Foreign contractor tax (FCT) is a specific kind of tax in Vietnam. The tax applies to foreign contractors, entities or individuals, who perform business activities and receive income in Vietnam. FCT is not a separate tax but it combines corporate income tax (CIT) or personal income tax (PIT) and value added tax (VAT) for the payments on foreign contractors.
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The regulation of FCT has been revised from time to time since its issuance in 1995. In this article, Cekindo will provide you with guidance on how to calculate your foreign contractor tax in Vietnam based on the latest legislation.
Payments Subject to Foreign Contractor Tax in Vietnam
Foreign contractors are responsible for FCT for services performed in Vietnam, excluding pure supply of goods and services performed and consumed outside Vietnam, and other services done entirely outside Vietnam (for instance training, repairs, promotion, advertising).
Payments that are subject to FCT are shown below:
- Royalties, license fees
- Service fees, leases, rentals, insurance premiums, transportation fees
- Management fees and head office charges/services
Profits paid to foreign shareholders are not subject to remittance tax or withholding tax. However, 5% CIT withholding tax is still applicable on interest paid on loans by foreign companies. Besides, 5% withholding tax applies on interests paid on certificate deposit and bonds to foreign companies.
Foreign Contractor Tax Calculation with Three Methods
There are three options for foreign contractors to calculate their FCT:
1. Deduction Method or Declaration Method
The deduction method applies to a foreign contractor who has a permanent establishment in Vietnam or a project contract has a duration of more than 182 days.
In order to use this method, they need to have the Vietnamese accounting system (VAS) with a tax code obtained from the tax authorities. Through this method, the FCT can be deducted from total revenues.
The use of this method must be reported to the tax authorities by the Vietnamese party in 20 business days upon the signing of the contract.
A 20% CIT on net profits earned by foreign contractors will also be imposed. If a foreign contractor has several projects in Vietnam, once they use the deduction method for one project, they must use the same method for the rest of the projects.
2. Direct Method
Unlike the deduction method, direct method for FCT means FCT is calculated based on the foreigner contractor’s turnover percentage. The Vietnamese party is obliged to withhold and pay the taxes deducted from the payments, before paying foreign contractors.
In addition, the Vietnamese payer has to represent the foreign contractor in the submission of tax declaration and dossiers to the tax agencies. Tax registration for FCT must be completed by the Vietnamese party within 20 business days upon the signing of the contract.
3. Hybrid Method
Another option for foreign contractors is the hybrid method. The hybrid method for FCT indicates that a foreign contractor can pay the CIT with direct method and the VAT with deduction method.
Only a foreign contractor with permanent residency in Vietnam or has a project contract of at least 182 days is permitted to use this method.
Each calculation has its pros and cons, and not all of them are applied to all foreign contractors. Foreign contractors must meet the criteria set out within each method and only choose one method for their FCT calculation.
Cekindo’s Tax Outsourcing Services
The team at Cekindo is highly experienced in taxation in Vietnam. We will advise you which FCT calculation option is suitable for you based on your current status and project details in Vietnam.
Take control of your FCT now by seeking professional advice from Cekindo. Get in touch by filling in the form below.