fees, depreciation, and other expenses related to business operations are generally deductible.
On the other hand, a number of expenses are routinely disallowed upon tax audits. These expenses may include undocumented expenses, personal expenses, penalties, and expenses that are disallowed under the provisions of the tax law.
Non-Vietnamese companies should be aware that Vietnam is a signatory of OECD’s Base Erosion and Profit Shifting (BEPS) and of its international tax standards. One such regulation is with respect to interest expenses. Under current laws, net interest expense is generally allowed if it does not exceed 30% of EBITDA.
For businesses that use intercompany financing arrangements, it can have a significant impact on taxable income and financial planning in general.
CIT Filing & Payment Deadlines
Because of self-assessment, businesses must determine, report, and pay their taxes.
Unlike some places, there is no requirement to report CIT on a quarterly basis. Companies instead make quarterly provisional tax payments, which are due:
- 30 April
- 30 July
- 30 October
- 31 January (for the final quarter)
Companies must prepare and submit to the tax authority the final annual CIT return by the end of the financial year.
Annual CIT returns are due 3 months after the close of the financial year. For companies using the calendar year, the deadline is 31 March of the following year.
If providers of provisional tax fail to maintain the required tax payments, tax authorities will impose interest on the tax shortfall. The current tax authorities define the interest for a late provision tax payment as 0.03% daily on the unpaid tax.
For foreign investors, keeping accounting records and periodic tax assessments will help avoid the risk of compliance and taxation liability during tax audits.
Transfer Pricing Rules for Foreign Owned Companies
For foreign multinational companies, tax compliance will make transfer pricing a top concern for doing business in Vietnam.
Decree 132/2020/ND-CP sets the framework for Vietnam’s transfer pricing laws. This decree follows the globally accepted arm’s length principle. This principle states that related entities’ transactions must occur in the same way as transactions between unrelated entities.
The rules also cover a variety of related party transactions, such as:
- Management fees
- Intra-group loans
- Royalties and licenses
- Intergroup goods and services
Depending on the company’s size, the Vietnamese tax authority might also require transfer pricing related documents such as the Local File, the Master File and the Country-by-Country Report (CbCR).
The Vietnam tax authority started focusing on transfer pricing, especially for foreign-invested enterprises with international transactions. For this reason, global enterprises must document transfer pricing methods in accordance with Vietnamese laws and the OECD documents.
From a business point of view, transfer pricing is more than a compliance method. For international corporate groups, it covers the company’s risk and tax management.
VAT in Vietnam
Corporate income tax and VAT are two of the most common taxes foreign enterprises deal with in Vietnam. The imposition of VAT will affect cash flow, pricing and compliance. VAT will apply regardless of whether the company produces goods, provides services, sells to locals, or engages in importation.
The VAT system in Vietnam is structured in a way that is consistent with the international norm of levying tax on the value added in each stage of production and distribution. Enterprises collect VAT from their customers, claim a credit for the input VAT on purchases, and pay the balance to tax authorities.
For foreign enterprises, understanding the rates, the registration and the refund procedures of VAT is important for both compliance and the financial aspects of the business.
VAT: Rates, Reduction, and Exemption
In Vietnam, different rates of VAT apply depending on the goods and services.
The standard VAT rate is 10%. This is the rate most foreign invested enterprises come across in the course of their activities in Vietnam. However, certain goods and services will be subject to a rate of 8% until December 31, 2026.
A reduced rate of 5% is available on certain goods and services that the government wishes to support. These include certain agricultural goods, medical devices, certain educational goods, clean water, and certain scientific or technical services.
A 0% VAT rate typically applies to goods and services exported, international transportation, and other export-related activities. Those are called “VAT-free” activities, although the transactions stay in the VAT system, and businesses may be eligible to recover input VAT.
Certain activities may be VAT-exempt, including the provision of most financial services, insurance, education and healthcare services, and some transactions involving land. Unlike activities that are subject to the 0% rate, VAT-exempt activities may affect the ability of a business to recover input VAT.
For foreign businesses, 0% VAT and VAT exemption must be differentiated, as the two have a significant effect on cash flow and tax recovery.
VAT Registration, Filing, and Refund
Most foreign-invested enterprises must register for VAT as part of the company’s setup. After the Enterprise Registration Certificate (ERC) is issued, and the tax registration is completed, the company may issue VAT invoices and will be subject to other compliance requirements.
The Vietnamese tax system currently employs two methods for VAT calculation. The credit method is the most common method among foreign-invested enterprises, as the method allows the offset of input VAT to output VAT.
VAT statements must be issued on a monthly or quarterly basis. Businesses must keep proper records to support the VAT claimed and to avoid tax inspections.
For firms engaged in international trade, the possibility of VAT refunds can have a substantial impact on cash flow. For firms with qualifying export activities, the application of VAT would normally be refundable to the extent that input VAT exceeds output VAT. Generally, VAT refund applications are processed by the tax authorities within 15 working days. However, in cases that are more complicated and require further verification, applications may take up to 40 days to be processed.
Because of the close scrutiny on VAT documentation, it is prudent for businesses to ensure their invoicing, accounting records, and supporting contracts are in good order from the outset.
VAT Liability for Foreign E- Commerce and Digital Service Providers
The growth of cross-border digital services has prompted changes to Vietnam’s VAT laws.
As of 2022, foreign providers of digital services who sell directly to consumers in Vietnam are mandated to register, declare and pay tax via a designated electronic channel in Vietnam for foreign suppliers. This system is applicable to providers of digital goods, software, online advertisement services, cloud services, streaming services, and other cross-border digital services.
These regulations apply to major international companies that provide digital services, such as Google, Meta, Netflix, Microsoft, and others, if they earn revenue from users in Vietnam.
One of the benefits of the system is that foreign suppliers are permitted to conduct tax registration and filing activities via the Internet, and are not required to establish a legal entity in Vietnam. Tax declarations are conducted via the Internet on the VAT portal for foreign suppliers of the General Department of Taxation, and payment is made in a foreign currency by way of official conversion based on the rates published by Vietcombank.
More attention is being paid to cross-border service taxes due to the growth in Vietnam’s digital economy. Regulators have begun to focus on the tax obligations of foreign companies that sell digital products to customers in Vietnam. Specifically, foreign digital service companies that sell products to customers in Vietnam should assess their VAT obligations, despite the absence of a business presence in Vietnam.
Tax Incentives for Foreign Investors in Vietnam
Tax incentives are one of the major strategies to optimize Foreign Direct Investment (FDI) in Vietnam, especially for those industries and localities that align with Vietnam’s socioeconomic development strategies. The current standard Corporate Income Tax (CIT) rate is 20%; however, projects that meet the government’s criteria may be eligible for a CIT rate reduction, CIT exemptions, and increased government support to encourage investment in prioritized sectors and localities.
These incentives can greatly improve the financial sustainability of a project for foreign investors. The incentives are dependent on the type of business, the location of the investment, and fulfillment of the criteria for the entire duration of the incentive period.
Preferential CIT Rates and Tax Holiday Periods
Vietnam’s government has prioritized several strategically important sectors and provides lower CIT rates and tax holidays to projects operating in those sectors. These sectors include, but are not limited to, high technology, research and development (R&D), software, education, health care, environmental protection, and some advanced manufacturing sectors and technologies.
Subject to meeting the criteria of the applicable project, businesses may be eligible for a CIT rate of 10% or 15% compared to the standard rate of 20%. These rates are typically provided for a fixed period of time and, in some cases, are granted for the entire duration of the project.
Along with lower tax rates, several projects may fit within tax holidays, which can greatly lessen tax liabilities in the early operational years. A typical incentive structure may have:
- A full exemption to Corporate Income Tax (CIT) for 4 years
- Followed by 9 years of 50% payable CIT
The incentive package for businesses may vary by sector, size of investment, geolocation, and applicable regulations at licensing time.
Tax incentives, Investors should be aware, are not guaranteed. Eligibility, and the accomplishment of the incentive period requirements, must be sustained. Substantial changes to the business’ activities, investment goals, project size, or operational conditions may all impact eligibility.
Tax incentives can be critical in evaluating business opportunities within Vietnam, as they improve returns and shorten the investment payback period.
Location-Specific Incentives: Industrial Zones, EPZs, and Economic Zones
Vietnam, in addition to offering sector-based incentives, offers tax incentives based on the location of the investment project.
Consequently, many foreign manufacturers have opted for Industrial Zones (IZs) for their operations as these zones tend to have better infrastructure and offer a number of investment administration benefits and incentives. Depending on location and project type, Industrial Zones may offer CIT incentives and other investment support to businesses.
Export Processing Zones (EPZs) offer even more support and custom and import duty benefits to exporting manufacturers, particularly those businesses that import raw materials to create final products for export.
Vietnam also runs various Economic Zones (EZs) where targeted development plays a large role. EZs potentially offer longer tax holidays and preferential support concerning corporate income taxes (CIT) and infrastructure.
More incentives are available if the regions have complex socio-economic challenges. In some cases, a 17% preferential CIT rate is available. Along with it, regional projects may also benefit from a longer tax reduction compared to projects set up in Ho Chi Minh City or Hanoi.
In evaluating potential investment sites, one should look beyond logistics, the availability of labor and infrastructure. Tax incentives should be included in the total operational costs.
With foreign investors, the preferred method is to incorporate tax incentives with the overall business objectives and compare them with other locations. Access to customers, infrastructure, and talent can offer greater long-term value than the location with the best incentives.
Other Taxes Foreign Investors Should Be Aware Of
Day-to-day activities mainly involve Corporate Income Tax (CIT) and Value Added Tax (VAT). Foreign investors engaged in business activities in Vietnam, depending on the model and type of activities, may encounter other taxes.
These particular taxes are essential to companies making payments abroad, importing goods, hiring overseas service providers, or working in fields of special consumption taxes. Getting ahead of these obligations helps avoid costs and compliance concerns for businesses.
Withholding Tax (WHT) and Foreign Contractor Tax (FCT)
For foreign-invested enterprises, overseas transactions trigger taxes which go beyond the typical Corporate Income Tax (CIT) and Value Added Tax (VAT).
One of the more frequent examples is the Foreign Contractor Tax (FCT). This applies when a Vietnamese enterprise acquires services from an overseas contractor which does not have a registered entity in Vietnam. Frequent examples of overseas contractor services are consulting, software and support, digital services, and a number of other professional services.
FCT is not a separate tax, but is a blend of Value Added Tax and Corporate Income Tax, and the applicable rates for the service are determined based on the service. For many of these service-based transactions, the Corporate Income Tax component is between 1% and 10% and the Value Added Tax component may vary from 3% to 5%.
Foreign companies must recognize their obligations relating to Withholding Tax (WHT) on some foreign payments. Typical cases include:
- Payments of dividends to foreign shareholders
- Cross-border interest payments
- Payments of royalties
- Fees for services to foreign entities
Vietnam has entered into 81 Double Tax Treaties (DTTs) with other nations and areas in the world. Based on the particular treaty and the tax residency of the foreign investor, WHT may be eliminated or reduced. To qualify for the tax treaty benefits, the foreign investor must usually provide adequate tax residency evidence.
For multinational companies, WHT and FCT tend to be in the highest focused areas during tax audits as these impact the multinational company’s cross-border profit and tax exposure the most.
Import Duties and Special Consumption Tax (SCT)
For companies engaged in the business of manufacturing, importing, trading, retailing, or distributing, taxes on imports may present a substantial cost and negatively impact their pricing.
In Vietnam, products that are imported are subject to import taxes. However, the rate is determined by product classification, the country of origin, and the trade agreements that apply. In the last ten years, Vietnam has entered into a number of Free Trade Agreements (FTAs). These include the EU – Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Tariffs for products that comply with the agreements’ rules of origin have been greatly reduced or eliminated.
Due to these agreements, foreign companies that import products into Vietnam should not use the standard Tariff rate. Careful analysis of the supply chain and product origin may greatly reduce duties.
In some situations, imported machinery, equipment, or production assets for investment projects may be exempt from import duties if comparable products are not made in the country.
Apart from import duties, some products are also subjected to the special consumption tax (SCT). This tax applies to goods and services considered luxury, non-essential, or socially sensitive. Common examples are:
- Alcoholic beverages
- Tobacco products
- Passenger vehicles
- Motorcycles above certain engine capacities
- Petroleum products
- Some entertainment and gaming-related products and services
The SCT burden should be considered when planning costs, as the SCT can be levied from 15% to 150%, depending on the product.
For foreign investors in Vietnam’s manufacturing, import, or distribution sectors, these taxes are as important as understanding CIT and VAT. SCT, import duties, and treaties significantly affect costs and the viability of entering the market.
Conclusion
Vietnam’s competitive CIT of 20% along with tax incentives to attract foreign investment in priority sectors and regions, along with VAT, withholding taxes, foreign contractor tax and other ongoing tax compliance make Vietnam an attractive proposition for foreign investors.
Tax planning is much more than liability mitigation. It is the design of a sustainable business structure that supports growth while remaining compliant with local regulations. Investors, especially foreigners planning to expand into Vietnam, should tax plan to their model to optimize foreign direct investments, enhance business operations, and capture maximum potential within the fast-developing economy of Vietnam.