Withholding Tax on Service Fees, Royalties, and Interest in Vietnam

Payments from a Vietnamese company to an overseas service provider, licensor, or lender can be subject to Vietnam’s Foreign Contractor Tax (FCT). Under the direct method, the Vietnamese payer generally withholds the tax, with the applicable value-added tax (VAT) and corporate income tax (CIT) rates determined by the type of income received by the foreign contractor.

Withholding tax on service fees

Foreign companies supplying services to Vietnamese customers can fall within Vietnam’s FCT regime without establishing a subsidiary or other legal entity in Vietnam. The regime can also apply where services are performed outside Vietnam but are consumed in Vietnam, subject to specific exclusions.

Under the direct method, general services are typically subject to 5 percent VAT and 5 percent CIT on taxable revenue. Different rates can apply to categories of services, so these rates do not apply to every service transaction.

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For example, if a Vietnamese company pays VND 1 billion (US$38,200) for consulting services subject to these rates, the transaction produces VND 50 million (US$1,910) of VAT and VND 50 million (US$1,910) of CIT, giving a total FCT liability of VND 100 million (US$3,820).

The taxable amount can differ where the foreign contractor is contractually entitled to receive a net amount after Vietnamese taxes. Where the Vietnamese customer bears the contractor’s tax liability, the payment may need to be grossed up to determine taxable revenue.

Withholding tax on royalties

Payments to foreign companies for intellectual property and specified rights can be treated as royalties under Vietnam’s FCT regime. Under the direct method, royalties are generally subject to 10 percent CIT.

VAT treatment depends on the rights involved. Certain transactions, including qualifying technology transfers and software products and services, are not subject to VAT, while other royalty arrangements can be subject to VAT.

A VND 2 billion (US$76,400) payment qualifying as royalty income would generate VND 200 million (US$7,640) of CIT at the 10 percent rate, before any VAT applicable to the arrangement.

A technology contract can contain both royalty and service components subject to different FCT treatment. For example, a VND 5 billion (US$191,000) technology contract might allocate VND 3 billion (US$114,600) to intellectual property rights and VND 2 billion (US$76,400) to implementation services. The royalty component would generally carry the 10 percent CIT rate, while the implementation component would be taxed according to the rates applicable to the relevant service.

Vietnam’s double tax agreements can alter the domestic treatment of royalty income. Under Vietnam’s treaty framework, where the beneficial owner of royalties is resident in the relevant treaty jurisdiction, the tax imposed in Vietnam may be limited by the rate specified in the applicable agreement.

Withholding tax on interest paid overseas

Interest paid by a Vietnamese company to an overseas lender is generally subject to 5 percent CIT under the direct FCT method and is exempt from VAT.

A Vietnamese company paying VND 3 billion (US$114,600) in interest to a foreign lender would incur VND 150 million (US$5,730) of CIT at the domestic 5 percent rate.

The FCT imposed on the foreign lender’s interest income is separate from the CIT treatment of the financing expense recorded by the Vietnamese borrower. For related-party financing, Vietnam’s transfer pricing rules can separately affect the tax treatment of the borrower’s interest expense.

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Vietnam’s tax treaties can also affect the tax imposed on interest. Where the beneficial owner of the interest is resident in a treaty jurisdiction, the rate imposed in Vietnam may be limited by the interest article of the applicable agreement.

Service fees, royalties, and interest compared

Managing withholding tax exposure in Vietnam with Dezan Shira & Associates

Dezan Shira & Associates advises foreign investors on managing the Vietnamese tax exposure arising from cross-border service fees, royalties, and interest. For support in determining the applicable FCT and treaty treatment for payments, contact our tax professionals in Vietnam.

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