In Vietnam, foreign companies or individuals conducting business or providing services within the country are subject to specific tax regulations. One of the key taxes they must comply with is the Foreigner Contractor Tax (FCT). This tax applies to foreign contractors and subcontractors working in Vietnam, covering both income earned within the country and the tax obligations that come with it. Understanding the Foreigner Contractor Tax is crucial for international businesses to ensure compliance, avoid penalties, and effectively manage their operations in Vietnam. In this article, we will explore what Foreigner Contractor Tax is, who it applies to, and how it is calculated.
1. Definition
The FCT applies to foreign individuals and organizations that earn income from business activities such as providing services and supplying goods in Vietnam. Foreign contractors include both foreign organizations—whether or not they have permanent establishments in Vietnam—and individuals, whether residents or non-residents, who are conducting business or earning income within the country.
The FCT encompasses obligations for Value Added Tax, Enterprise Income Tax, or Personal Income Tax. This tax applies when there is an increase in income earned within Vietnam.
In accordance with Article 1, Circular No. 103/2014/TT-BTC prescribes the FTC which are subjected to individuals or organizations.
To conclude, FCT applies to individuals and organizations when they:
- Conduct business in Vietnam or earn income in Vietnam through contracts, agreements, or commitments.
- Distribute goods in Vietnam.
- Produce goods in Vietnam and generate income.
- Negotiate contracts through Vietnamese organizations or individuals, with foreign organizations and individuals entering contracts in their own names.
In these cases, the payable taxes are as follows:
FCT includes VAT and PIT for foreign contractors and organizations, whether they are residents or non-residents in Vietnam.
FCT includes VAT and EIT for foreign contractors and organizations.
2. What is the FCT rate?
According to Circular No. 103/2014/TT-BTC, which regulates FCT, the FCT rate is determined based on the taxpayer’s classification and the applicable taxes. First, the EIT (Earned Income Tax) or PIT (Personal Income Tax) is considered based on taxable income. Then, the payable VAT for foreign contractors is assessed.
Details on EIT rate are shown in the table as follows:
| No. | Business Sector | Corporate Income Tax Rate |
|---|---|---|
| 1 | Commercial activities: distribution, supply of goods, raw materials, supplies, machinery, equipment | 1% |
| 2 | Machinery rental services | 5% |
| 3 | Aircraft, aircraft engine, aircraft parts, and marine vessel rental | 2% |
| 4 | Construction and installation with or without contractor-supplied materials, machinery, equipment | 2% |
| 5 | Manufacturing, business operations, sea and air transportation | 2% |
| 6 | Securities trading, certificates of deposit, reinsurance commission | 2% |
| 7 | Loan interest | 5% |
| 8 | Royalty income | 10% |
PIT Rate for Foreign Contractors
For foreign individuals who are residents of Vietnam, the PIT rate is 20%, excluding any family circumstance deductions.
For a foreign individual residing in Vietnam, the PIT rate is the same as that for a Vietnamese individual.
Details on VAT rate of foreign contractor in the table as follows:
| No. | Business Sector | Value Added Tax Rate |
|---|---|---|
| 1 | Services, construction, machinery and equipment installation, rental, insurance | 5% |
| 2 | Manufacturing, transportation, goods-related services | 3% |
| 3 | Other business activities | 2% |
3. Is FCT deducted?
FCT includes 2 methods of tax calculation: the declaration method and the direct method. In accordance with the declaration method, foreign contractors are allowed to pay the same tax as Vietnamese enterprises which are deducted in accordance with law provisions.
Foreign contractors must register tax declaration of enterprise income tax and VAT as Vietnam’s enterprises. Foreign contractors must satisfy the conditions as follows:
Fill in the tax registration declaration and being issued with tax code of contractor, apply Vietnam’s accounting regime.
- Foreign business organizations with permanent establishments in Vietnam;
- Foreign businesspeople who are residents in Vietnam
- The period of business operation on Vietnam under the contract or subcontract is at least 183 days
Representatives of Vietnam must notify local tax authorities in writing regarding the foreign contractor’s submission of FCT under the deduction method. This written notification must be submitted within 20 days from the contract signing date.
If foreign contractors have multiple contracts at the same time, one of the registered contracts for tax payment under the deduction method will be approved. In this case, all other contracts must also follow the tax payment according to the registered deduction method.
Foreign contractors are required to pay EIT at a rate of 20% on their before-tax profits.
Therefore, FCT applies to individuals and organizations conducting business and earning income in Vietnam. It is important to follow Circular No. 103/2014/TT-BTC and other guidelines provided by local tax authorities to determine the payable FCT.
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