This article aims to help you reduce FCT cost.
Posted by Nguyễn Hữu Thức
1. Overview
of Vietnamese Foreign Contractor Withholding Tax (“FCWT”):
The Foreign Contractor Withholding Tax (FCWT or FCT) regime
applies to payments made by a Vietnamese contracting party to a foreign entity
doing business in or earning income from Vietnam without setting up a legal
entity in Vietnam; except for services performed and consumed outside of
Vietnam, and certain other services performed outside of Vietnam, such as a
repair of transportation means, machinery and equipment, brokerage services;
training, etc. Therefore, it is a very important tax for foreign companies
doing business here, their Vietnamese counterparts and the State.
FCT includes 2 (two) types of tax which are Corporate
Income Tax (“CIT”) and Value Added Tax (“VAT”). The rates vary depending on the nature of the payment, and
you should be informed before signing contracts or shall be subject to a review
of tax accountants before making payment.
2. VAT
portion & CIT portion:
VAT component will be claimed back as the recoverable input
VAT, while CIT portion can be treated as:
(i) either the deductible expense; or
(ii) the exemption with the existence of tax treaties
between Vietnam and the countries/territories of foreign parties who are
constituted of having no Permanent Establishment (PE) in Vietnam.
3. Net vs
Gross contract
If we sign a net-of-tax contract where grossing-up is
required to determine the FCT liabilities. We highly recommend that you should
deal the gross contract with foreign contractors in the future. For example: we
have the net payment of 100 MVND then first we increase it to 105.26 MVND
(grossed-up) and then pay 5% tax of 5.26 MVND to the tax authority and transfer
100 million to the foreign party.
4. Tax Treaty:
Vietnam has concluded Double Tax Avoidance (“DTA”)
Agreement with over 60 countries, including the United Kingdom, the
Netherlands, France, Denmark, Germany, Sweden, Switzerland, Australia, India,
China, Japan, South Korea, Bangladesh, Hong Kong, Singapore, Indonesia,
Malaysia, the Philippines, Taiwan, Thailand... DTA provisions generally accord
protection for residents (companies and individuals) of one contracting country
against the tax (mainly Corporate Income Tax) imposed on the income of companies
and individuals by another country where double taxation issues arise.
4.1. If we sign the gross contract with a foreign party, we
will withhold and declare the FCT. After our FCT declaration, we will request
the CIT paid certificate from the tax authority, and then we will deliver to
our foreign party for CIT deductibility in its home country overseas where DTA
is available.
4.2. If we sign the net-of-tax contract, we wish to apply
the DTA exemption in Vietnam with the existence of tax treaties between Vietnam
and the countries/territories of foreign parties who are constituted of having
no Permanent Establishment (PE) in Vietnam. Normally, the supporting documents
must be submitted to enjoy CIT exemption:
- Notice form No.01/HTQT under the Circular on tax administration;
- The original certificate of residence of a foreign party, that has been legalized and translated into Vietnamese by the Notary Public;
- The certified copy of service agreements between a foreign party and the Vietnamese Company; translated into Vietnamese; and
- Business License/ Tax Certificate of a foreign party.
