Circular No. 04/TC-TCT guiding certain points regarding tax policies for foreign law firm branches operating in Vietnam

CIRCULAR

OF THE MINISTRY OF FINANCE

Guidelines on certain points regarding tax policies for foreign law firm branches
Foreign law firm branches
Operating in Vietnam

Based on current Tax Laws and Ordinances;

Based on Decrees of the Government detailing the implementation of current Tax Laws and Ordinances;

Based on Decision No. 42/CP dated July 8, 1995 of the Government promulgating the Rules for Legal Consultation Services Practice of foreign law firms operating in Vietnam;

Based on Circular No. 3755/KTTH dated August 7, 1996 of the Government concerning taxes for foreign law firm branches;

The Ministry of Finance provides guidelines on certain points regarding tax policies for foreign law firm branches operating in Vietnam as follows:

I. SCOPE OF APPLICATION

1. The tax obligations outlined in this Circular apply to foreign law firm branches (hereinafter referred to as law firm branches) established according to the Rules for Legal Consultation Services Practice issued together with Decision No. 42/CP dated July 8, 1995 of the Government.

2. In cases where the State of Vietnam participates in or signs an international treaty, agreement, or legal commitment with international organizations or other States' governments, and such documents stipulate tax regulations for the activities of foreign law firm branches that differ from the guidelines set out in this Circular, then those treaties, agreements, or commitments shall be applied.

II. TYPES OF TAXES APPLICABLE

1-Business Income Tax

According to the Law on Foreign Investment in Vietnam and guiding legal documents; the Business Income Tax Law dated June 30, 1990; the Law Amending and Supplementing Certain Provisions of the Business Income Tax Law dated July 5, 1993, and the Law Amending and Supplementing Certain Provisions of the Business Income Tax Law adopted by the National Assembly on October 28, 1995, foreign law firm branches operating in Vietnam that generate business income from their operations in Vietnam are subject to business income tax.

a-Taxable income:

All amounts received from business activities of foreign law firm branches during the tax period, regardless of whether they have been collected or not, constitute taxable business income.

Taxable income does not include amounts held in trust by the law firm branch on behalf of clients.

Where domestic and/or foreign organizations and individuals enter into contracts with the law firm branch to perform part of the work under a contract already signed by the law firm branch with its client, the taxable income of the law firm branch does not include the amounts paid to these organizations and individuals for performing such work.

b-Rate of business income tax:

The rate of business income tax applicable to the legal consultation services provided by the law firm branch is 4% of the taxable income (as stipulated in Point 3, Section VI, Schedule of Business Income Tax issued together with the Law Amending and Supplementing Certain Provisions of the Business Income Tax Law adopted by the Ninth National Assembly, eighth session, on October 28, 1995).

c-Procedures for registration, declaration, and payment of business income tax:

The law firm branch must comply with the procedures for registration, declaration, and payment of business income tax as prescribed in Circular No. 97 TC/TCT dated December 30, 1995 of the Ministry of Finance guiding the implementation of Decree No. 96/CP dated December 27, 1995 of the Government detailing the implementation of the Business Income Tax Law and the Law Amending and Supplementing Certain Provisions of the Business Income Tax Law.

Where the law firm branch enters into contracts with foreign organizations and individuals to perform part of the work as mentioned in Point 1.a above, before making payments to these organizations and individuals, the law firm branch must deduct and pay the tax to the State budget according to Circular No. 37/TC-TCT dated May 10, 1995 of the Ministry of Finance.

2-Profit Tax

According to the Law on Foreign Investment in Vietnam and guiding legal documents, profits derived from business activities in Vietnam by foreign law firm branches, including other profits such as profit allocations from foreign law firms to their branches in Vietnam (if any), are subject to profit tax.

Where the law firm branch has dependent businesses located both within and outside Vietnam, the profits earned from these businesses are aggregated into the profits of the law firm branch when determining taxable profits.

a-Taxable profit:

The taxable profit of the law firm branch is the difference between total revenue and all reasonable and legitimate expenses related to the formation of taxable profit, plus other profits (including incidental profits such as gains from the sale or liquidation of assets, interest differential between deposits and loans, exchange rate differential, and profit allocations from foreign law firms to their branches in Vietnam) for the tax year. Among which:

a1-Revenue for calculating taxable profit is the total amount received by the law firm branch from business activities consistent with the taxable business income determined according to the guidance at Point 1.a, Section II, of this Circular.

a2-Reasonable and legitimate business expenses include the following items:

+Salaries, wages, and allowances paid to Vietnamese and foreign employees based on labor contracts in accordance with labor rules and current laws.

+Expenses for materials, raw materials, and energy related to service provision.

+Depreciation of fixed assets used in service provision. The depreciation rate of fixed assets is implemented according to the ratio specified in Circular No. 31/TC-TCĐN dated July 18, 1992 and Decision No. 1062/TC-QĐ-CSTC dated November 14, 1996 on the management, use, and depreciation of fixed assets by the Ministry of Finance.

+Expenses for purchasing or paying for the use of materials and services provided.

+Management and operational expenses of the law firm branch.

In the case where the Bylaws of foreign law firms contain provisions on the allocation of management and operational costs from the headquarters to branches in other countries, the actual management and operational costs allocated to the branch in Vietnam shall be included in the deductible expenses for determining taxable income if there are reasonable and valid supporting documents. In this situation, the ratio of the actual costs allocated to the branch in Vietnam to the total costs of the foreign law firm shall not exceed the ratio of taxable revenue generated in Vietnam to the total revenue of the foreign law firm. Within three months from the end of the fiscal year, the branch must submit an audited accounting report of the headquarters conducted by an independent auditing organization for the tax authority to determine the allocated management and operational costs.

+Amounts paid into social insurance funds for employees as required by the current social insurance regulations.

+Insurance premiums for property insurance of the branch.

+Taxes, fees, and charges with a nature similar to taxes that have been paid (excluding income tax).

+Other expenses not mentioned above but not exceeding 5% of the total expenses listed above.

All of the aforementioned expenses must be supported by reasonable and valid documentation. Any expense lacking such documentation shall not be considered as deductible expenses when determining taxable income.

When determining revenue and deductible expenses for calculating taxable income, the tax authority has the right to examine the reasonableness of revenues and expenditures related to service contracts and transactions between the branch and organizations, individuals, or between the branch and the foreign law firm it is subject to, including those with unclear accounting records and transactions that do not follow fair dealing principles. If the accounting records and transactions are not clear or do not adhere to fair dealing principles, the tax authority has the right to determine the taxable revenue and taxable income.

a3-Included in the calculation of taxable income are, but are not limited to, the following items:

+Income derived from the ownership and use of assets by the branch.

+Financial income such as the difference between interest earned on deposits and interest paid on loans; income from buying and selling securities...

+Allocated income from the headquarters to the branch.

b-Tax rate for corporate income tax:

The corporate income tax rate applicable to the legal advisory services provided by the branch is 25% on taxable income (as stipulated in the Law on Foreign Investment in Vietnam and implementing legal documents).

c-Procedures for registration, declaration, payment, and settlement of corporate income tax:

The branch must comply with the procedures for registration, declaration, payment, and settlement of corporate income tax as prescribed in the implementing legal documents of the Law on Foreign Investment in Vietnam.

3.Personal income tax for high-income individuals

Foreign nationals and Vietnamese citizens working at the branches are required to pay personal income tax according to the Decree on Personal Income Tax for High-Income Individuals issued on May 19, 1994, and implementing legal documents thereof.

4.Tax on repatriation of profits

When repatriating profits, the branches must pay a tax on repatriation of profits at a rate of 10%. Procedures for declaring and paying the tax on repatriation of profits shall be carried out in accordance with the guidelines set forth in the implementing legal documents of the Law on Foreign Investment in Vietnam.

5.Other taxes

In addition to the aforementioned taxes, the branches are also required to pay business license tax, export tax, import tax, and other types of taxes and levies as prescribed by current tax laws, decrees, and implementing legal documents.

During their operations, the branches are obligated to declare, withhold, and remit to the Vietnamese state the following taxes (if they arise):

-Royalty income tax as prescribed in Circular No. 08 TC/TCT dated February 5, 1994, issued by the Ministry of Finance regarding tax on income from royalties.

-Taxes payable by foreign organizations and individuals operating in Vietnam as prescribed in Circular No. 37 TC/TCT dated May 10, 1995, issued by the Ministry of Finance concerning tax regimes applicable to economic organizations and individuals engaged in business activities in Vietnam outside the scope of foreign investment under the Law on Foreign Investment in Vietnam (including service provision activities by foreign law firms to branches in Vietnam).

The tax year for the branch begins on January 1 and ends on December 31 of each calendar year. The first tax year starts from the date of registration for operation and ends on December 31 of that year.

III. RESPONSIBILITIES OF FOREIGN LAW FIRM BRANCHES OPERATING IN VIETNAM

1.At least five days before commencing operations, dissolution, or changing the location of the administrative office, the branches must complete tax registration procedures with the provincial or centrally-administered municipal tax authorities where the administrative office is located, in accordance with the implementing legal documents of the Law on Foreign Investment in Vietnam.

2.Strictly comply with the regulations on tax declaration and payment procedures as outlined in the implementing legal documents of the Law on Foreign Investment in Vietnam and this circular.

3.Provide all accounting books, supporting documents, and necessary materials related to tax calculations and settlements upon request by the tax authority.

4.Pay taxes fully and on time in accordance with current Vietnamese tax laws.

IV. HANDLING VIOLATIONS AND SETTLING COMPLAINTS

1.Handling violations

Every violation of tax laws will be dealt with according to the current legal provisions in Vietnam.

Branches of foreign law firms that fail to comply with the procedures for tax registration, declaration, accounting record-keeping, and the use and retention of supporting documents may be warned or fined, depending on the severity of the violation, as prescribed by Vietnamese law.

Branches of law that engage in fraudulent declarations, tax evasion, late paymentof taxes, or fines recorded in tax collection notices, tax collection orders, orthe tax authority's decisions on handling will be dealt with according to theprovisions of the Tax Law and Decree No. 22/CP dated April 17, 1996, issued bythe Government regarding administrative penalties in the field of taxation.

2. Handling complaints

Complaints about taxes shall be resolved by the local tax authority directlyresponsible for collecting taxes from branches of law. The complaint form mustbe submitted to the local tax authority issuing the tax handling decisions within30 days from the date the branch of law receives such decisions. If thecomplainant is unsatisfied with the resolution of the local tax authoritydirectly responsible for tax collection, they may submit a complaint to theGeneral Department of Taxation and the Ministry of Finance. The decision of theMinister of Finance is final. Pending the decision of the competent authority,the complainant must strictly comply with the conclusions of the local taxauthority directly responsible for tax collection.

Complaints about taxes related to provisions of an Agreement signed between theGovernment of Vietnam and the Government of another country shall be handledaccording to the dispute resolution procedures stipulated in that Agreement.

V. IMPLEMENTATION

Provincial and centrally-administered city tax bureaus are responsible formanaging tax collection and disseminating and guiding foreign law firm branchesto strictly implement the provisions of this Circular.

This Circular takes effect from the date of signature. The provisions of thisCircular serve as the basis for checking and settling tax obligations of lawfirm branches in 1996. Any changes (if any) to the Tax Law and subordinatelegislative instruments after the issuance of this Circular shall apply to thecorresponding types of taxes as directed in this Circular.

During the implementation of this Circular, if there are any difficulties orobstacles, please report them to the Ministry of Finance through the law firmbranches and tax bureaus for supplementary guidance./.