Thông tư 205/2013/TT-BTC

THE MINISTRY OF FINANCE ---------	SOCIALIST REPUBLIC OF VIET NAM Independence - Freedom – Happiness --------------
No. 205/2013/TT-BTC	Hanoi, December 24, 2013

 

CIRCULAR

GUIDING THE IMPLEMENTATION OF THE AGREEMENTS ON DOUBLE TAXATION AVOIDANCE AND PREVENTION OF TAX EVASION WITH RESPECT TO TAXES ON INCOME AND PROPERTY BETWEEN VIETNAM AND OTHER STATES OR TERRITORIES AND IN FORCE IN VIETNAM

Pursuant to the current legal documents on enterprise income tax, individual income tax;

Pursuant to Law on the conclusion, accession to and implementation of treaties No. 41/2005/QH11 dated June 14, 2005;

Pursuant to agreements on double taxation avoidance and prevention of tax evasion with respect to taxes on income and property between Vietnam and other countries or territories and in force in Vietnam;

Pursuant to Government’s Decree No. 118/2008/ND-CP defining the functions, tasks, powers and organizational structure of the Ministry of Finance;

At the proposal of General Director of Taxation;

The Minister of Finance promulgates Circular guiding the implementation of the agreements on double taxation avoidance and prevention of tax evasion with respect to taxes on income and property between Vietnam and other states or territories (hereinafter collectively referred to as the contracting states or states as the context requires ) and in force in Vietnam (hereinafter abbreviated to the agreements).

Chapter I

GENERAL PROVISIONS

Section 1. SUBJECTS AND SCOPE OF APPLICATION

Article 1. Subjects of application

This Circular regulates the subjects that are residents of Vietnam or of the Contracting State to an Agreement concluded with Vietnam or of both.

1. Under the Agreements, the term “a resident of the Contracting State” means any person who, under the laws of that state, is liable to tax therein by reason of:

That person has an home, a period of residence in that State or any other criterion of similar nature, in the case of an individual; or

1.2. That person has a place of management, a registered office, or is established in that State or has any other criterion of similar nature, in the case of an organization; or

1.3. This term also includes the Government or local authorities of that State, in case where an Agreement provides.

2. According to the current laws on tax in Vietnam, the following persons are regarded as residents of Vietnam:

2.1. Individuals who satisfy one of the following conditions:

a) They are present in Vietnam for 183 or more days computed over one calendar year or 12 consecutive months as from the first day those persons arrive in Vietnam;

Individuals present in Vietnam as prescribed at this point means those who appear in the Vietnamese territory;

b) They have regular residences in Vietnam under one of two cases:

- Residences registered for permanent residence as prescribed by law on residence;

- Houses rented for residence in Vietnam as prescribed by law on dwelling house, with duration of rent contract is 183 days or more in taxable year.

If an individual has regular residence in Vietnam as prescribed at this point but practically he resides in Vietnam less than 183 days in taxable year and he fails to prove that he is resident of other State, he is resident in Vietnam.

Example 1: In 2010, one Japanese expert arrived Vietnam for work within 10 months.  Two months in 2010 (June and December), this expert on leave to visit his family.  In 2009, the expert lived and worked in Japan. Taxable year of Japan is from 01/4 to 31/3 of next year. So that, in 2010, Japanese expert has worked principally in Vietnam and regularly lived in Vietnam, and although he still has house and family in Japan and hold Japanese nationality, he is still considered as a resident of Vietnam for tax purpose. (Stated in Article 4, Clause 1, Agreement between Vietnam and Japan). However, in period from 01/2010 to 30/3/2010, expert is considered as resident of Japan for purpose of tax finalization in Vietnam and Japan.

2.2. Organizations established and operating under the laws of Vietnam.

3. In cases where a person is deemed to be a resident of both Vietnam and the Contracting State to an Agreement concluded with Vietnam under the provisions of Clauses 1 and 2 of this Article, the residence position of such person shall be determined as follows:

3.1. For individuals:

The criteria in the following priority order shall serve as the basis for determining whether the person is a resident of Vietnam:

a) If that individual has a permanent home in Vietnam (either under his/her ownership or, for rented houses, his/her use right);

b) If that individual has permanent homes in both countries, but he/she has a closer economic relation in Vietnam such as: He has an employment, a business location, a place for personal property management or closer personal relations in Vietnam such as familial relation (relatives as father, mother, spouses, children, etc.), social relation (i.e. member of a social organization or professional association, etc.);

c) If it is impossible to determine in which State that individual has closer economic or personal relations or if he/she has no permanent home in either of the States but has a longer time of presence in Vietnam in the taxable year;

d) If that individual is regularly present in both Vietnam and the Contracting State to an Agreement concluded with Vietnam or in neither of the States but he/she holds the Vietnamese nationality, or is determined as Vietnamese citizen under nationality principle in force in of Vietnam;

dd) If that individual holds the nationalities of both Vietnam and the Contracting State to an Agreement concluded with Vietnam or of neither of the States, the Vietnamese competent authorities shall settle this question through mutual agreement procedure with the competent authorities of the other Contracting State.

3.2. For a subject not being individual:

Depending on specific provisions in each Agreement to determine a subject not being individual as resident of Vietnam. In the Agreements usually prescribe the following criteria:

a) If such subject is established or registered for operation in Vietnam, it shall be deemed to be resident of Vietnam; or

b) If such subject has main office in Vietnam, it shall be deemed to be resident of Vietnam; or

c) If such subject has place of effective management in Vietnam, it shall be deemed to be residents of Vietnam (place of effective management is normally the place where high-ranking officials or the leadership of enterprise meet to consider, discuss and make managerial decisions or where the most important accounting books are recorded and archived; or

d) If a subject is established or registered in both of States or has main offices or places of effective management in both of States, the Vietnamese competent authorities and competent authorities of the Contracting State to an Agreement concluded with Vietnam will determine such subject to be resident of one of two States  through mutual agreement procedure. If two States fail to reach a mutual Agreement, that subject shall not be deemed as resident for tax of any State due to purpose of applying Agreement.

Provisions on residents above are stated at provision of resident (Usually Article 4) of the Agreements.

Article 2. The applied taxes

The applied taxes in Agreements are taxes on incomes and assets specified in each Agreement.

1. In the case of Vietnam, taxes in application scope of Agreement are:

a) Enterprise income tax; and

b) Personal income tax.

2. In the case of the Contracting States to an Agreement concluded with Vietnam, taxes in application of Agreements shall be specified at Article 2 of Agreements (Usually Clause 3 of Article 2).

Example 2: At Article 2, Clause 3, point b) of Agreement between Vietnam and State N prescribes as follows:

“3. The existing taxes to which this Agreement shall apply are:

...

b) In State N:

i) Income tax;

ii) Corporation tax; and

iii) The local inhabitant taxes on income.”

According to provision above, if a local of State N has a local inhabitant tax on income of residents and non-residents  of State N, that local inhabitant tax on income will be in application scope of Agreement between Vietnam and State N.

Article 3. Immunities for members of diplomatic and consular missions

Under the Agreements, the provisions of the Agreements shall not affect the immunities of members of a diplomatic or consular mission prescribed in the international treaties which the Socialist Republic of Vietnam has signed or acceded to.

The above-said provisions on immunities of diplomatic agents and consular officers are included in the Article Members of Diplomatic Missions and Consular Posts (usually Article 27) of the Agreements.

Section 2. PRINCIPLES FOR APPLICATION OF AGREEMENTS

Article 4. Principles for application of agreements

When applying, settling tax for each case, it must base on provision in each Agreement (included Protocol and/or exchange letters, if any).

Article 5. Application of Agreements, tax laws and relevant laws

1. In cases where there are disparities between the provisions of the Agreements and those of domestic tax laws, the provisions of the Agreements shall apply.

2. The Agreements shall not create new tax obligations or tax obligations that are different from or heavier than those prescribed by the domestic tax laws. Where an Agreement contains provisions under which Vietnam is entitled to tax a certain type of income or a certain tax rate but Vietnam’s tax law has not yet provided for the taxation of such income or provides for a lower rate, Vietnam’s tax law shall apply, it means non-collection of duty or collection of duty at the lower rate.

3. When Vietnam implements the provisions of an Agreement, at a certain time the terms which are not yet defined in the Agreement shall have the meanings provided for in Vietnam’s laws for the taxation purpose at such time. For a term which is not yet defined in Agreement and not yet defined or concurrently defined in Vietnamese law and law of the Contracting State to an Agreement concluded with Vietnam, the competent authorities of two States shall resolve problem through mutual agreement procedures. For a term which is defined in tax laws and other laws, definition in tax laws will be applied for implementation of Agreement.

Article 6. Some cases of refusal for application of Agreements on the basis of the principle of Agreement beneficial right

Unless otherwise provided in Agreement on limitation of Agreement beneficial right, the Vietnamese taxation agencies shall refuse the request for application of Agreement in the following cases:

1. The proposing person wishes apply Agreement for a tax which has arisen than three year before time of request for application of Agreement.

Example 3: In period from 2006 to 2012, every year, enterprise V of Vietnam has income from royalties in Malaysia and every year, it has paid tax in Malaysia as prescribed in Agreement between Vietnam and Malaysia. On 01/10/2012, enterprise V files to request tax deduction under Agreement between Vietnam and Malaysia for all tax amounts paid in Malaysia during 2006 to 2012. In this case, the Vietnamese tax agencies shall only consider tax deduction in Vietnam for the amounts paid for taxes arising in Malaysia in 3 years from 01/10/2009 to 01/10/2012.

2. When principal purposes of contracts or agreements are subjects entitled to tax exemption or reduction under Agreement.

3. The proposing person for application of Agreement is not beneficial owner incomes involving the tax amounts which are requested exemption, reduction under Agreement. The beneficial owner may be an individual, a company, or an organization but it must be subject entitled to own and control incomes, assets, or rights creating incomes. When considering to determine a subject as a beneficial owner, the taxation agencies shall consider all elements and circumstance involving that object on basis of principle “nature decides for form” because objective of Agreement is double taxation avoidance and prevention of tax evasion. In the following cases, a person will not be deemed as the beneficial owner:

a) When the proposing person is a non-resident person having obligation to distribute more than 50% of his income to a resident of third State within 12 months as from receiving income;

b) When the proposing person is a non-resident person having no (or almost having no) any business activity except for owner of assets or rights to create incomes;

c) When the proposing person is a non-resident person having business activity, but quantity of assets, business scale or quantity of employees are not proportional with the earned incomes;

Example 4: A bank of a state which has no agreement with Vietnam establishing a legal entity in France to borrow loans in Vietnam and requests for tax exemption for interests arising in Vietnam under the Tax Agreement between Vietnam and France. In this case, to determine the legal entity in France is eligible for application of Agreement or not, the Vietnamese taxation agencies shall base on amounts of loan, capability of legal entity in France (quantity and specialized qualification of employees, assets and other material facilities) to determine the proportionality between income and business scale of such legal entity. If income earned by this legal entity is very big while legal entity has only one office in France with several employees, the proposal for application of Agreement will be refused.

d) When the proposing person is a non-resident person having no (or almost having no) right to control or determine and not suffering or suffering very little risk for incomes or assets or rights to create incomes;

dd) When agreements of loaning or supplying royalties or technical services between the proposing person who is a non-resident and persons in Vietnam including conditions and provision in a other agreement which the proposing person is concluding with a third party but in that other agreement, the proposing person is the person who receives loans, royalties or technical services;

e) When the proposing person is a resident of a State or territory which does not collect income tax or has low tax rate (less than 10%) without reason of investment incentives stated in Agreement;

g) When the proposing person is an agent, an intermediate company (unless an agent, an intermediate company requested application of Agreement under authorization of a beneficial owner).

An agent or an intermediate company is a company established in a contracting State only for having a necessary legal form to be existed for purpose of tax avoidance or reduction or transfer of profit and not participate in principal business activities such as production, trading or service provision.

Article 7. Procedures for solving complaints under Agreement

Procedures for solving complaints under Agreements are stated in provision on mutual agreement procedures (usually Article 25) of Agreements.

1. For residents of the Contracting State to an Agreement concluded with Vietnam

Where a person who is a resident of a Contracting State (hereinafter referred to as the complainant) assumes that Vietnamese tax agencies determined his tax obligation not in accordance with the provisions of this Agreement, he may present his case under the process prescribed in tax law or documents on solving complaints of Vietnam.

1.2. The complainant may not conduct complaint under the process stated in point 1.1 above and may directly present his case to the Vietnamese competent authorities prescribed in Article 51 of this Circular or competent authorities of the contracting State where he is tax resident to push up the process of mutual agreement procedures under Agreement. In this case, the complaint must be conducted within three years from the first notification of the taxation agencies resulting in taxation settlement which the complainant assumed that it is inconsistently with Agreement.

Example 5: On 01/6/2012, Mr. A, a resident of the Contracting State to an Agreement concluded with Vietnam receives a decision on settlement of personal income tax issued by the Taxation Department in province H and he assumes that tax obligation stated in such decision is inconsistently with Agreement. After fulfilling obligations stated in Decision on handling tax, Mr. A has right to make complaints directly to the General Department of Taxation – as the Vietnamese competent authority – for solving his case.  Time limit for Mr. A to file complaint will be 3 years from 01/6/2012.

1.3. In order to make complaint under provisions at points 1.1 and 1.2 this Clause, the complainant must comply with the following regulations:

a) To fulfill obligation as notified at decisions on handling tax (including tax administrative decisions, tax notification, etc) of tax agencies before and during complaint. In case of complaint involving the tax amount which is calculated or fixed by tax administrative agencies, the complainant must still pay fully that tax amount; unless competent agencies decide suspend implementation of decision on tax calculation, decision on imposing tax by tax administrative agencies.

b) The Vietnamese competent authorities will do not solve complaints for cases: Complaints which have been or are being settled by Court; or are being or have been settled under the process of solving complaints of Vietnam; or complaints which are expired as prescribed in point 1.2.

2. For residents of Vietnam

If a resident of Vietnam assumes that a Contracting State has determined his tax obligation not in accordance with Agreement, he may request the Vietnamese competent authorities to conduct mutual agreement procedures as prescribed in Agreement. Before suggesting the Vietnamese competent authorities to conduct mutual agreement procedures, the complainant must fulfill obligations as notified at decisions on handling tax of Vietnamese tax agencies and tax agencies of the Contracting State to an Agreement concluded with Vietnam in case required by law of such State. The requesting for the Vietnamese competent authorities to perform mutual agreement procedures must be conducted within three years since the Contracting State to an Agreement concluded with Vietnam promulgates decisions on handling tax which the Vietnamese resident assumes that it is not appropriate with Agreement.

Chapter II

TAXES ON DIFFERENT TYPES OF INCOME

Section 1. INCOME FROM IMMOVABLE PROPERTY

Article 8. Definition of immovable property

Under the Agreements, the term “immovable property” shall have the meaning which it has under the laws of the Contracting State in which the property in question is situated and include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of law respecting land apply, the right to use immovable property, the right to enjoy payments for the natural resource exploitation or the right to exploit natural resources. Ships, boats, aircraft shall not be regarded as immovable property.

Specifically, in the case of Vietnam, immovable property includes:

- Properties which are stated in definition on immovable property as prescribed in Civil Code and Law on immovable property business;

- Property accessory to immovable property above;

- Livestock and equipment used in agriculture and forestry;

- Rights applied under law on land in Vietnam;

- Rights to enjoy payments for the natural resource exploitation or the right to exploit natural resources.

Example 6: A foreign resident shall be regarded to have immovable property in Vietnam if such person owns immovable assets in Vietnam, such as dwelling houses, construction works in attached to land, including assets attached to those houses and construction works, or has the land use rights in Vietnam (according to the 2005 Civil Code’s Article 174: Immovable property and movable property) and if such person has a cattle herd in Vietnam directly related to such land use rights, this cattle herd shall be also regarded as immovable property in Vietnam.

Article 9. Determination of tax obligation for incomes from immovable property

Under the Agreements, all types of income earned by a resident of a Contracting State to an Agreement concluded with Vietnam from the direct use, exploitation or leasing of assorted immovable property in Vietnam, including also immovable property of enterprises or independent service-providing individuals, shall be taxed in Vietnam in accordance with Vietnam’s current tax law.

Example 7: Overseas Vietnamese person X is a resident of Singapore owns a house in Vietnam and uses it for leasing.  Income from the leasing of this house shall be taxed in Vietnam though such person is not present in Vietnam throughout the taxable period.

The above-mentioned provisions on taxation on income from immovable property are included in the Article Income from immovable property (usually Article 6) of the Agreements.

Section 2. BUSINESS INCOME

Article 10. Definition of business income

Under the Agreements, business income means income of enterprises of the Contracting States (hereinafter called foreign enterprises) carrying out production and business activities in Vietnam, excluding the types of income mentioned in Section 1 and Sections from 3 through 17, Chapter II, of this Circular.

Article 11. Determination of tax obligation for business income

1. Cases where foreign enterprises carrying on production and business activities in Vietnam without forming legal persons in Vietnam.

Tax obligation

Under the Agreements, business income of a foreign enterprise shall be taxed in Vietnam only if such enterprise has a permanent establishment in Vietnam and such income is directly or indirectly related to that permanent establishment.  In this case, the foreign enterprise shall be taxed in Vietnam only on the portion of income apportioned to such permanent establishment.

1.2. Definition of permanent establishment

1.2.1. Under the Agreements, “permanent establishment” means a fixed place of business of an enterprise, through which the business of the enterprise is wholly or partly carried on.

An enterprise of a Contracting State shall be regarded to have a permanent establishment in Vietnam if it fully satisfies the following three conditions:

a) Maintaining in Vietnam an “establishment”, for example a building, an office or part thereof, a means or equipment, etc; and

b) This establishment must be fixed, i.e. it must be established at a specified place and/or maintained on a permanent basis.  The fixedness of a business establishment must not necessarily mean that such establishment must be attached to a specific geographical point for a certain length of time; and

c) The enterprise carries on wholly or partly business activities through this establishment.

Example 8: Chinese company X opens a stall in a Tet (New Year) market place in Vietnam, through which it sells goods items.  Then, this stall shall be regarded as a permanent establishment of company X in Vietnam.

1.2.2. An enterprise of the Contracting State shall be regarded to conduct business activities through a permanent establishment in Vietnam in the following major cases:

a) That enterprise has in Vietnam: place of management, branch (such as branch of a law firm, branch of a foreign office, branch of a tobacco company, branch of a bank, etc.), office (including commercial representative office authorized to negotiate and sign commercial contracts), factory, workshop, mine, oil or gas well, forwarding storehouse, a place of exploration or exploitation of natural resources, or has equipment, facilities used for the exploration and exploitation of natural resources in Vietnam.

Example 9: A foreign subcontractor that uses means, equipment and labor for participation in oil and gas exploration activities in Vietnam shall be regarded to conduct business through a permanent establishment in Vietnam.

b) That enterprise has in Vietnam a building site, a construction, installation or assembly project, or carries on supervisory activities in connection therewith, provided that such site, project or activities last for more than 6 months or 3 months (depending on each Agreement) in Vietnam.

Building sites, construction or installation projects include the building site, construction of houses, roads, bridges, sewerage, installation of pipelines, excavation, dredging, etc. The period (of 6 months or 3 months) is calculated from the date the contractor commences the preparation for the construction in Vietnam, such as establishing its office, planning the construction design, until the completion and transfer of the entire construction project in Vietnam, including the time of discontinuance of the project for any reasons.

Sub-contractors of the Contracting State participating in the aforementioned construction or installation projects shall be also regarded to conduct business in Vietnam through permanent establishments if they meet all conditions stated at Point 1.2.1 above.

The time of execution of projects for the determination of permanent establishments for principal contractors shall be the sum of the time for the execution of contractual components by sub-contractors and the time of execution by the principal contractor.

Example 10: Japanese company Z wins the bid for building a bridge in Vietnam. Bridge-building activities proceed as follows: 5 months of building bridge piles by sub-contractor Y that is also a Japanese company and 3 months of building the bridge floor and finishing by contractor Z itself.  In this case, according to Article 5 Clause 3 of Agreement between Vietnam and Japan, company Z shall be regarded to conduct business in Vietnam through a permanent establishment because the total time of building the bridge is 8 months (5 months + 3 months); company Y is not deemed as a permanent establishment in Vietnam.

c) That enterprise provides services including also consulting services in Vietnam through its staff or another person, provided that these services in a related Vietnam-based project or projects last in a period or periods exceeding 183 days in each 12-month period.

Example 11: A Sweden aircraft-manufacturing company D entered into an aircraft maintenance service contract with Vietnam Airlines.  Under this contract, in period from 01/6/2010 to 30/5/2011, it sent teams of technical experts to Vietnam to work for a total of 190 days.  So, according to Clause 4 Article 5 of Agreement between Vietnam and Swedish, the company D shall be regarded to have a permanent establishment in Vietnam because teams of technical experts to Vietnam to work for a duration exceeding 6 months in 12-month period.

Example 12. A Japanese Consultancy Company N signs an consultancy contract with investor of project on construction of power plant V in Vietnam as follow: i) contract of consultancy service for power plant construction is prolonged 4 months from 01/8/2010 to 30/11/2011 and ii) contract of consultancy service for installation is prolonged 3 months from 01/01/2011 to 31/3/2011. Both of contracts require the presence of representation of Consultancy Company N at the construction and installation site of power plant V in order to carry out the work during time limit of contract. To perform consultancy contract for power plant installation, the consultancy company N has hired a Japanese consultancy company B for performance as representative for company N.  In this case, according to Clause 4 Article 5 of Agreement between Vietnam and Japan, the consultancy company N shall be regarded to have a permanent establishment in Vietnam because the presence of representative of Company at project in Vietnam exceeds 6 months in 12-month period. The consultancy company B shall be not regarded to have a permanent establishment in Vietnam because its presence in Vietnam does not exceed 6 months.

Example 13: With assumptions as example 12, if the consultancy company B and investor of project entered into a consultancy agreement in the course of test operation from 01/4/2011 to 30/7/2011. Contract requires representative of Consultancy Company B to present during time limit of contract at the site of test operation of power plan V. In this case, according to clause 4 Article 5 of Agreement between Vietnam and Japan, the Consultancy Company B shall be regarded to have a permanent establishment in Vietnam because the presence of its representative in Vietnam exceeds 6 months in 12-month period.

Involving service supply, although Agreement prescribed that a permanent establishment includes supply of services in which have consultancy service in Vietnam through employees of enterprise or other and provided that the services above in a project or concerned projects that are prolonged in Vietnam in a duration or many durations aggregating more than 183 days in each 12-month period, but because nature of service, time of service supply does not prolong more than 6 months in a 12-month period, while three conditions of permanent establishment at point 1.2.1 above still satisfy, the service supply still be regarded to have a permanent establishment in Vietnam. 

Example 14: Sweden aircraft-manufacturing company D entered into an aircraft maintenance service contract with Vietnam Airlines for two years. Under this contract, annually, it sends teams of technical experts to Vietnam to work for a total of 90 days at location of aircraft maintenance.  In this case, according to Clause 1 Article 5 of Agreement between Vietnam and Swedish, the company D shall be regarded to have a permanent establishment in Vietnam because annually teams of technical experts to Vietnam to work at a fixed location in Vietnam (place where aircraft are maintained).

d) That enterprise has in Vietnam a brokerage agent, a commission agent or any other agent, and such agents devote wholly or most of their agency activities for that enterprise (dependent agent).

Example 15. Company V, a resident of Vietnam, signs an agency contract for storage and delivery of paint products with company H, a resident of the Great Britain. Under this contract, company V is not allowed to act as agent for another paint manufacturer or distributor.  In this case, though having no function to sign contracts or collect money in Vietnam, company V has become a dependent agent of Company H, not independent.  Under the Vietnam-Great Britain Agreement (Clause 6 or Article 5: Permanent establishment), company H shall be regarded to have a permanent establishment in Vietnam.

dd) That enterprise gives for a person in Vietnam:

- An authority to habitually negotiate and conclude contracts in the name of the enterprise; or conclude contracts in his name but bind obligations and duties of that enterprise; or

- No such authority, but the right to habitually represent that company to deliver goods in Vietnam.

1.2.3. A foreign enterprise shall not be regarded to have a permanent establishment in Vietnam in the following cases:

a) That enterprise uses facilities in Vietnam solely for the purpose of storage, display of its goods.

b) That enterprise has a stock of goods in Vietnam solely for the purpose of storage, display or of processing by another enterprise.

c) That enterprise has a fixed place of business in Vietnam solely for the purpose of purchasing goods or collecting information for the enterprise.

d) That enterprise has a fixed place of business in Vietnam solely for the purpose of carrying on preparatory or auxiliary activities for the enterprise.

1.2.4. In cases where a resident of the Contracting State to an Agreement concluded with Vietnam controls, or is controlled by, a company that is a resident of Vietnam, or is conducting business in Vietnam (possibly through a permanent establishment or in other forms), neither of the companies shall become a permanent establishment of another company.

Example 16: A foreign enterprise contributes its capital to a joint-venture company or a company with 100% foreign capital in Vietnam.   Then, the joint-venture company or the company with 100% foreign capital shall not be regarded a permanent establishment of that foreign enterprise.

However, in case where a company, resident of the Contracting State to an Agreement concluded with Vietnam, contributes capital in establishment of a joint-venture company or a company with 100% foreign capital in Vietnam (including export processing enterprises), that enterprise shall be regarded to have a permanent establishment in Vietnam if:

- Joint-venture company or company with 100% foreign capital usually negotiates, signs contract in name of such contract; or signs contracts in name of Joint-venture company or company with 100% foreign capital but binding obligations or duties of foreign company; or

- Joint-venture company or company with 100% foreign capital usually represent for foreign company to deliver goods in Vietnam; or

- That foreign company has right to determine the material-technical facilities of Joint-venture company or company with 100% foreign capital during production and business (that is case where foreign company use the material-technical facilities of Joint-venture company or company with 100% foreign capital in Vietnam (if any) during production and business not on the basis of the price market principle).

1.3. Determination of taxable incomes of permanent establishments

1.3.1. The determination of the taxable income of the permanent establishment of foreign enterprises, exclusive of foreign banks’ branches in Vietnam as guided at point 1.3.3 below, shall comply with documents guiding the implementation of enterprise income tax in respect to foreign organizations and individuals doing business without establishment of a legal entity or earning incomes in Vietnam.

1.3.2. When determining expenditures apportioned by the headquarters of foreign enterprise or offices of foreign enterprise to a permanent establishment in Vietnam, the permanent establishment shall be regarded as an independent enterprise jointly conducting the same or similar activities under the same or similar conditions totally independent from its headquarters of foreign enterprise or offices of foreign enterprise. However, in al case, the below apportions from the headquarters of foreign enterprise or offices of foreign enterprise to a permanent establishment in Vietnam shall not be recognized as expenditures for deduction:

- Royalties or similar payments for use of patents or similar rights;

- Commission for services or management jobs;

-  Loan interests under any form.

1.3.3. The determination of the taxable income of foreign banks’ branches in Vietnam shall comply with guides on determination of incomes subject to EIT of legal entities in Vietnam. However, in al case, the below apportions from the headquarters of foreign bank or offices of foreign bank to its branch in Vietnam shall not be recognized as expenditures for deduction:

- Royalties or similar payments for use of patents or similar rights;

- Commission for services or management jobs;

Provisions on tax for incomes from business above are stated in Article business income (usually Article 7) of the Agreements.

2. Cases where foreign enterprises carry on production and business activities in Vietnam through forming legal persons in Vietnam.

According to Vietnam’s current laws, foreign enterprises may conduct business in Vietnam through forming such legal persons in Vietnam as joint-venture enterprises or enterprises with 100% foreign capital.

Under the Agreements, these legal persons are obliged to pay tax on incomes from their production and business activities like other Vietnamese enterprises in accordance with the current provisions of the enterprise income law.  Particularly, incomes that are earned by foreign enterprises in the form of profit divided to investors or income from the transfer of contributed capital amounts (if any) shall comply with the provisions of the relevant articles of the Agreements on Dividends or Income from Alienation of Property.

Example 17: A Chinese company T contributes capital to a joint-venture company X in Vietnam.  In 2009, Joint venture X earned VND 100 million which is profit from its business activities; after paying enterprise income tax in Vietnam at the tax rate of 25%, all after-tax profit is divided under rate of capital contribution. In 2010, Company T sold 50% of its contributed capital in joint venture X and collected VND 3 billion and VND 50 million as interests of loan which it supply for Joint venture X. Tax obligation of joint venture X and company T in 2010 as follows:

- Joint venture X pays enterprise income tax as other Vietnamese enterprises. Specified:

Enterprise income tax = VND 100 million x 25% - VND 25 million

- Chinese company T pays tax in Vietnam according to the Agreement as follows:

+ For divided after-tax profit (VND 75 million x 70%): To pay tax for dividends (guide in section 4. Dividends, Chapter II, this Circular);  

+ For income from transfer of contributed capital (VND 3 billion): To pay tax for income from Alienation of Property (guide in section 8. Income from Alienation of Property, Chapter II, this Circular);

+ For income from loan interests (VND 50 billion): To pay tax for income from loan interests (guide in section 5. Income from loan interests, Chapter II, this Circular). 

Section 3. INCOME FROM INTERNATIONAL TRANSPORT

Article 12. Definition of international transport

Under the Agreements, international transport means activities of carrying  cargoes, passengers by ship or aircraft (some cases specified in each particular Agreement may also include means of road transport, railway transport, inland waterway transport (hereinafter referred collectively to as transport means), performed by enterprises of the Contracting State, except for the case these transport activities take place only between two places in Vietnam or in the Contracting State to an Agreement concluded with Vietnam.

Example 18: A Japanese company transports cargoes and passengers in Vietnam.  The following passenger and cargo transport activities of this enterprise shall be regarded as international transport:

- Carriage of cargoes and passengers from a place in Vietnam to a place in Japan (including also the carriage of cargoes and passengers from Hai Phong via Ho Chi Minh City and Osaka to Tokyo);

- Carriage of cargoes and passengers from a place in Vietnam to a place outside Vietnam (for example, Singapore);

In cases where a ship of the above-mentioned Japanese enterprise carries tourists on a package tour of Ho Chi Minh City - Singapore - Hai Phong; it starts off at Ho Chi Minh City and calls at the Singaporean port, after visiting Singapore, all passengers return to the ship for Hai Phong.  In Singapore, this ship does not receive any more passengers.  So, the passenger transport on the above-said voyage shall not be regarded as international traffic (because its departure point and final arrival point are in Vietnam, though the ship’s voyage consists of a trip occurring outside Vietnam).

Article 13. Identification of beneficial owners for incomes from international transport

Depending on each Agreement, international transport enterprises of the Contracting State shall be identified according to the following criteria:

1. Enterprises are managed by residents of Vietnam or of the Contracting State to an Agreement concluded with Vietnam, or

2. Enterprises have a place of effective management in Vietnam or in the Contracting State to an Agreement concluded with Vietnam; provided that these enterprises own or have the right to use at least the whole of a transport means and use such means for cargo and/or passenger transport on international traffic routes (called transport means directly managed by enterprises).

Article 14. Determination of income from international transport

Depending on the provisions of each Agreement, income derived from international transport of persons stated in Article 13 shall enjoy tax reduction or exemption in Vietnam or in the Contracting State to an Agreement concluded with Vietnam.

The scope of application of tax exemption or reduction in Vietnam to enterprises of the Contracting State to an Agreement concluded with Vietnam covers:

1. Income from international transport by transport means of directly managed by enterprises and from auxiliary activities attaching to such international transport, specifically:

Turnover from international transport by transport means directly managed by enterprises which issue transport documents (tickets, bills of lading or passenger and cargo transport manifests).

1.2. Turnover from the charter of part of transport means (also called space charter) or from the charter of the whole of transport means by shipment directly managed by enterprises.

Example 19: Japanese shipping company A agrees to transport cargoes of company C from Vietnam to Holland with the freight of USD 300.  As shipping company A has no ship under its direct management, it charters a space aboard a ship of shipping company B of Thailand at the freight of USD 250.  Apart from the above-said carriage of cargoes for shipping company A, shipping company B also directly transports cargoes of other customers on the same trip with the freight of USD 200.  In this case:

- For shipping company A: the amount of USD 300 earned from the transport of cargoes for Company C or the amount of USD 50 earned as a difference from its transport of cargoes for Company C and charter of a space aboard the ship of company B shall all be regarded as income from international traffic by sea-going ship so as to enjoy exemption or reduction under the Vietnam-Japan Agreement because Company A does not directly manage the ship (just buying a space aboard the ship of shipping company B). Therefore, it is still liable to full payment of enterprise income tax.

- For shipping company B: the freight of USD 450 shall be regarded as income from international transport entitled to tax reduction under the Vietnam-Thailand Agreement (a 50% reduction of payable enterprise income tax)

1.3. Turnover from the carriage of cargoes or passengers when the enterprises enter into partnerships to operate on international traffic routes, provided that the enterprises enter into the partnerships on the basis of contributing transport means directly managed by the enterprises or contributing funds for the operation of the transport means directly managed by the partnerships and the involved parties use separate transport documents.  In this case, turnover shall be determined on the basis of transport documents issued by the enterprises of the partnerships but must not exceed the space limits of the transport means which the enterprises may exploit in accordance with the partnership agreements.

1.4. Turnover from the carriage of passengers or cargoes by transport means managed by other enterprises, with international transport documents issued by the enterprises under either of the following two conditions:

a) Such carriage stage is part of the international traffic trip by ship or aircraft directly managed by the enterprises and is stated in the transport documents issued by the enterprises themselves;

Example 20: Using example 10 above, Japanese shipping company A agrees to transport cargoes of company C from Vietnam to Holland with the freight of USD 300.  Yet, shipping company A has ship A1 under its direct management and this ship transports cargoes at the second stage from Singapore to Holland.  For the first stage from Vietnam to Singapore, company A has to hire shipping company B of Thailand to transport the cargoes with the freight of USD 50.

- For shipping company A: the freight of USD 250 (300- 50) shall be regarded as income from international transport entitled to tax reduction under the Vietnam-Japan Agreement.

- For shipping company B: the freight of USD 50 shall be regarded as income from international transport entitled to tax reduction under the Vietnam-Thailand Agreement (a 50% reduction of payable enterprise income tax).

b) That carriage is effected on the basis of the agreement on the swapping of a space aboard a transport means (called space swapping) directly managed by an enterprise for a corresponding space aboard another transport means managed by another enterprise.  In this case, turnover shall be determined on the basis of transport documents issued by the enterprise itself but must not exceed the space limit the enterprise is allowed to exploit free of charge aboard the means of the counterpart company in accordance with the space swapping agreement.

1.5. Income from the short-term letting (keeping) of containers as an auxiliary activity attaching to the operation of the transport means directly managed by enterprises, if prescribed in the Agreements.

The nature of auxiliary activity attaching to the operation of transport means of the short-term letting (keeping) of containers shall be determined to be containers accompanying the transport means entering a Vietnamese port, containers currently containing import cargoes and the container use charge is included in the freight; income from the short-term letting of containers arises because the goods recipients keep containers beyond the time limit for free-of-charge use.

1.6. Turnover from the charter of bare ships or aircraft (called bareboat charter) which is auxiliary to the international traffic operation of the transport means directly managed by the enterprises, if it is specified in the Agreements and fully meets the following three conditions:

a) The transport means is being used by the enterprise in international transport; and

b) The total chartering time is shorter than the time the transport means is operated for international transport by the enterprise itself within 12 months starting or ending the calendar year; and

c) The charterer must not change the name and call signals of the transport means.

Bareboat charter means that the charter of a ship whereby the chartered supplies the charterer a specific ship not including entire ship or crew.

Turnover mentioned at Points 1.5 and 1.6 above shall not be regarded as turnover from auxiliary activities attaching to international transport for application of the Agreements if enterprises do not derive any turnover items stated at Point 1.1, 1.2, 1.3 or 3.1.4.

2. Where two or more enterprises carry on partnership activities in order to create a partnership without legal person status to carry on international traffic activities with transport means directly managed by the partnership and transport documents issued in the name of such partnership, the identification of the scope of tax exemption and reduction under an Agreement shall be made separately for each party to the partnership under the Agreement concluded between Vietnam and the country of which the party to the partnership is a resident or in which the party to the partnership has its place of effective management.   The bases for determination of turnover entitled to tax exemption or reduction shall be similar to those stipulated at Clause 1 and such turnover shall be apportioned according to the percentage of turnover divided to the party to the partnership in accordance with the partnership contract or agreement.

Example 21. The Scandinavian Airlines (SAS) partnership is engaged in transporting international passengers from Vietnam to Northern European countries.  Therefore, the airlines’ turnover arising in Vietnam shall be apportioned to the parties contributing capital to, and managing, SAS, which are residents of Norway, Denmark or Sweden for application in accordance with each relevant Agreement.

When declaring their tax obligations, the above-said enterprises must separately account the aforesaid income items for consideration of enterprise income tax exemption or reduction in accordance with the provisions on income from international transport. In all cases, turnover considered for tax exemption or reduction must not exceed the enterprise income tax-liable turnover of international transport in accordance with relevant regulatory documents.

Where an Agreement (like the Agreements with Bangladesh, Thailand and the Philippines) stipulates only a percentage of income tax reduction, enterprises shall have to pay income tax on income from international transport according to the non-reduction percentage.

The above-said provisions on taxation on income from international transport are included in the Article International transport (usually Article 8) of the Agreements.

Section 4. INCOME FROM DIVIDENDS

Article 15. Definition of dividends

Under the Agreements, dividends mean amounts deducted from the after-tax incomes of limited liability companies, joint-stock companies and paid to members of limited liability companies, shareholders, amounts deducted from after-tax incomes of joint-venture enterprises, enterprises with 100% foreign capital and paid to foreign parties, incomes derived from overseas (indirect) investment activities (excluding loan interests under the provisions of Section 5, Chapter II, this Circular) by residents of Vietnam, and Vietnamese enterprises’ divided incomes from overseas direct investment, which are treated by the Contracting States like dividends.

Example 22: Vietnamese enterprise S invests in States X and Y and the situation of its income and tax payment according to the regulations of States X and Y is as follows.

No.		State X	State X
1 2 3 4 5	Pre-tax income Income tax of 28% After-tax Income Income tax on dividends Actually received income	100 28 72 14.4 (tax rate of 20%) 57.6	100 28 72 No dividends 72

So, enterprise S is regarded to have overseas dividends of 72 within the scope of the Agreement with State X and to have no overseas dividends within the scope of the Agreement with State Y.

Article 16. Determination of tax obligation for incomes from dividends

1. Under the Agreements, Vietnam is entitled to tax dividends paid by a company being a resident of Vietnam to a resident of the Contracting State to an Agreement concluded with Vietnam at the limit rate set in each Agreement (usually not exceeding 15%, provided that the recipient is the beneficial owner.

2. Where a resident of Vietnam receives dividends of a company being a resident of the Contracting State to an Agreement concluded with Vietnam, the Contracting State to an Agreement concluded with Vietnam shall be entitled to impose income tax in accordance with the provisions of Clause 1 this Article and Vietnam shall be entitled to tax this income in accordance with Vietnam’s current tax law; but at the same time Vietnam must apply methods for elimination of double taxation on this income (provided for in Chapter III. Methods for elimination of double taxation in Vietnam, of this Circular).

3. Where a resident receives dividends which, under Vietnam’s current tax law, are not subject to income tax or are subject to income tax at a rate lower than that prescribed in the Agreement, such resident shall fulfill the tax obligation prescribed by Vietnam’s current tax law.

Example 23. A British company invests USD 14 million in a joint-venture company in Vietnam and in 2010 it received dividends from joint venture in Vietnam.   Although under the Vietnam-Great Britain Agreement (Clause 2.a of Article 10: Dividends), Vietnam is entitled to tax such income at the rate of 7%. But according to its current laws, Vietnam does not tax this income, so the British company does not have to pay tax on the above-said income from dividends.

Article 17. Identification of beneficial owners for incomes from dividends under Agreement

Under the Agreements, the provisions on taxation on dividends shall apply only to residents being recipients, beneficial owners of the benefits of shares, namely shareholders.  Therefore, apart from some cases of not being entitled to enjoy benefit under Agreement defined in Article 6. Some cases of refusal for application of Agreement on the basis of principle of enjoying benefit under Agreement, the reduced tax rates or tax exemption for incomes from dividend prescribed in Agreements shall not apply to:

1. Recipients of paid dividends, which are not shareholders or not residents.

Example 24: An investment fund registered in State S (established by members being residents of Contracting States to Agreements concluded with Vietnam) participates in capital contribution for establishment of Joint venture Company V in Vietnam. That investment fund is not a resident of State S. The received dividends from investment fund of joint venture company V and the received incomes by members contributing capital in investment fund from the dividends divided by investment fund are not applied Agreements between Vietnam and State S and States in which members are residents.

2. Dividends paid by companies being residents of Vietnam to the Vietnam-based permanent establishments of the residents of the Contracting State to an Agreement concluded with Vietnam.

Example 25. Bank branch CV, a Vietnam-based branch of French bank C, purchases shares of a Vietnamese joint-stock company and is divided a dividend.  At the request of CV branch, such dividend is directly remitted to bank C headquartered in Paris.  In this case, the beneficial owner of the dividends is branch CV, not bank C. Because branch CV is a Vietnam-based permanent establishment of bank C so, under the Vietnam-France Agreement (Clause 5 of Article 10: Dividends), the provisions on taxation on dividends shall not apply to bank C but the provisions on taxation on income from business activities shall apply (Article 7: Enterprise profits, the Vietnam-France Agreement).

3. Dividends paid by a company being a resident of Vietnam to another Vietnamese company’s permanent establishment based in the Contracting State to an Agreement concluded with Vietnam.

Example 26. Vietnamese bank V has a branch VC in State L, the Contracting State to an Agreement concluded with Vietnam.  According to the laws of State L, branch VC is regarded as a permanent establishment of bank V in such State.  Branch VC purchases shares of a Vietnam-based company and receives dividends therefrom.  In this case, the provisions on taxation on dividends in the Vietnam-L Agreement shall not be applied

The above-said provisions on taxation on dividends are included in the Article Dividends (usually Article 10) of the Agreements.

Section 5. INCOME FROM LOAN INTERESTS

Article 18. Definition of loan interests

Under the Agreements, “loan interest” means income from money amounts lent in any forms, secured or not secured by mortgage and with or without the borrower’s right to enjoy profits, and especially income from government securities and income from bonds or debentures, including also premiums and prizes attaching to such securities, bonds or debentures.

Article 19. Determination of tax obligation for incomes from loan interests

1. Under the Agreements, Vietnam is entitled to tax interest arising in Vietnam and paid to a resident of the Contracting State to an Agreement concluded with Vietnam at a limit rate (usually not exceeding 10%), depending on each Agreement, provided that the recipient is the beneficial owner.

Interest arising in Vietnam means interest from lent money which is borne and paid by any resident of Vietnam, including interest borne and paid by the Vietnamese government and Vietnamese local authorities or Vietnam-based permanent establishments or fixed places of foreign residents.

Example 27. Bank branch QT, a Vietnam-based branch of Thai bank Q, pays to bank Q an interest.  Because branch QT is a Vietnam-based permanent establishment of bank Q, this interest, under the Vietnam-Thailand Agreement, is regarded as arising in Vietnam and being taxed in Vietnam at the rate of 10% (Clause 2.a of Article 11: Loan interest).  However, this tax rate is equal to 5% that prescribed in Vietnam’s current income tax documents. So, Vietnam is entitled to collect tax only at the rate of 5%.

2. In cases where a resident of Vietnam receives an interest arising in the Contracting State to an Agreement concluded with Vietnam, such Contracting State is entitled to tax at source such income as stipulated at Clause 1 above and Vietnam is also entitled to tax this income in accordance with Vietnam’s current tax law but, at the same time, Vietnam must apply methods for elimination of double taxation on this income (prescribed in Chapter III. Methods for elimination of double taxation in Vietnam, of this Circular).

3. In cases where Vietnam’s current tax law does not provide for the taxation on this type of income or provides for the taxation at a rate lower than that prescribed in an Agreement, the income earners shall fulfill the tax obligation prescribed by Vietnam’s current tax law.

Example 28: Using example 17 above, but with the assumption that the interest is paid to a resident being an individual in Thailand.  Though, under the Vietnam-Thailand Agreement (Clause 2.b of Article 11: Interest), Vietnam is entitled to tax this income at the rate of 15%. But according to Vietnam’s current income tax law, the applicable tax rate is 5%.  So, Vietnam collects tax only at the rate of 5%, instead of 15%.

Article 20. Identification of beneficial owners for incomes from interest under Agreement

Under the Agreements, the provisions on taxation on income being interest shall apply only to persons directly supplying loans, directly receiving interests and concurrently being beneficial owners of such interests, i.e. lenders.

Example 29. A Vietnamese company signs a contract borrowing capital with a Korean Bank H. Under contract, Vietnam company receives principal from and pay both the principal and interest to bank H in an account of Bank H opened in Bank C of State C. In this case, the beneficial owner of the interest is Korean bank H, regardless where State C, has concluded a Double taxation agreement with Vietnam or not.

Example 30. Company A is resident in Vietnam sign a contract borrowing capital with a C Bank of country C. Bank D in State Y and Bank E in State Z and the principal is remitted directly from accounts of such banks to Company A. In which, States X and Y have Double taxation agreements with Vietnam.  Company A may pay the interest under the following ways: (i) Company A pays the interests directly to every banks C, D and E proportional to rate of contributed capital; or (ii) Company A pays all the interests to Bank C, after that, the interests are divided under agreement of the lenders (Banks C, D and E). In this case, the interest of syndicated loans of Banks C and D in case (i) and bank C in case (ii) will be applied Agreement.

Example 31: Using example 30 above with an assumption that Company A pay the interest under the way (iii) as follows: Company A pays all the interest to bank E, after that, the interest is divided under agreement of lenders (Banks C, D and E). In this case, Banks C, D and E are not subject to apply Agreement.

Apart from some cases of not being entitled to enjoy benefit under Agreement defined in Article 6. Some cases of refusal for application of Agreement on the basis of principle of enjoying benefit under Agreement, the reduced tax rates or tax exemption for incomes from the interest prescribed in Agreements shall not apply to:

1. Recipients of paid interests, which are not lenders.

Example 32: A Vietnamese company pays an interest to Thai Bank C.  At the request of this bank, this interest is remitted to French bank P headquartered in Paris.  In this case, the beneficial owner of the interest is Thai bank C, not French bank P.  So, bank P is not entitled to request the application of the provisions of the Vietnam-France Agreement to this interest.

2. Interest arising in Vietnam and paid to a Vietnam-based permanent establishment of a resident of the Contracting State to an Agreement concluded with Vietnam.

Example 33. A Vietnamese company pays the interest to Vietnam-based branch V of foreign bank C being resident of Thailand.  In this case, the interest received by foreign bank’ branch V shall be regarded as a normal business income (not income from interest) of foreign bank’ branch V in Vietnam according to provisions of Thailand-Vietnam Agreement.

3. Interest arising in Vietnam and paid to another Vietnamese company’s permanent establishment situated in the Contracting State to an Agreement concluded with Vietnam.

Example 34. Vietnamese bank V has a branch VC in State L, the Contracting State to an Agreement concluded with Vietnam.  According to the laws of State L, branch VC is regarded as a permanent establishment of bank V in such State.  Branch VC grants a loan to a Vietnam-based company and receives an interest thereon.  In this case, the provisions on taxation on interests in the Vietnam- L Agreement shall not be applied.

4. Interest arising in Vietnam and paid to a permanent establishment of an enterprise of a third State situated in the Contracting State to an Agreement concluded with Vietnam.

Example 35. A Vietnamese company pays the interest to bank’s branch N in State N of bank C being resident of Thailand.  In this case, the interest received by bank’s branch N shall not be applied provisions of Vietnam-Thailand Agreement.

5. The lent money is not transferred directly from account of the lender being resident of Contracting State to an Agreement concluded with Vietnam.

Example 36: Using example 30 above with an assumption that all the lent money under contract is transferred to Company A from account of Bank E; then, the interest arising on this lent money will not subject to application of Agreements.

The above-said provisions on taxation on interest are included in the Article Interest (usually Article 11) of the Agreements.

Section 6. INCOME FROM ROYALTIES

Article 21. Definition of royalties

Under the Agreements, royalties mean amounts paid for the use of or the right to use:

1. Copyright of literary, artistic or scientific work including cinematographic films, photograph films or tapes used for radio or television broadcasting;

2. Patent and invention;

3. Trademark;

4. Design, model, plan, secret formula or process;

5. Computer software;

6. Industrial, commercial or scientific equipment;

7. Information related to industrial, scientific or commercial experiences.

Article 22. Determination of tax obligation for incomes from dividends

1. Under the Agreements, Vietnam is entitled to tax royalties arising in Vietnam and paid to a resident of the Contracting State to an Agreement concluded with Vietnam at a limit rate (usually not exceeding 10%), depending on each Agreement, provided that the recipient is the beneficial owner.

Royalties arising in Vietnam mean royalties borne and paid by any resident of Vietnam, including those borne and paid by the Vietnamese Government and local authorities or Vietnam-based permanent establishments or fixed places of foreign residents.

2. Where a resident of Vietnam receives a royalty arising in the Contracting State to an Agreement concluded with Vietnam, such Contracting State is entitled to impose income tax thereon as stipulated at Clause 1 above and Vietnam is also entitled to tax this income in accordance with Vietnam’s current tax law but, at the same time, Vietnam must apply methods for elimination of double taxation on this income (prescribed in Chapter III: Methods for elimination of double taxation in Vietnam of this Circular).

Example 37: A lubricant-making joint venture in Vietnam signs with a Korean company a contract which stipulates that this company transfers to the Vietnamese joint venture its lubricant-making formula for 20 years.  When the Vietnamese joint venture pays the royalty to the Korean company, it must, according to Vietnam’s tax law, deduct 10% of the total of such royalty for remittance into the budget.  However, under the Vietnam-Korea Agreement (Clause 2.a of Article 12: Royalties), this joint venture must make a deduction at 5% only, instead of 10%.

3. Where Vietnam’s current tax law does not provide for the taxation on this type of income or provides for the taxation at a rate lower than that prescribed in the Agreements, the income earners shall fulfill the tax obligation prescribed by Vietnam’s current tax law.

Example 38: Using example 37 above, but with the assumption that the Korean company contributes capital to the Vietnam-based joint-venture company with the right to use the lubricant-making formula for 20 years.  Under the Vietnam-Korea Agreement (Clause 2.a of Article 12: Royalties), Vietnam is entitled to tax the royalty of the Korean company at the rate of 5% because the right to use the lubricant-making formula is converted into monetary capital.  However, according to Vietnam’s laws, if the capital contribution by technology transfer is exempted from income tax, the Korean company is exempted from the tax.

Article 23. Identification of beneficial owners for incomes from royalties under Agreement

Under the Agreements, the provisions on taxation on royalties shall apply only to persons directly receiving and concurrently being beneficial owners of royalties, i.e. persons having the right to own, use or exploit copyright.  And, therefore, shall not apply to:

1. Recipients of paid royalties, which are not persons having the right to own, use or exploit copyright; or

2. Royalties arising in Vietnam and directly related to a Vietnam-based permanent establishment of the beneficial owner being a resident of the Contracting State to an Agreement concluded with Vietnam; or

3. Royalties arising in Vietnam and paid to another Vietnamese company’s permanent establishment situated in the Contracting State to an Agreement concluded with Vietnam.

Example 39: A Vietnam-based branch of a British tobacco company permits a Vietnamese company to use the formula and trademark of the British tobacco company in the Vietnamese company’s products on the condition that the branch inspects and monitors the use process.  In this case, the royalty from the use of the formula and trademark of the British tobacco company is directly related to the branch.  Because the branch is a Vietnam-based permanent establishment of the British tobacco company, under the Vietnam- Great Britain Agreement (Clause 4 of Article 12: Royalties), Vietnam is entitled to tax this income in the same manner applicable to business income (Article 7: Business profits, of the Vietnam-Great Britain Agreement).

The above-said provisions on taxation on royalties are included in the Article Royalties (usually Article 12) of the Agreements.

Section 7. INCOME FROM THE PROVISION OF TECHNICAL SERVICES

Article 24. Definition of technical service charges

Under the Agreements, technical service charges mean payments in any forms made to any persons, other than employees of the payers, for any services of technical, managerial or consultancy nature.

Article 25. Determination of tax obligation for incomes from technical services

1. Under the Agreements, Vietnam is entitled to tax technical service charges arising in Vietnam and paid to a resident of the Contracting State to an Agreement concluded with Vietnam at a limit rate (usually not exceeding 10%), depending on each Agreement, provided that the recipient is the beneficial owner.

Technical service charges arising in Vietnam mean payments borne and made in any forms by any resident of Vietnam, including those borne and paid by the Vietnamese Government and local authorities or Vietnam-based permanent establishments or fixed places of foreign residents.

Example 40: Company X, a resident of Vietnam, specializes in producing canned fruits.  In order to expand its outlets to Europe, it hires company M in Germany to give legal advice on the procedures for opening a branch or finding a sale agent.  This consultancy service is provided in Germany and company M has no permanent establishment in Vietnam.

In this case, when paying service charges to company M, company X must deduct an enterprise income tax at a rate not exceeding 7.5% according to the Vietnam-Germany Agreement (Clause 1.b of Article 12: Royalties and technical service charges).

2. Where a resident of Vietnam receives a technical service charge arising in the Contracting State to an Agreement concluded with Vietnam, such Contracting State is entitled to impose income tax thereon as stipulated at Clause 1 above and Vietnam is also entitled to tax this income in accordance with Vietnam’s current tax law but, at the same time, Vietnam must apply methods for elimination of double taxation on this income (prescribed in Chapter III: Methods for elimination of double taxation in Vietnam, of this Circular).

The above-said provisions on taxation on technical service charges are included in the Article Technical service charges (usually Article 13) of the Agreements.

Section 8. INCOME FROM THE ALIENATION OF PROPERTY

Article 26. Definition of income from the alienation of property

Income from the alienation of property means income in any forms from the sale or alienation (of the whole or part of) or exchange of the property and rights over the property, including also the case where the property is brought into a business establishment in exchange for the rights therein.

Article 27. Definition of tax obligation for income from the alienation of property

1. Tax obligation for income from the alienation of immovable property in Vietnam

Under the Agreements, Vietnam is entitled to tax income derived from the alienation of immovable property in Vietnam by a resident of the Contracting State to an Agreement concluded with Vietnam in accordance with Vietnam’s current tax law.

Example 41: A French oil-exploiting firm transfers its right to exploit oil at a location in Vietnam’s sea; income derived therefrom shall be taxed in accordance with Vietnam’s law.

2. Tax obligation for Income from the alienation of movable property being business property of a Vietnam-based permanent establishment

Under the Agreements, Vietnam is entitled to tax income earned from the alienation of business property by a Vietnam-based permanent establishment of a resident of the Contracting State to an Agreement concluded with Vietnam in accordance with Vietnam’s current tax law.

Example 42. Bank branch C of State P (the Contracting State to an Agreement concluded with Vietnam) operates in Hanoi.  In 2004, the branch terminated its operation and sold all equipment and property already used for its business purpose.  Income from the above-said alienation must be declared for tax payment (after subtracting the residual value of the equipment and property) at the current enterprise income tax rate in Vietnam (of 25%).

3. Tax obligation for income from the alienation of ships and aircraft operated in international transport

Under the Agreements, income from the alienation of ships and aircraft operated in international transport (in line with the definition at Article 12. Definition of international transport, of this Circular) and managed by international transport enterprises of the Contracting State to an Agreement concluded with Vietnam shall not be taxed in Vietnam.

4. Tax obligation for income from the alienation of capital of foreign investors in foreign-invested enterprises, in a trust or a partnership in which value of immovable property occupies a principal rate in total capital of enterprises.

Most of the Agreements between Vietnam and foreign countries provide that Vietnam is entitled to collect income tax in cases where the foreign parties alienate their capital in enterprises, entrusts or partnerships being resident of Vietnam and the value of immovable property occupies a principal rate in total assets of enterprises.

Rate of immovable property value in total properties of enterprise is simple average of rate of immovable property value in total properties of enterprise at time of alienation  of property, the beginning time and ending time of Taxable year is time prior to year when properties are transferred.  Determination of immovable property value is based in the audited property summary table of enterprise at the aforesaid times.

The principal rate of immovable property value in total properties of enterprise is determined as follows:

- Where Agreement specifies the rate or principal rate, complying with the rate prescribed in Agreement, such as at Clause 4 Article 13 of Vietnam - Spain Agreement  specified the rate of over 50%, or at clause 4 Article 14 of Vietnam-Oman Agreement and at Clause 4 Article 13 of Vietnam - United Arab Emirates Agreement specified the principal rate of over 50%. 

- Where an Agreement fails to specify the rate or the principal rate, the principal is determined over 50%

Example 43: On 30/3/2012, an investor, resident of Indonesia, transfers its capital part in an enterprise V in Vietnam.  Rate of immovable property value in total properties of enterprise V at times of 30/3/2012, 01/01/2011 and 31/12/2011 will be respectively60%, 40% and 53%.    Determination of the principal rate of immovable property value in total properties of enterprise V for purpose of tax obligation determination of Indonesian investor as follows:

Clause 4 Article 13: Gains from alienation of property, Vietnam-Indonesia Agreement prescribes as follows:

“4. Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally or immovable property situated in the other Contracting State, may be taxed in that other State." 

The provision above does not specify rate of immovable property value in assets of company, so the rate of over 50% will be principal.

The simple average of rates of immovable property value in total properties of enterprise is determined as follows:

(60% + 40% + 53%) / 3 = 51%.

So that, in this example, the value of immovable property has occupied principally in assets of company V.

5. Tax obligation for income from the alienation of shares in a Vietnam-based company

In some Agreements, prescribed that income from alienation of shares of a resident of the Contracting State to an Agreement concluded with Vietnam in a company being resident of Vietnam must tax in Vietnam.

Example 44: Clause 5 Article 13: Gains from alienation of property, Vietnam-Indonesia Agreement prescribes as follows:

“Gains from the alienation of shares other than those mentioned in clause 4 in a company which is a resident of a Contracting State may be taxed in that State."

According to the provision above, if an Indonesian resident earns income from transfer of shares to a company which is resident of Vietnam, that income will be taxed in Vietnam.

6. Tax obligation for income from the alienation of other property in Vietnam

Under the Agreements, income earned from the alienation of property other than the kinds of property stated at Clause 1 thru Clause 5 above in Vietnam by a resident of the Contracting State to an Agreement concluded with Vietnam shall not be taxed in Vietnam.

Example 45: A Chinese construction company brings machinery into Vietnam for the construction of a project for 3 months.  After the time of construction, this company returns home and sells the above-said machinery in Vietnam.  Under the Vietnam-China Agreement, this company has no permanent establishment in Vietnam (Clause 3.a of Article 5: Permanent establishment), so it shall not be taxed in Vietnam (Clause 6 of Article 13: Capital gains).

The above-said provisions on taxation on income from the alienation of property are included in the Article Income from the alienation of property (usually Article 13) of the Agreements.

Section 9. INCOME FROM INDEPENDENT PROFESSIONAL SERVICES

Article 28. Definition of income from independent professional services

Under the Agreements, income from independent professional services means income earned by an individual who is a resident of the Contracting State to an Agreement concluded with Vietnam from independent activities of providing professional services such as scientific, literature, art, education or training services, particularly independent professional services of doctors, lawyers, engineers, architects, dentists, accountants and auditors.

Income from individual professional services does not include remuneration from employment (prescribed in the Article Income from dependent personal activities), directors’ fees (prescribed in the Article Directors’ fees), pensions (prescribed in the Article Pensions), government services (prescribed in the Article Income from government services), income of pupils and students (prescribed in the Article Income of students), teachers and professors (prescribed in the Article Income of professors, teachers and researchers), and independent performances of artistes and athletes (prescribed in the Article Income of artistes and athletes).

Article 29. Determination of tax obligation for income from independent professional services

Under Agreements, a resident of the Contracting State to an Agreement concluded with Vietnam conducts supply of independent professional service in Vietnam must pay individual income tax in Vietnam in the following cases:

1. That individual does practice independently through a fixed place of business.

The phrase “fixed place” refers to a place or an address of a habitual or stable nature within the territory of a nation, through which an individual provides professional services (for example, a medial counseling room, an architect’s or lawyer’s office, etc.).  The principle for determination of a “fixed place” is similar to that for determination of a “permanent establishment” of an enterprise stated at Point 1.2, Article 11 of this Circular.

2. That individual is present in Vietnam for 183 days or more in taxable year or within 12 months from the day of arriving Vietnam, depending on each Agreement.

3. That individual earns a total fixed income, depending on each Agreement, from independent practice implementation in Vietnam in a defined duration (usually a financial year).

Example 46: in 2012, a doctor, resident of Bangladesh, conducted an operation at an international hospital in Vietnam and received a remuneration of VND 50,000,000.    Duration for doctor to be present in Vietnam for operation is 5 days. According to provision of Vietnam (Clause 1c Article 15: Independent professional service activity), because the income of doctor is VND 50,000,000 (in excess of USD 1,500), so this doctor has obligation to pay individual income tax in Vietnam.

The above-mentioned provisions on taxation on income from independent professional service activity are included in the Article Independent personal services (usually Article 14) of the Agreements.

Section 10. INCOME FROM DEPENDENT PROFESSIONAL SERVICES

Article 30. Definition of income from dependent professional services

Under the Agreements, income from dependent personal services means income in the form of remuneration derived by a person who is a resident of a Contracting State to an Agreement concluded with Vietnam from his employment in Vietnam and vice versa.  Income from dependent personal services does not include income of individuals in the capacity as independent professional practitioners (prescribed in the Article Independent professional services), members of enterprises’ directorates (prescribed in the Article Directors’ fees), artistes and athletes (prescribed in the Article Income of artistes and athletes), employees serving foreign governments (prescribed in the Article Income from government services), and remuneration in the form of pensions (prescribed in the Article on Pensions.

Article 31. Determination of tax obligation for incomes from dependent individual services

1. Under the Agreements, an individual, who is a resident of a Contracting State to an Agreement concluded with Vietnam, derives income from his/her employment in Vietnam, shall have to pay income tax in Vietnam in accordance with Vietnam’s current regulations on personal income tax.

Example 47. In 2003, Mr. A, a resident of France, worked for bank branch F, a Vietnam-based branch of a French bank, for 2 months.  All of his salary and other income were paid by branch F.  In the years preceding and following 2003, Mr. A was not present in Vietnam.  In this case, Mr. A is obliged to pay personal income tax on the income he earns during the time of working in Vietnam in accordance with Vietnam’s current regulations on personal income tax.

2. If the individual stated at Clause 1 concurrently fully satisfies the following three conditions, his/her remuneration from the employment in Vietnam shall be exempt from income tax in Vietnam:

a) That individual is present in Vietnam for less than 183 days in a period of 12 months starting or ending within the taxable year concerned; and

b) 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; and

c) This remuneration is not borne and paid by the Vietnam-based permanent establishment set up by the employer.

Example 48: Japanese company N participates in setting up joint venture S specialized in the distribution of goods in Vietnam.  In 2002, company N sent Mr. Z to Vietnam in the capacity as its representative to negotiate on a contract on company N’s supply of sale “know-how” to joint venture S for one month.  In the years preceding and following the year 2002, Mr. Z was not present in Vietnam.  All of his income and expenses were paid by company N.  In this case, Mr. Z concurrently satisfies all the three conditions stated at Clause 2 above, so he is exempt from personal income tax in Vietnam.

3. The term “employer” used at Point 2b) refers to real employer.  As usual, a person shall be regarded as real employer in the following cases:

a) That person has rights on the products and services created by the employee and bearing responsibility as well as risks for such labor; or

b) That person gives instructions and supplies working tools to the employee; or;

c) That person is entitled to control and bears responsibility for the working place.

Example 49: Using example 29 above with the assumption that in 2003 Mr. Z visited Vietnam in the capacity as specialist of joint venture S to guide the application of the “know-how” for 3 months.  In the years preceding and following that year, Mr. Z was not present in Vietnam.  In the spirit of assisting joint venture S, company N paid for all incomes and expenses of Mr. Z during his working time in Vietnam.  In this case, in terms of form, Mr. Z concurrently satisfies all three conditions stated at Clause 2 above, but, in essence, compared to real employer’s criteria, the real employer of Mr. Z during his working time in Vietnam is joint venture S, not company N. So, Mr. Z is not exempt from personal income tax in Vietnam

4. Income earned by a Vietnamese being a resident of the Contracting State to an Agreement concluded with Vietnam not from his/her employment in Vietnam but from his/her employment overseas shall not be taxed in Vietnam.

Example 50: In 2011, Vietnamese Construction Company V assigned its workers go to Laos for work at a construction site of it in Laws within duration of 12 months. Income from salary of these workers for working in Laws will not be taxed in Vietnam.

5. Income earned by individuals employed aboard ships, boats or aircraft (crews) operated in international transport by enterprises that are residents of, or have places of effective management in, Vietnam shall be taxed in Vietnam.

Example 51: Company S, a Vietnamese ocean shipping company, charters ships and foreign crews to operate on the China-Singapore international route. It is obliged to deduct personal income tax according to Vietnam’s laws from the salaries paid to individual crewmembers though these salaries constitute part of the ship charter costs.

The above-mentioned provisions on taxation on income from dependent professional service activity are included in the Article Dependent personal services (usually Article 15) of the Agreements.

Section 11. INCOME FROM DIRECTORS’ FEES

Article 32. Definition of income from directors’ fees

Under the Agreements, directors’ fees mean incomes received in Vietnam by a person being a resident of the Contracting State to an Agreement concluded with Vietnam in the capacity as a member of Board of Directors, Managing  Board of a company or as a senior manager of an enterprise being a resident of Vietnam; and vice versa.  This income does not include salaries received by such members for other functions performed by them as employee, consultant or advisor, salaries of foreigners holding a post in Vietnam-based representative offices of foreign companies.  These normal incomes shall be regarded as incomes from dependent personal services (prescribed in Section 10: Income from dependent personal services, Chapter II of this Circular).

Article 33. Definition of tax obligation for income from directors’ fees

Under the Agreements, individuals who are residents of the Contracting State to an Agreement concluded with Vietnam receive remuneration in the capacity as members of Board of Directors, Managing Board or as senior managers of a company being a resident of Vietnam shall pay tax on such type of income in accordance with the regulations on individual income tax in Vietnam (regardless whether they are present in Vietnam or not)

Example 52. A resident of the Great Britain is a member of the Managing Board of a joint venture in Vietnam.  In 2012, he worked in Vietnam for a total of 60 days and received remuneration in the capacity as a Managing Board member.  Under the Vietnam-Great Britain Agreement and Vietnam’s current regulations on individuals income tax, that person shall have to pay individual income tax on his remuneration earned for his capacity as a Managing Board member at a current rate in Vietnam (of 20%) of total income as applicable to non-residents of Vietnam.

Provisions on tax for incomes from directors' fee above are included in Article directors' fee (usually Article 16) of the Agreements.

Section 12. INCOME FROM PERFORMANCES OF ARTISTES AND ATHLETES

Article 34. Definition of income from performances of artistes and athletes

Under the Agreements, income from performances in Vietnam by artistes and  athletes means income from art or sport performances in Vietnam by artistes or athletes themselves, who are residents of the Contracting State to an Agreement concluded with Vietnam; and vice versa.

Article 35. Determination of tax obligation for income from performances of artistes and athletes

1. Notwithstanding the provisions of Section 9 - Income from independent professional services and Section 10 - Income from dependent personal services, Chapter II of this Circular, income earned by an individual, who is a resident of the Contracting State to an Agreement concluded with Vietnam, from his/her art, sport performance in Vietnam shall be taxed in accordance with Vietnam’s laws.

Example 53: In 2012, at the invitation of Vietnamese Performance Company V, a singer, resident of Korea, had a performance in Vietnam and received a remuneration of VND 500,000,000.   Duration for the singer to be present in Vietnam for performance is 3 days. According to provision of Vietnam-Korea Agreement (Clause 1 Article 17: artistes and athletes), this singer has obligation to pay individual income tax in Vietnam.

2. Notwithstanding the provisions of Section 2 - Business income, Section 9 - Income from independent professional services and Section 10 - Income from dependent personal services, Chapter II of this Circular, income from art or sport performances which is not paid to the performing individuals being residents of the Contracting State to an Agreement concluded with Vietnam but to other persons shall be taxed in Vietnam in accordance with Vietnam’s laws.

Example 54: Using example 53 above, Korean singer arrived Vietnam for performance on the basis of a contract (which is signed in Korea) between Vietnamese performances Company V and Korean Star Company. According to provision of Vietnam-Korea Agreement (Clause 2 Article 17: artistes and athletes), the income of Star Company from this contract will be taxed enterprise income tax in Vietnam.

3. In cases where the art, sport performances carried on by an individual or a company that is a resident of the Contracting State to an Agreement concluded with Vietnam with the framework of a program of cultural exchanges between the governments of the two countries, income derived from the art or sport performance in Vietnam by such foreign individual or company shall be exempt from tax in Vietnam if Agreement between Vietnam and that State provides.

Example 55: In 2012, in framework of cultural exchange signed between Vietnamese Government and Korean Government, a singer, resident of Korea, had a performance in Vietnam and received a remuneration of VND 500,000,0000.  According to provision of Vietnam-Korea Agreement (Clause 3 Article 17: artistes and athletes), this singer does not have obligation to pay individual income tax in Vietnam.

The above-said provisions on taxation on income of artistes and athletes are included in the Article Artistes and Athletes (usually Article 17) of the Agreements.

Section 13. INCOME FROM PENSIONS

Article 36. Definition of income from pensions

Under the Agreement, pensions mean pensions received by a resident of the Contracting State to an Agreement concluded with Vietnam from his/her past employment in Vietnam; and vice versa.  This income does not include pensions paid by the governments, local authorities of Vietnam and the Contracting State to an Agreement concluded with Vietnam because this income is regarded as income from Government services (prescribed in Section 14: Income from Government services, Chapter II of this Circular).

Article 37. Determination of tax obligation for incomes from pensions

Depending on each particular Agreement, pensions shall be taxed:

a) Only in the State of which the pension recipients are residents; or

b) Only in the State where pensions are paid; or

c) Both in the State of which the pension recipients are residents and in the State where the pensions arise, if the pension payers are residents of, or permanent establishments in, such States.

Example 56: Mr. F is a French citizen and works for private sector in France, when he retires, he lives in Vietnam.  According to Article 17: the pensions, Vietnam-France Agreement, income from pension received from France will be taxed only in Vietnam irrespective of any retirement fund of France paying that pension.

Example 57: Mr. M is an Oman citizen and works for private sector in Oman. During his work, he paid his pension insurance premiums to the pension insurance fund of Oman Government, at his retirement; he came to live in Vietnam.  According to Clause 2 Article 19: The pension and social insurance payments, Vietnam-Oman Agreement, income derived from pension paid by this pension insurance fund will be taxed in Oman only.

Example 58: Mr. M is a resident of Denmark and works for private sector in Denmark, at his retirement, he lives in Vietnam.  According to Article 18: the pensions and similar amounts, Vietnam – Denmark Agreement, income from pension derived from Denmark will be taxed in Vietnam and Denmark if National Law of Denmark provides for imposing tax on that pension.

The above-said provisions on taxation on pensions are included in the Article Pensions (usually Article 18) of the Agreements.

Section 14. INCOME FROM GOVERNMENT SERVICES

Article 38. Definition of income from Government services

Under the Agreements, income from Government services means wages, salaries or pensions paid by the Government, local authorities of the Contracting State to an Agreement to an individual for the tasks performed for that Contracting State.

Article 39. Determination of tax obligation for salaries from Government services

1. In cases where a foreigner sent by the Government of the Contracting State to an Agreement concluded with Vietnam to work in Vietnam for a Vietnam-based organization of that Government or for a program of economic, cultural co-operation or aid between the two States, his salary or wage paid by that foreign Government shall be exempt from income tax in Vietnam even though such person has become a resident of Vietnam for the purpose of performing such jobs.

Example 59: Mr. J is a Japanese citizen and works for JICA office (of Japanese Government) in Vietnam. Income from salary of Mr. Z during working in Vietnam shall be exempt from personal income tax in Vietnam (Clause 1.a, Article 19 of Vietnam-Japan Agreement).

2. Salaries or wages paid by the Government of the Contracting State to an Agreement concluded with Vietnam shall only be taxed in Vietnam if they are paid to an individual being a resident of Vietnam for the tasks performed for that foreign Government in Vietnam and this individual satisfies two following conditions:

a) Holding the Vietnamese nationality; or

b) Being a resident of Vietnam before performing the tasks in Vietnam for the foreign Government.

Example 60: Mr. V is a Vietnamese citizen and works for JICA office (of Japanese Government) in Vietnam. Income from salary of Mr. V during working in Vietnam shall be taxed personal income tax in Vietnam as prescribed in Vietnamese Law on personal income tax (Clause 1.b(i), Article 19 of Vietnam-Japan Agreement).

Article 40. Determination of tax obligation for pensions from Government services

A pension paid to an individual from a fund set up by the Vietnamese State or local authorities (hereinafter collectively referred to as Vietnamese State) or paid directly by the Vietnamese State, for his/her past employment, shall only be taxed in Vietnam, unless the above-said individual is concurrently a resident of the Contracting State to an Agreement concluded with Vietnam and holds the nationality of that Contracting State.  In this case, the above-said individual is resident of the Contracting State to an Agreement concluded with Vietnam and holds nationality of that Contracting State, the pension of above-said individual shall be taxed in that Contracting State only.

Example 61: Mr. V is a Vietnamese citizen and works for Vietnamese Government. At his retirement, he lives in Japan. Then, the pension due to the employment for Vietnamese Government shall be exempt from personal income tax in Japan (Clause 2.a, Article 19 of Vietnam-Japan Agreement).

Example 62: Mr. J is a Japanese citizen and works for Embassy of Vietnam in Japan. At his retirement, he still lives in Japan. Then, the pension due to the employment for Vietnamese Government shall be taxed personal income tax in Japan (Clause 2.b, Article 19 of Vietnam-Japan Agreement).

Article 41. Determination of tax obligation for salaries, pensions from Government’s business activities

Notwithstanding the provisions of Articles 39 and 40 above, salaries, wages or pensions paid by a foreign Government to an individual for his/her participation in the foreign Government’s business activities in Vietnam, such as activities of railway transport enterprises, postal enterprises or State performance companies, shall be taxed according to regulations, depending on each case as stated in Section 10 - Income from Dependent personal services, Section 11- Directors’ fees, Section 12- Income of Artistes and athletes, and Section 13- Pensions, Chapter II of this Circular.

The above-said provisions on taxation on income from Government services are included in the Article Government services (usually Article 19) of the Agreements.

Section 15. INCOME OF STUDENTS, APPRENTICES AND INTERNS

Article 42. Income of students, apprentices and interns

Under the Agreements, income of students, apprentices and interns in Vietnam in service of their education, study or job training in Vietnam, falling within the scope of regulation of this Article, only includes:

1. Income received from overseas sources for the purpose of their learning and maintenance in Vietnam.

2. Income received from their employment in Vietnam directly related to the education, study or job training in Vietnam (in the case it is specified in the Agreement).  In some Agreements, only a certain level of this income is exempt from tax.

Article 43. Determination of tax obligation for income of students, apprentices and interns

If immediately before visiting Vietnam for education, study or job training, foreign students, apprentices or interns were residents of the Contracting State to an Agreement concluded with Vietnam, they shall be exempt from income tax in Vietnam on the types of income stated in Article 42.

Example 63: A student, a resident of China, comes to Vietnam to study folk arts for 4 years. During the time of study in Vietnam, he receives a monthly scholarship of VND 800,000 from China, a monthly income of USD 50 from teaching Chinese at a school in Hanoi and a total annual income of USD 2,500 for participation in Vietnamese folk art performances.  Under the Vietnam- China Agreement (Article 20: Students, apprentices and interns), this student shall be exempt from income tax on the scholarship and income from art performance within the limit of USD 2,000; and pay tax on income from teaching and the amount in excess of USD 2,000 earned from performances.

The above-said provisions on taxation on income of students, apprentices and interns are included in the Article Students, apprentices and interns (usually Article 20) of the Agreements.

Section 16. INCOME OF TEACHERS, PROFESSORS, AND RESEARCHERS

Article 44. Definition of income of teachers, professors, and researchers

Some Agreements specifically provide for the taxation of income earned by foreign teachers, professors and researchers from teaching, lecturing, researching activities in Vietnam. This income includes incomes derived from teaching, lecturing or researching activities at universities or educational facilities recognized by Vietnamese Government.

Article 45. Determination of tax obligation for income of teachers, professors, and researchers

1. Income of foreign teachers, professors and researchers from teaching, lecturing, researching activities in Vietnam according to Article 44 above will be exempt tax in Vietnam (in duration specified in Agreement), if the following conditions are satisfied:

- If immediately before visiting Vietnam for teaching, lecturing, researching activities, foreign teachers, professors and researchers were residents of the Contracting State to an Agreement concluded with Vietnam, and

- The teaching, lecturing or researching activities are conducted at universities or educational facilities recognized by Vietnamese Government.

Example 64. According to linkage program between a Vietnamese University V and a Philippine University P, from school year 2012, University P assigned a lecturer to teach in University V for 3 years. This lecturer will be exempt individual income tax in Vietnam for income from lecturing at University V for 2 years since arriving Vietnam and will pay individual income tax in Vietnam for income from lecturing in University B for third year (Clause 1, Article 21: teachers, professors, and researchers, Vietnam-Philippine Agreement).

2. The above-said tax exemption shall not apply to teaching or researching activities for the purposes of an individual or a private organization.

Example 65: Under contract signed with a private hospital of Vietnam, in 2012, a professor, resident of Philippines (with status as a party in contract) arrived and researched at this hospital for 12 months.  This professor shall pay individual income tax in Vietnam for income from researching under contract.

The above-said provisions on taxation on income of teachers, professors, and researchers are included in the Article teachers, professors, and researchers (usually Article 21) of the Agreements.

Section 17. OTHER INCOME

Article 46. Definition of other income

Under the Agreements, other income means all other incomes not yet mentioned in the above-said articles, such as income from lottery win, amounts won from gambling at casinos, financial supports from familial or marital obligations, etc

Article 47. Determination of tax obligation for other income

1. Under the Agreements, a resident of the Contracting State to an Agreement concluded with Vietnam, who derives other income from Vietnam, shall have to pay tax in accordance with Vietnam’s current tax law.  Nevertheless, in some Agreements (for example, the Vietnam- France Agreement, the Vietnam-Great Britain Agreement), Vietnam commits to grant tax exemption for other income in this case.

Example 66: Mr. H is a resident of China and Mr. P is a resident of France. During a two-week tour in Vietnam, both of them won a lottery prize of VND 20 million in Hanoi.  According to Vietnam’s personal income tax regulations, this type of income is irregular, so both of them have to pay tax in Vietnam on this prize.  Under the Vietnam-China Agreement (Clause 2 of Article 22: Other income), Vietnam may tax Mr. H’s income. Under the Vietnam-France Agreement (Clause 1 of Article 20: Other income), Mr. P’s income is exempt from tax in Vietnam.

2. In cases where other income is related to a Vietnam-based permanent establishment of a resident of the Contracting State to an Agreement concluded with Vietnam, Vietnam is entitled to tax such income in accordance with the provisions of Vietnam’s current tax law and the provisions of Section 2- Business income and Section 9 - Income from independent professional services, Chapter II this Circular, as the case may be.

Example 67. Bank branch V, a Vietnam-based branch of Japanese bank S, purchases a car of a company in State X and wins a sale promotion prize worth USD 10,000.  This car is used for the business purpose of branch V. Notwithstanding the internal policy of bank S, which says that such income must be regarded as income of the headquarters and transferred into bank S’s account in Japan, the income being this prize shall still be regarded as actually related to branch V, a Vietnam-based permanent establishment of bank S in accordance with the Vietnam-Japan Agreement (Clause 2 of Article 21), and, therefore, Vietnam is entitled to tax this income in accordance with the provisions of Vietnam’s current tax law and the provisions of Section 2- Business income, Chapter II of this Circular (Article 7 of the Vietnam-Japan Agreement).

The above-said provisions on taxation on other income are included in the Article Other income (usually Article 22) of the Agreements.

Chapter III

METHODS FOR ELIMINATION OF DOUBLE TAXATION IN VIETNAM

Under the Agreements, when a taxpayer being a resident of Vietnam, derives an income from the Contracting State to an Agreement concluded with Vietnam and has paid tax in that State (under the provisions of the Agreement and that State’s laws), Vietnam may still tax such income but, at the same time, it is also obliged to apply methods for elimination of double taxation so that that taxpayer does not have to pay double tax.

Depending on each concluded Agreement, Vietnam may apply one or a combination of the following methods for elimination of double taxation as prescribed in Articles 48, 49, and 50 of this Circular.

Article 48. Tax deduction method

In cases where a resident of Vietnam derives income from and has paid tax in the Contracting State to an Agreement concluded with Vietnam, if in that Agreement Vietnam commits to apply the tax deduction method, then, when this resident makes income tax declaration in Vietnam, such income shall be included in his/her taxable income in Vietnam in accordance with Vietnam’s current tax law and the tax amount already paid in the Contracting State shall be deducted from the tax amount payable in Vietnam.  Tax deduction shall comply with the following principles:

a) Tax amount already paid in the Contracting State shall be deducted from the taxes specified in Agreement;

b) The deducted tax amount shall not exceed the tax amount payable in Vietnam, which is computed on the income derived in the Contracting State in accordance with Vietnam’s current tax law and also not be deducted or refunded tax more than the paid tax amount in foreign State;

c) Tax amount already paid in the Contracting State is the taxes arising in time of taxable year in Vietnam.

Example 68: Mr. A is a Laos’ citizen and a resident of Vietnam in 2011. In 2011 Mr. A earned an income of VND 40,000,000 from his employment for 8 months in Vietnam and an income of VND 80,000,000 from his employment for 4 months (period from 9/2011 to 12/2011) in Laos.  Taxable year of Laos is from 01/10 to 30/9 of next year. Under the Vietnam- Laos Agreement (Clause 1 of Article 15: Dependent personal services), Mr. A must pay tax in Laos on his income derived from this State at the rate prescribed by the tax law of this State (20%).  It is assumed that Mr. A has no other income apart from the above-said incomes.  In this case, in Vietnam Mr. A’s tax declaration and payment and deduction of the tax already paid in Laos shall be as follows:

- Determination of Mr. A’s taxable income in taxable year 2011 (according to Vietnam’s current tax law):

(VND 40,000,000 + VND 80,000,000) = VND 120,000,000

- Determination of Mr. A’s income tax in taxable year 2011 (according to Vietnam’s current tax law):

(VND 60,000,000 x 5% + VND 60,000,000 x 10%) = VND 9,000,000

- The tax amount paid in Laos (according to Laos’ tax law):

VND 80,000,000 x 20% = VND 16,000,000

- The tax amount calculated according to Vietnam’s law on the income derived in Laos:

VND 9,000,000 : 12 months x 4 months = VND 3,000,000

So, Mr. A is only entitled to the deduction of VND 3,000,000 from the total tax of VND 16,000,000 already paid on VND 80,000,000 derived from Laos.

Example 69: Company V of Vietnam has a permanent establishment in Laos.  In 2010, this permanent establishment was determined to have an income of USD 100,000.  Under the Vietnam-Laos Agreement (Clause 1 of Article 7: Enterprise profits), under Laos’s tax law, company V was obliged to pay income tax (at the rate of 20%) on this permanent establishment’s determined income.  In this case, in Vietnam Company V’s tax declaration and payment and deduction of the tax already paid in Laos shall be as follows:

- Determination of the tax amount paid in Laos (according to Laos’s tax law):

USD 100,000 x 20% = USD 20,000

- Determination of the tax amount payable in Vietnam (according to Vietnam’s current tax law):

USD 100,000 x 25% = USD 25,000

- The tax amount further payable in Vietnam:

USD 25,000 – USD 20,000 = USD 5,000

Example 70: Using example 69 above, with the assumption that company V is a joint- venture eligible for an enterprise income tax rate of 10% in Vietnam.  Then, in Vietnam Company V shall make tax declaration and payment and enjoy a deduction of the tax already paid in Laos as follows:

- Determination of the tax amount paid in Laos (according to Laos’s tax law):

USD 100,000 x 20% = USD 20,000

- Determination of the tax amount payable in Vietnam (according to Vietnam’s current tax law):

USD 100,000 x 10% = USD 10,000

- The maximum tax amount to be deductible in Vietnam: USD 10,000

In this case, company V shall enjoy a deduction of USD 10,000 from the total tax amount of USD 20,000 already paid in Laos.  The difference of USD 10,000 (USD 20,000 - USD 10,000) must not be deducted from the income tax on company V’s derived domestically income and not be forwarded to next year.

Article 49. Method of deduction of deemed tax

In cases where a resident of Vietnam derives income from and must pay tax in the Contracting State to an Agreement concluded with Vietnam (a reduced or exempted tax as a special preference), if, in that Agreement Vietnam commits to apply the method for deduction of deemed tax, when this resident makes income tax declaration in Vietnam,  such income shall be included in his/her taxable income in Vietnam in accordance with Vietnam’s current tax law and the deemed tax amount shall be deducted from the tax amount payable in Vietnam.  The deemed tax amount is the amount which should have been paid by a resident of Vietnam in the Contracting State to an Agreement concluded with Vietnam on the income derived from that Contracting State, which, however, according to that Contracting State’s law, is exempted or reduced as a special preference.

Tax deduction shall comply with the following principles:

a) Tax amount already paid in the Contracting State and deducted must be taxes specified in Agreement;

b) The deducted tax amount shall not exceed the tax amount payable in Vietnam, which is computed on the income derived in the Contracting State in accordance with Vietnam’s current tax law;

c) Tax amount already paid in the Contracting State is the taxes arising in time of taxable year in Vietnam.

Example 71: Vietnamese company Q has a permanent establishment in Uzbekistan.  In 2010, this permanent establishment was determined to have an income of USD 100,000.  According to the tax law of Uzbekistan, this income was exempted from tax as a special preference (in case of non-exemption, it will be taxed at the rate of 33%).  Company Q was obliged to pay tax in Vietnam at the current rate (of 25%).  Under the Vietnam-Uzbekistan Agreement (Clause 5 of Article 24: elimination of double taxation), Vietnam is obliged to deduct the deemed tax (i.e. the tax amount which should have been paid but exempted in Uzbekistan).  In this case, in Vietnam company Q’s tax declaration and payment and deduction of the deemed tax amount shall be as follows.

- Determination of the deemed tax amount paid in Uzbekistan (according to Uzbekistan’s tax law):

USD 100,000 x 33% = USD 33,000

- Determination of the tax amount payable in Vietnam (according to Vietnam’s current tax law):

USD 100,000 x 25% = USD 25,000

So, company Q shall be regarded as having paid, though in fact being exempted from paying, USD 25,000 (out of a total of USD 33,000 computed according to Uzbekistan’s tax law before the preference is granted) and have this tax amount deducted from the tax amount payable in Vietnam (meaning that it does not have to pay tax in Vietnam).

Article 50. Method of deduction of indirect tax

1. In cases where a resident of Vietnam derives an income from the Contracting State to an Agreement concluded with Vietnam, for which corporate income tax has been paid before it is divided to that resident, if in the Agreement Vietnam commits to apply the method for deduction of indirect tax, in making income tax declaration in Vietnam,  such income shall be included in the taxable income in Vietnam in accordance with Vietnam’s current tax law and the indirect tax amount already paid in the Contracting State shall be deducted from the tax amount payable in Vietnam.  Nevertheless, in all cases, the deductible tax amount shall not exceed the tax amount payable in Vietnam, which is computed on the income derived from abroad in accordance with Vietnam’s current tax law.

The deductible indirect tax amount is the tax amount already paid by a joint-stock company being a resident of the Contracting State to an Agreement concluded with Vietnam in that Contracting State in the form of corporate income tax before the dividend is divided to a resident of Vietnam, provided that the resident of Vietnam directly controls a minimum percentage (usually 10%) of the voting right in the joint-stock company.

Example 72: Vietnamese company V invests USD 10,000,000 (equivalent to 20% of the equity) in company N of the Russian Federation.  In 2010, company N earned an income of USD 100,000 and had to pay tax according to the tax law of the Russian Federation (at the rate of 30%).  The after-tax profit of company N was divided to company V according to its share percentage and taxed in the Russian Federation at the rate of 10% (Clause 2.a of Article 10: Dividends, the Vietnam-Russian Federation Agreement).  Company V was obliged to pay tax according to Vietnam’s tax law at the current rate (of 25%).  In this case, company V’s tax declaration and payment and deduction of the indirect tax in Vietnam shall be as follows:

- The pre-tax profit earned by Vietnamese company V out of the total profit of company N in the Russian Federation is:

USD 100,000 x 20% = USD 20,000

- The enterprise income tax amount already paid by company N in the Russian Federation on the above-said profit of company V according to the Russian Federation’s tax law is:

USD 20,000 x 30% = USD 6,000

- The after-tax dividend divided to company V is:

USD 20,000 – USD 6,000 = USD 14,000

- The tax amount payable by company V in the Russian Federation on its dividend divided under the Vietnam-Russian Federation Agreement is:

USD 14,000 x 10% = USD 1,400

- The total tax amount payable by company V in the Russian Federation (including the direct tax paid by company V on its dividend and the indirect tax paid by company N, which has investment capital of company V, on its income) is:

USD 1,400 + USD 6,000 = USD 7,400

- The tax amount payable by company V in Vietnam according to Vietnam’s current tax law is:

USD 20,000 x 25% = USD 5,000

In this case, company V shall enjoy a maximum deduction of USD 5,000 out of the total of USD 7,400 already paid in the Russian Federation.  The difference of USD 2,400 (USD 7,400 - USD 5,000) is not allowed to be deducted from the tax on the domestic income of company V (if any).

2. Notwithstanding the provision above, under which Vietnam shall apply the method of deduction of indirect tax only when it so commits in the Agreements, if, according to Vietnam’s laws, incomes derived from abroad by residents of Vietnam enjoy deduction of indirect tax, this provision is still implemented.

Example 73: Using example 41 above with the assumption that company N’s investment in the Russian Federation is an overseas direct investment project of company V according to Vietnam’s laws, even when the investment percentage of company V accounts for less than 10% of the equity of company N, the methods of deduction of indirect tax shall still be applied (point 21 Article 7 Chapter II of the Finance Ministry’s Circular No. 14/2008/QH12">123/2012/TT-BTC dated 27/2/2012, guiding the implementation of a number of articles of Law on Enterprise Income Tax No.14/2008/QH12 and guidelines on implementation of Decree No.124/2008/ND-CP dated December 11, 2008, Decree No.122/2011/ND-CP dated December 27, 2011 of the Government detailing the implementation of a number of articles of Law on Enterprise Income Tax, though it is not so prescribed in the Vietnam-Russian Federation Agreement (Clause 2 of Article 23: Methods for elimination of double taxation).

Notwithstanding the above-said provisions on methods for elimination of double taxation, if, according to the provisions of an Agreement, incomes derived from abroad by residents of Vietnam are exempt from tax in Vietnam, these incomes shall be exempt from tax and the tax amounts already paid overseas shall not be deducted (meaning that it shall be taxed only once and it is not necessary to apply methods for elimination of double taxation). Example scholarships of foreign students and apprentices during the time of their study in Vietnam (Section 15: Incomes of students and apprentices, Chapter II of this Circular)

The above-said provisions on methods for elimination of double taxation are included in the Article Methods for elimination of double taxation (usually Article 23) of the Agreements.

Chapter IV

RESPONSIBILITIES AND POWERS OF COMPETENT AUTHORITIES

Article 51. Competent authorities

To enforce the provisions of the agreements, the Finance Minister or representative authorized by the Finance Minister is the competent authority of Vietnam involving Tax Agreements

The General Department of Taxation is authorized by the Finance Minister to perform the tasks and powers defined in Article 52.

Article 52. Responsibilities and powers of the General Department of Taxation in implementation of provisions of Agreements

To implement provisions of Agreements, the General Department of Taxation is authorized by the Finance Minister to perform the following tasks and powers:

1. To promulgate documents notifying the entry into force or termination of effect of each Agreement within the tax service after the effect notices are issued by the Foreign Ministry;

2. To organize the direction, guidance, examination and inspection of the Tax Departments, Tax Sub-Departments and organizations authorized with the collection task in the implementation of the Agreements;

3. To act as “competent authorities” of Vietnam to deal with matters related to the Agreements, including:

a) Studying and settling disputes, complaints, proposals and relevant matters in the course of implementation of the Agreements with the competent authorities of the Contracting State to the Agreements concluded with Vietnam through bilateral agreement procedure prescribed in the Agreements;

b) Exchanging information with foreign tax authorities, using information supplied by foreign tax authorities and be responsible for keeping such information secret under the provisions of the Agreements;

c) Performing measures to support tax administrative management as prescribed by Agreements and in accordance with Vietnamese law.

Chapter V

ORGANIZATION OF IMPLEMENTATION

Article 53. This Circular takes effect on February 06, 2014, replaces Circular No. 133/2004/TT-BTC dated December 31, 2004, of the Ministry of Finance, guiding the implementation of the Agreements on double taxation avoidance with respect to taxes on income and property between Vietnam and other countries and in force in Vietnam.    Procedures for applying Agreements shall comply with the Law on tax administration and current guiding documents.

In the course of implementation, any arising problems should be reported to the Ministry of Finance for research and settlement.

 

FOR THE FINANCE MINISTER DEPUTY MINISTER Do Hoang Anh Tuan