Service Contracts in Vietnam: What You Need to Know
Foreign firms in Vietnam occasionally face a skills gap when undertaking certain functions or projects. Traditionally, they would hire an employee under a labor contract to address this gap. However, for temporary tasks or projects, firms may opt for a service contract as a more suitable alternative.
But what exactly are service contracts, and how do they differ from labor contracts?
Labor contracts vs service contracts
Labor contracts are the principal form of employment contracts in Vietnam. Required to be in both Vietnamese and English, these documents outline the location at which the work is to be undertaken, the scope of work, working hours and days off, the length of employment, salary, and benefits.
Service contracts, on the other hand, are used to employ individuals on a more flexible basis. With a service contract, the individual is treated more like another business rather than an employee. In this respect, the company is not required to pay benefits, for example, social or unemployment insurance.
Service contracts outline the scope of work like labor contracts. However, instead of specifying a salary, a service contract defines a fee or fees payable for the services rendered. It typically stipulates a timeline for the project, often with key milestone targets. Other details like the location, working hours, and days off are more flexible and may not be explicitly mentioned in the contract.
Service contracts and foreign workers
Labor laws in Vietnam require foreign workers to have a work permit to engage in employment in Vietnam. It is, however, common for firms to employ foreign workers on service contracts and make use of various visa types that allow foreigners to stay in Vietnam for prolonged periods – three-month business visas, for example.
It’s important to note that service contracts should not be used to bypass work permit requirements. Both foreign workers and firms employing foreign workers on visas should be aware that using visas for purposes other than their intended use can have legal consequences if discovered.
Foreign contractor tax and service contracts
When a foreign entity is engaged by a company in Vietnam to provide services without physically entering Vietnam, a service contract may be used. In such cases, the foreign entity may be subject to Vietnam’s foreign contractor withholding tax.
Vietnam’s foreign contractor tax (FCT), often referred to as the withholding tax, is a tax that is applied to transactions conducted in Vietnam between a foreign company or sub-contractor and a Vietnamese company.
The FCT consists of two types of taxes: value-added tax (VAT) and either personal income tax (PIT) for individuals or corporate income tax (CIT) applicable to most foreign contractors that are registered as organizations.
Service contracts in the gig economy
Traditionally, service contracts have been used for professional services such as accounting, legal counsel, or business consulting. However, in recent years, service contracts have emerged as a fundamental component of the gig economy.
Platforms like Upwork or Fiverr leverage service contracts for freelancers, while food delivery services like Uber Eats or Foody.vn also operate on similar arrangements.
Even the popular ride-hailing app Grab utilizes service contracts with its drivers instead of hiring them as employees. This practice has sparked concerns regarding worker treatment and the rights and responsibilities of such organizations. Service contracts typically do not include leave entitlements or insurance coverage.
Globally, courts have handled cases related to these arrangements with varying outcomes. In Vietnam, while definitive results are yet to emerge, Grab drivers have expressed their demands for enhanced rights, and key decision-makers have shown indications of potential reforms.
It is important for foreign firms operating in Vietnam’s gig economy and utilizing service contracts to be mindful of the dynamic nature of the gig economy landscape in the country. This requires careful consideration and planning for their staffing requirements.
Key points of note for foreign firms
Foreign firms utilizing service contracts should be aware that these contracts may undergo audits by tax authorities, especially if there are suspicions of transfer pricing or profit shifting. To minimize the risk of audits and ensure compliance, foreign firms should ensure that their service contracts meet the following conditions:
- Commercial nature: The service contract should be clearly defined as a commercial arrangement.
- Clear outline: The details of the service arrangement should be clearly outlined in the contract, leaving no room for ambiguity.
- Proof of service delivery: Foreign firms should maintain evidence or documentation demonstrating that the services outlined in the contract have been delivered.
- Documentation and record-keeping: It is crucial to keep receipts, invoices, and any other relevant documentation readily available for inspection.
- Justification for services: The service contract should include clear documentation that outlines the reasons for engaging in the specific service and its necessity.
By ensuring that these conditions are met and maintaining clear documentation, foreign firms can reduce the likelihood of issues arising during audits of their service contracts.
Getting help with service contracts in Vietnam
Service contracts offer foreign firms a flexible approach to engaging individuals and can be highly advantageous. However, it is essential for firms to be aware of potential pitfalls, such as the gig economy’s perception of service contracts and the scrutiny they may face from tax authorities.
To ensure the correct and effective use of service contracts, as well as to mitigate legal risks, foreign firms are encouraged to seek guidance from human resources experts. Consulting with professionals can provide valuable insights and assistance in navigating the complexities of service contracts in Vietnam’s business landscape.
ASEAN Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in Singapore, Hanoi, Ho Chi Minh City, and Da Nang in Vietnam, in addition to Jakarta, in Indonesia. We also have partner firms in Malaysia, the Philippines, and Thailand as well as our practices in China and India. Please contact us at firstname.lastname@example.org or visit our website at www.dezshira.com.