Circular No. 205/2013/TT-BTC guiding the implementation of Double Taxation Agreements and Measures to Prevent Tax Evasion on Income and Property Taxes between Vietnam and other countries and territories that are effective in Vietnam.

CIRCULAR

Guidelines on the basic contents of Double Taxation Agreements and Measures to Prevent Tax Evasion for income and property taxes between Vietnam and other countries and territories that are in force in Vietnam to prevent double taxation and to stop tax evasion on income and property taxes between Vietnam and other countries and territories that are in force in Vietnam types of taxes levied on income and property between Vietnam and other countries and territories in force in Vietnamthat are effective in Vietnam

Pursuant to current laws and regulations on corporate income tax and personal income tax;

Pursuant to the Law on the Conclusion, Ratification and Implementation of International Treaties No. 41/2005/QH11 dated June 14, 2005;

Pursuant to Double Taxation Agreements and Measures to Prevent Tax Evasion for income and property taxes between Vietnam and other countries and territories that are currently in force;

Pursuant to Decree No. 118/2008/NĐ-CP of the Government stipulating the functions, tasks, powers, and organizational structure of the Ministry of Finance;

At the proposal of the Director General of the State Revenue总局局长的提议；

The Minister of Finance hereby issues this Circular guiding the basic contents of Double Taxation Agreements and Measures to Prevent Tax Evasion for income and property taxes between Vietnam and other countries and territories (hereinafter referred to collectively as Contracting State or State depending on the context) that are in force in Vietnam (hereinafter referred to as Agreement).

PART I
GENERAL PROVISIONS

Section 1
SUBJECTS AND SCOPE OF APPLICATION

Article 1. Scope of application

This Circular applies to subjects who are residents of Vietnam or of a Contracting State with Vietnam or are simultaneously residents of both Vietnam and a Contracting State with Vietnam.

1. According to the Agreement, the term "resident of a Contracting State" refers to an individual or entity that, under the laws of a Contracting State, is subject to taxation in that state due to:

1.1. Having a place of residence, having a period of stay in that state, or other similar criteria in the case of an individual; or

1.2. Having a head office, registered office, or being established in that state, or other similar criteria in the case of an organization; or

1.3. This term also includes the State or local government of that state, where the Agreement so provides.

2. Under current Vietnamese tax laws, the following entities are considered residents of Vietnam:

2.1. Individuals meeting one of the following conditions:

a) Being present in Vietnam for 183 days or more within a calendar year or within 12 consecutive months from the first day of presence in Vietnam;

An individual's presence in Vietnam as provided herein means the physical presence of the individual on Vietnamese territory;

b) Having a permanent place of residence in Vietnam according to either of the following situations:

- Having a registered permanent residence address in accordance with the law on residence;

- Renting a house for residence in Vietnam in accordance with the law on housing, with lease contracts lasting 183 days or more during the tax year.

In the case where an individual has a permanent place of residence in Vietnam as provided herein but is actually present in Vietnam for less than 183 days during the tax year and cannot prove residency in any other country, such individual shall be considered a resident of Vietnam.

Example 1: In 2010, a Japanese expert came to work in Vietnam for ten months. For two months in 2010 (June and December), the expert returned home on leave. In 2009, the expert lived and worked in Japan. Japan's tax year runs from April 1 to March 31 of the following year. Therefore, in 2010, since the Japanese expert mainly worked and lived in Vietnam, despite still having a home and family in Japan and holding Japanese citizenship, the expert was considered a resident of Vietnam for tax purposes (as stipulated in Article 4, Clause b, Agreement between Vietnam and Japan). However, from January 1, 2010, to March 30, 2010, the expert was considered a resident of Japan for tax settlement purposes in both Vietnam and Japan.

2.2. Organizations established and operating under Vietnamese law.

3. Where, based on the provisions of Clauses 1 and 2 of this Article, an entity is a resident of both Vietnam and a Contracting State with Vietnam, the residency status of such entity shall be determined as follows: 3.1. For individuals:

Based on the criteria listed below in order of priority to determine whether an individual is a resident of Vietnam:

a) If the individual has a permanent residence in Vietnam (property owned, rented, or under the individual's use);

b) If the individual has a permanent residence in both countries but has closer economic ties in Vietnam, such as employment, business locations, management of personal assets, or closer personal relationships in Vietnam, such as family ties (relatives like parents, spouse, children, etc.) or social ties (members of social organizations, professional associations, etc.);

c) If it cannot be determined which country the individual has closer economic or personal ties to, or if the individual does not have a permanent residence in either country, but the individual spends more time in Vietnam during the tax year;

d) If the individual frequently resides in both Vietnam and a Contracting State with Vietnam, and does not reside frequently in either country, but the individual holds Vietnamese nationality or is recognized as a Vietnamese citizen under the principle of effective nationality;

e) If the individual holds both Vietnamese and Contracting State nationalities or does not hold nationality in either country, then the competent authority of Vietnam will resolve this issue through bilateral procedures with the competent authority of the Contracting State with Vietnam.

d) If such individual holds both Vietnamese nationality and the nationality of the State which has concluded the Agreement with Vietnam, or does not hold the nationality of either State, then the competent authority of Vietnam shall resolve this issue through bilateral procedures with the competent authority of the State which has concluded the Agreement with Vietnam.

3.2. For an entity that is not an individual:

Depending on the specific provisions of each Agreement to determine whether an entity that is not an individual is a resident of Vietnam. Typically, the following criteria are provided in the Agreements:

a) If the entity is established or registered to operate in Vietnam, then the entity is a resident of Vietnam; or

b) If the entity has its main office in Vietnam, then the entity is a resident of Vietnam; or

c) If that object has its actual place of management in Vietnam, then such object shall be considered a resident of Vietnam (the actual place of management is usually where senior officers or the leadership of the enterprise hold meetings, review, discuss, and make management decisions or production and business decisions for the enterprise, or where the most important accounting records are kept); or

d) In the case where the object is established or registered in both countries or has its main office or actual place of management in both countries, the competent authority of Vietnam and the Competent Authority of the Contracting State to the Agreement with Vietnam will determine through bilateral procedures that such object is only a resident of one of the two countries. In the event that the Contracting States cannot reach an agreement, such object shall not be considered a tax resident of either country for the purposes of applying the Agreement.

The provisions regarding residents mentioned above are set forth in the Resident Article (usually Article 4) of the Agreement.

Article 2. Types of Tax Applicable

The types of taxes applicable under the Agreements are specific taxes imposed on income and property as defined in each Agreement.

1. In the case of Vietnam, the types of taxes within the scope of application of the Agreement include:

a) Corporate income tax; and

b) Personal income tax.

2. In the case of the Contracting States to the Agreement with Vietnam, the types of taxes applicable under the Agreement are specifically provided for in Article 2 of the Agreement (usually Clause 3 of Article 2).

Example 2: At Article 2, Clause 3, Point b of the Agreement between Vietnam and Country N provides as follows:

"3. The current types of taxes applied under the Agreement are:

...

b) In Country N:

i) income tax;

ii) company tax; and

iii) local residence taxes levied on income."

According to the above provision, if a locality in Country N imposes a local residence tax on the income of both residents and non-residents of Country N, then such local residence tax on income shall fall within the scope of application of the Agreement between Vietnam and Country N.

Article 3. Exemption for Members of Diplomatic Missions and Consular Posts

According to the Agreement, the provisions of the Agreement shall not affect the exemption rights of members of diplomatic missions and consular posts as stipulated in international treaties to which the Socialist Republic of Vietnam is a party or has acceded.

The provisions regarding the exemption for members of diplomatic missions and consular posts are set forth in the Article on Members of Diplomatic Missions and Consular Posts (usually Article 27) of the Agreement.

Section 2
PRINCIPLES OF APPLICATION OF THE AGREEMENT

Article 4. Principles of Application of the Agreement

When applying and handling taxes for individual cases, it must be based on the provisions of each Agreement (including Protocols and/or Exchange Notes, if any).

Article 5. Application of the Agreement, Tax Law, and Related Laws

1. In the case of differences between the provisions of the Agreement and the domestic tax laws, the provisions of the Agreement shall apply.

2. The Agreement does not create new, different, or heavier tax obligations than those under domestic tax laws. Where the Agreement provides that Vietnam has the right to tax a certain type of income at a certain tax rate but the current domestic tax law does not provide for taxation of such income or taxes it at a lower rate, the provisions of the current domestic tax law shall apply, meaning no tax or tax at a lower rate.

3. When Vietnam implements the provisions of the Agreement, if there are terms that have not been defined in the Agreement, such undefined terms shall have the meaning as defined in Vietnamese law for tax purposes at that time. For a term that has not been defined in the Agreement and is not defined or is simultaneously defined in Vietnamese law and the law of the Contracting State to the Agreement with Vietnam, the Competent Authorities of the two countries shall resolve the issue through bilateral procedures. For a term that is simultaneously defined in tax law and other laws, the definition in tax law shall be applied to implement the Agreement.

Article 6. Certain cases for refusing to apply the Agreement based on the principle of benefiting from the Agreement

Unless otherwise provided in the Agreement regarding the limitation of benefiting from the Agreement, the Vietnamese Tax Authority will refuse the application request of the Agreement in the following cases:

1. The person requesting the application of the Agreement for taxes that have arisen more than three years prior to the date of the application request.

Example 3: During the period from 2006 to 2012, Enterprise V of Vietnam annually earned income from royalties in Malaysia and annually paid tax in Malaysia according to the Agreement between Vietnam and Malaysia. On October 1, 2012, Enterprise V submitted an application to deduct tax according to the Agreement between Vietnam and Malaysia for the entire amount of tax paid in Malaysia during the period from 2006 to 2012. In this case, the Vietnamese Tax Authority will only consider deducting tax in Vietnam for the amount paid for taxes arising in Malaysia within the three-year period from October 1, 2009 to October 1, 2012.

2. When the main purpose of the contracts or agreements is to benefit from tax exemption or reduction under the Agreement.

3. The person requesting the application of the Agreement is not the actual beneficiary owner of the income for which the related tax is proposed to be exempted or reduced under the Agreement. The actual beneficiary owner may be an individual, a company, or an organization but must be the subject having ownership and control over the income, assets, or rights generating income. When considering to determine whether a subject is an actual beneficiary owner, the Tax Authority will examine all relevant factors and circumstances concerning that subject based on the principle of "substance over form" with the aim of avoiding double taxation and preventing tax evasion. In the following cases, a subject will not be considered an actual beneficiary owner:

a) When the applicant is a non-resident entity obligated to distribute more than 50% of its income to a resident entity of a third country within twelve months from receiving the income;

b) When the applicant is a non-resident entity without (or almost without) any business activity other than ownership of assets or rights generating income;

c) When the applicant is a non-resident entity engaged in business activities, but the quantity of assets, scale of business, or number of employees is not commensurate with the income received;

Example 4: A bank from a country without an Agreement with Vietnam establishes a legal entity in France to conduct lending in Vietnam and requests tax exemption on interest income generated in Vietnam according to the Tax Agreement between Vietnam and France. In this case, to determine whether the French legal entity meets the conditions to apply the Agreement, the Vietnamese Tax Authority will base its decision on the amount of loans, the capacity of the French legal entity (number and level of expertise of employees, other assets and facilities) to assess the proportionality between income and the scale of business of that entity. If the income obtained by this legal entity is very large while it only has an office in France with a few employees, the application request will be refused.

d) When the applicant is a non-resident entity without (or almost without) control or disposal rights and does not bear or bears very little risk for the income, asset, or rights generating income;

đ) When loan agreements, license agreements, or technical service provision agreements between the applicant, a non-resident entity, and entities in Vietnam include terms and conditions from another agreement that the applicant has with a third party, but in that other agreement, the applicant is the borrower, licensee, or recipient of technical services;

e) When the applicant is a resident of a country or territory that does not impose income tax or imposes income tax at a low rate (below 10%) not for reasons of investment incentives stipulated in the Agreement;

g) When the applicant is an intermediary agent, an intermediary company (except when an intermediary agent or intermediary company applies the Agreement on behalf of an actual beneficiary owner);

An intermediary agent or intermediary company is a company established in a Contracting State solely for the necessary legal form existence merely for the purpose of avoiding or reducing tax or transferring profits without engaging in essential business activities such as production, trade, or service provision.

Article 7. Procedure for handling complaints under the Agreement

The procedure for handling complaints under the Agreement is set forth in the Bilateral Procedures Clause (usually Article 25) of the Agreement.

1. For residents of the Contracting State with Vietnam

1.1. In the case where a resident of the Contracting State (hereinafter referred to as the complainant) believes that the Vietnamese Tax Authority's determination of their tax liability does not conform to the provisions of the Agreement, such resident may file a complaint according to the procedures stipulated by Vietnamese tax laws or other complaint resolution documents.

1.2. The complainant may choose not to follow the procedure specified in Point 1.1 above but instead directly file a complaint with the Competent Authority of Vietnam designated in this Circular or the Competent Authority of the Contracting State where the complainant is a resident taxpayer, to facilitate the bilateral procedures as provided in the Agreement. In this case, the complaint must be filed within three years from the date of the first notification issued by the Tax Authority leading to the tax treatment that the complainant considers inconsistent with the Agreement.

Example 5: On June 1, 2012, Mr. A, a resident of the Contracting State with Vietnam, received a decision on personal income tax from the Provincial Tax Department H and he believed that the tax liability stated in the decision did not comply with the Agreement. After fulfilling all obligations specified in the tax decision, Mr. A has the right to directly file a complaint with the General Tax Department - as the Competent Authority of Vietnam - to resolve his case. The deadline for Mr. A to submit a complaint is three years from June 1, 2012.

1.3. To initiate a complaint in accordance with the provisions of Points 1.1 and 1.2 of this Clause, the complainant must comply with the following requirements:

a) Fulfill all obligations notified in tax decisions (administrative tax decisions, tax notifications, etc.) issued by the Tax Authority before and during the complaint process. If the complaint concerns the amount of tax calculated or determined by the tax administration authority, the complainant still needs to pay the full amount of tax, except when the competent state authority decides to temporarily suspend the implementation of the tax calculation decision or the tax determination decision of the tax administration authority.

b) The Competent Authority of Vietnam will not handle complaints in cases where: the complaint is currently being or has been resolved by a court; or is currently being or has been processed through the Vietnamese complaint resolution procedure; or the complaint exceeds the time limit specified in Point 1.2.

2. For residents of Vietnam

In the case where a resident of Vietnam believes that a Contracting State has determined their tax liability in a manner inconsistent with the provisions of the Agreement, such resident may request the Competent Authority of Vietnam to initiate the bilateral procedures as provided in the Agreement. Before requesting the Competent Authority of Vietnam to initiate the bilateral procedures, the complainant must fulfill all obligations notified in tax decisions issued by the Vietnamese Tax Authority and the Contracting State if the law of that country requires it. The request for the Competent Authority of Vietnam to initiate the bilateral procedures must be made within three years from the date the Contracting State issues tax decisions that the resident of Vietnam considers inconsistent with the Agreement.

Chapter II
TAX ON TYPES OF INCOME

Section 1
INCOME FROM REAL PROPERTY

Article 8. Definition of Real Property

According to the Agreement, the term real property shall have the meaning under the law of the Contracting State where the real property is located and shall include accessory assets attached to the real property, livestock, and equipment used in agriculture and forestry, benefits applied according to land laws, rights to use real property, and rights to receive payments for exploitation or rights to exploit natural resources. Types of watercraft, boats, and aircraft shall not be considered real property.

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

- Assets defined in the definition of real property under the Civil Code and the Law on Real Estate Business;

- Accessory assets attached to the aforementioned real property;

- Livestock and equipment used in agriculture and forestry;

- Benefits applied according to the land laws of Vietnam;

- Rights to receive payments for exploitation or rights to exploit natural resources.

Example 6: A foreign resident will be considered to have real property in Vietnam if such individual owns non-movable assets in Vietnam such as houses, buildings attached to land, including assets attached to those houses and buildings, or has the right to use land in Vietnam (as stipulated in Article 174: Real Property and Chattels of the Civil Code 2005), and if such individual has a herd of livestock in Vietnam directly related to that land use right, then that herd of livestock will also be considered real property in Vietnam.

Article 9. Determination of Tax Liability on Income from Real Property

According to the Agreement, all types of income derived by a resident of a Contracting State to the Agreement with Vietnam from the direct use, exploitation, or leasing of real property in Vietnam, including real property of enterprises or of independent professionals, must be subject to tax in Vietnam according to current Vietnamese tax laws.

Example 7: A Vietnamese overseas citizen X is a resident of Singapore who owns a house in Vietnam and uses it for rental purposes. The income from renting this house will be subject to income tax in Vietnam even though the person is not present in Vietnam during the entire tax period.

The provisions regarding taxation of income from real property as mentioned above are set forth in the Income from Real Property Clause (usually Article 6) of the Agreement.

Section 2
INCOME FROM BUSINESS ACTIVITIES

Article 10. Definition of Income from Business Activities

According to the Agreement, income from business activities is the income of enterprises of a Contracting State to the Agreement with Vietnam (hereinafter referred to as foreign enterprises) engaged in production and business operations in Vietnam, excluding the income items listed in Section 1, and Sections from Section 3 to Section 17 of Chapter II of this Circular.

Article 11. Determination of Tax Liability on Income from Business Activities

1. In the case where a foreign enterprise conducts production and business operations in Vietnam but does not establish a legal entity in Vietnam.

1.1. Tax Liability

According to the Agreement, income from business activities of a foreign enterprise is only subject to tax in Vietnam if the enterprise has a fixed place of business in Vietnam and the income is directly or indirectly related to that fixed place of business. In this case, the enterprise is only subject to tax in Vietnam on the portion of income allocated to that fixed place of business.

1.2. Definition of Fixed Place of Business

1.2.1. According to the Agreement, "fixed place of business" is a fixed business establishment of an enterprise through which the enterprise carries out all or part of its business activities.

An enterprise of a Contracting State is considered to have a fixed place of business in Vietnam if it meets the following three conditions:

a) Maintaining at least one "place" in Vietnam such as a building, an office, or a part of a building or office, a means of transport or equipment, etc.; and

b) Such place has a permanent character, meaning it is established at a specific location and/or maintained regularly. The permanence of a business establishment does not necessarily depend on the fact that the establishment must be attached to a specific geographic location for a certain period of time; and

c) The enterprise carries out all or part of its business activities through such place.

Example 8: Company X of China opens a booth at a Vietnamese New Year market fair, through which company X sells goods at the fair. At that time, the booth will be considered a fixed place of business of company X in Vietnam.

1.2.2. An enterprise of a Contracting State will be considered to carry out business activities through a fixed place of business in Vietnam in the main cases below:

a) The enterprise has in Vietnam: headquarters, branch offices (such as law firm branches, foreign office branches, tobacco company branches, bank branches, etc.), offices (including trade representative offices if there is negotiation and signing of commercial contracts), factories, production workshops, mines, oil or gas wells, warehouses for receiving and delivering goods, exploration or resource extraction sites, or has equipment and means serving for exploration and resource extraction in Vietnam.

Example 9: A foreign subcontractor using equipment, facilities, and labor participating in oil and gas drilling exploration activities in Vietnam will be considered to carry out business activities through a fixed place of business in Vietnam.

b) The enterprise has in Vietnam a construction site, a construction project, installation or assembly, or carries out supervisory activities related to these construction sites, projects, installations, or assemblies, provided that such sites, projects, or supervisory activities last more than six months or three months (depending on the specific Agreement).

The location, construction project, or installation includes the location, construction of houses, roads, bridges, culverts, pipeline installation, excavation, dredging of rivers and streams, etc. The period (six months or three months) is calculated from the date when the contractor begins preparatory work for the construction project in Vietnam, such as establishing a construction office to plan the work, until the completion and full handover of the project in Vietnam, including any interruption time due to any cause.

Subcontractors of the Contracting State participating in the construction projects, installations, or assembly mentioned above shall also be considered to carry on business activities in Vietnam through a fixed place of business if they meet the conditions set forth in Point 1.2.1 above.

The duration of the project to determine a fixed place of business for the main contractor includes the total duration of the subcontracted contract parts performed by subcontractors and the duration of the main contractor's performance.

Example 10: Japanese Company Z won a bid to construct a bridge in Vietnam. The construction activities proceeded as follows: five months of bridge pier construction by a subcontractor Y, also a Japanese company, and three months of bridge deck construction and completion by Company Z itself. In this case, according to Article 5, Clause 3, of the Agreement between Vietnam and Japan, Company Z is considered to carry on business activities in Vietnam through a fixed place of business because the total construction period is eight months (five months plus three months). Company Y is not considered to have a fixed place of business in Vietnam.

c) That enterprise carries out service provision, including consulting services, in Vietnam through its employees or another entity, provided that the service activities in a project or related projects last in Vietnam for more than 183 days cumulatively within any twelve-month period.

Example 11: Swedish aircraft manufacturer Company D signed a maintenance service contract with Vietnam Airlines. According to the contract, during the period from June 1, 2010, to May 30, 2011, Company D sent technical experts to Vietnam for a total of 190 days. In this case, according to Clause 4, Article 5, of the Agreement between Vietnam and Sweden, Company D is considered to have a fixed place of business in Vietnam as the technical experts worked in Vietnam for more than six months within a twelve-month period.

Example 12: Japanese consultancy firm N signed service contracts for consultancy with the Project Owner of the V Power Plant Construction Project in Vietnam as follows: i) a construction consultancy contract lasting four months from August 1, 2010, to November 30, 2010, and ii) a power plant system installation consultancy contract lasting three months from January 1, 2011, to March 31, 2011. Both contracts require the presence of representatives of Consultancy Firm N at the construction and installation site of the V Power Plant throughout the contract term. To fulfill the power plant installation consultancy contract, Consultancy Firm N hired Japanese consultancy firm B to act as its representative. In this case, according to Clause 4, Article 5, of the Agreement between Vietnam and Japan, Consultancy Firm N is considered to have a fixed place of business in Vietnam as the representatives of the firm were present at the Project in Vietnam for more than six months within a twelve-month period; Consultancy Firm B is not considered to have a fixed place of business in Vietnam as the firm was present in Vietnam for no more than six months.

Example 13: With assumptions similar to Example 12, if Consultancy Firm B and the Project Owner signed an advisory agreement for the trial operation phase from April 1, 2011, to July 30, 2011. The contract also requires representatives of Consultancy Firm B to be present throughout the contract term at the trial operation site of the V Power Plant. In this case, according to Clause 4, Article 5, of the Agreement between Vietnam and Japan, Consultancy Firm B is considered to have a fixed place of business in Vietnam as the representatives of the firm were present at the Project in Vietnam for more than six months within a twelve-month period.

Regarding the provision of services, although the Agreement stipulates that a fixed place of business includes the provision of services, including consulting services, in Vietnam through the enterprise’s employees or another entity, provided that the service activities in a project or related projects last in Vietnam for more than 183 days cumulatively within any twelve-month period, but due to the nature of the services, the service provision does not exceed six months within a twelve-month period, while the three conditions for a fixed place of business set forth in Point 1.2.1 above are still met, the provision of services is still considered to have a fixed place of business in Vietnam.

Example 14: Swedish aircraft manufacturer Company D signed a regular aircraft maintenance service contract with Vietnam Airlines for two years. According to the contract, each year, Company D sends technical experts to Vietnam for a total of 90 days at the maintenance site. In this case, according to Clause 1, Article 5, of the Agreement between Vietnam and Sweden, Company D is considered to have a fixed place of business in Vietnam as the technical experts regularly work at a fixed location in Vietnam (the maintenance site) each year.

d) That enterprise has an agent, broker, commission agent, or any other type of agent in Vietnam, if these agents devote all or substantially all of their activities to that enterprise (dependent agents).

Example 15: Company V, a resident entity of Vietnam, enters into an agency contract with warehousing functions and product delivery services for company H, a resident entity of the United Kingdom. According to the contract provisions, company V is not permitted to act as an agent for any other paint manufacturer or distributor. In this case, although it does not have the authority to conclude contracts or collect payments in Vietnam, company V has become a dependent agent of company H and is no longer considered an independent agent. Pursuant to the Agreement between Vietnam and the United Kingdom (Clause 6, Article 5: Permanent Establishment), company H is deemed to have a permanent establishment in Vietnam.

d) The enterprise authorizes an entity in Vietnam:

- To regularly negotiate and enter into contracts on behalf of that enterprise; or to sign contracts under the name of that entity but which bind the enterprise to obligations or liabilities; or

- Without the authority to negotiate or enter into contracts, but with the regular authority to represent the enterprise in delivering goods in Vietnam.

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

a) The enterprise uses facilities solely for the purpose of storing and displaying its goods.

b) The enterprise has a warehouse in Vietnam solely for the purpose of storing and displaying its goods or for another enterprise to process.

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

d) The enterprise has a fixed business premises in Vietnam solely for the purpose of conducting preparatory or auxiliary activities for the enterprise.

1.2.4. Where a company that is a resident of a Contracting State to the Agreement with Vietnam controls or is subject to control by a company that is a resident of Vietnam, or is carrying out business activities in Vietnam (through a permanent establishment or otherwise), such circumstances shall not cause either company to be considered a permanent establishment of the other.

Example 16: A foreign enterprise contributes capital to establish a joint venture or a wholly foreign-owned enterprise in Vietnam. In such cases, the joint venture or wholly foreign-owned enterprise is not considered a permanent establishment of the foreign enterprise in Vietnam.

However, where a company that is a resident of a Contracting State to the Agreement with Vietnam contributes capital to establish a joint venture or a wholly foreign-owned enterprise in Vietnam (including export processing zones), that company will be deemed to have a permanent establishment in Vietnam if:

- The joint venture or wholly foreign-owned enterprise regularly negotiates and enters into contracts under the name of that company; or signs contracts under the name of the joint venture or wholly foreign-owned enterprise but which bind the foreign company to obligations or liabilities; or

- The joint venture or wholly foreign-owned enterprise regularly represents the foreign company in delivering goods in Vietnam; or

- The foreign company has the right to dispose of the material and technical facilities of the joint venture or wholly foreign-owned enterprise during the production and business operations (meaning that the foreign company's use of the material and technical facilities of the joint venture or wholly foreign-owned enterprise in Vietnam, if any, during production and business operations is not based on market price principles).

1.3. Determination of taxable income of a permanent establishment

1.3.1. The determination of the taxable income of a permanent establishment of a foreign enterprise, except for foreign bank branches in Vietnam, is guided by Point 1.3.3 below, according to the guiding documents implementing the Law on Corporate Income Tax for organizations and individuals from abroad conducting business without establishing a legal entity in Vietnam or having income in Vietnam.

1.3.2. When determining the expenses allocated by the head office of a foreign enterprise or foreign enterprise offices to a permanent establishment in Vietnam, the permanent establishment will be treated as an independent enterprise conducting similar activities under similar conditions. However, in all cases, the following allocations by the head office of a foreign enterprise or foreign enterprise offices to a permanent establishment in Vietnam will not be accepted as deductible expenses:

- Royalty fees or similar payments for the use of patents or similar rights;

- Commissions for services or management work;

- Interest on loans of any kind.

1.3.3. The determination of the taxable income of foreign bank branches in Vietnam follows the guidelines for determining the taxable corporate income of legal entities in Vietnam. However, in all cases, the following allocations by the head office of a foreign bank or foreign bank offices to a branch in Vietnam of a foreign bank will not be accepted as deductible expenses:

- Royalty fees or similar payments for the use of patents or similar rights;

- Commissions for services or management work.

The tax regulations on business income as mentioned above are set forth in the Business Income Clause (usually Article 7) of the Agreement.

2. Cases where foreign enterprises conduct production and business activities in Vietnam through the establishment of legal entities in Vietnam.

Under current Vietnamese law, foreign enterprises may conduct business in Vietnam through the establishment of legal entities in Vietnam such as joint ventures or wholly foreign-owned enterprises.

In accordance with the Agreement, these legal entities are obligated to pay corporate income tax on income from production and business activities in the same manner as other Vietnamese enterprises under the current Corporate Income Tax Law. The portion of income received by foreign enterprises in the form of profits distributed to investors or income from the transfer of contributed capital (if any) shall be implemented in accordance with the relevant provisions of the Agreement concerning Income from Share Dividends or Income from Asset Transfers.

Example 17: Company T of China contributes 70% of the capital to establish Joint Venture Company X in Vietnam. In 2009, Joint Venture Company X earns a profit of 100 million VND from its business operations; after paying corporate income tax (TNDN) at a rate of 25% in Vietnam, the post-tax profit is fully distributed according to the contribution ratio. In 2010, Company T sells 50% of its contributed capital in Joint Venture X for 3 billion VND and receives 50 million VND in interest on the loan provided to Joint Venture X. The tax obligations of Joint Venture Company X and Company T in 2010 are as follows:

- Joint Venture Company X pays corporate income tax like other Vietnamese enterprises. Specifically:

Corporate Income Tax = 100 million VND x 25% = 25 million VND

- Company T of China pays taxes in Vietnam in accordance with the provisions of the Agreement as follows:

+ For the post-tax profit distributed (75 million VND x 70%): Pay tax on income from share dividends (as detailed in Section 4. Income from Share Dividends, Chapter II, this Circular);

+ For the income from transferring contributed capital (3 billion VND): Pay tax on income from asset transfers (as detailed in Section 8. Income from Asset Transfers, Chapter II, this Circular);

+ For the income from interest on loans (50 million VND): Pay tax on income from interest on loans (as detailed in Section 5. Income from Interest on Loans, Chapter II, this Circular).

Section 3
INCOME FROM INTERNATIONAL TRANSPORTATION ACTIVITIES

Article 12. Definition of international transportation

According to the Agreement, international transportation includes the activities of transporting goods and passengers by sea vessels or aircraft, and may include road, rail, or inland waterway transport means (hereinafter referred to collectively as transport means) carried out by enterprises of the Contracting State, except where such transportation activities only occur between two locations within Vietnam or between a location in Vietnam and a location in the Contracting State. Example 18: A Japanese enterprise carries out transportation of goods and passengers in Vietnam. The following transportation activities of this enterprise will be considered as international transportation:

Transporting goods and passengers from a location in Vietnam to a location in Japan (including goods and passengers that travel from Hai Phong through Ho Chi Minh City and Osaka to Tokyo);

- - Transporting goods and passengers from a location in Vietnam to a location outside Vietnam (for example, Singapore);

If the ship of the aforementioned Japanese enterprise transports tourists on a package tour service route from Ho Chi Minh City -- Singapore -- Hai Phong; the ship departs from Ho Chi Minh City and docks in Singapore, all passengers visit Singapore and then return to the ship to go back to Hai Phong. In Singapore, the ship does not take on any additional passengers. Therefore, this passenger transportation route is not considered international transportation (although part of the voyage takes place outside Vietnam, both the starting point and final destination are within Vietnam).

In the case where a Japanese company's ship transports tourists under a package service for the route Ho Chi Minh City -- Singapore -- Hai Phong; the ship departs from Ho Chi Minh City and docks at Singapore, all passengers visit Singapore and return to the ship to go back to Hai Phong. At Singapore, the ship does not take on any additional passengers. Therefore, this passenger transport journey is not considered international transportation (although part of the ship's voyage takes place outside Vietnam, the starting point and final destination are both within Vietnam).

Article 13. Determination of the Object Benefiting from the Agreement on Income from International Transportation

Depending on each Agreement, enterprises of the Contracting State that carry out international transportation activities shall be determined based on the following criteria:

1. Enterprises managed by a resident of Vietnam or of the Contracting State with which Vietnam has an Agreement; or

2. Enterprises having their actual place of management in Vietnam or in the Contracting State with which Vietnam has an Agreement;

provided that such enterprises own or have the right to use entirely at least one means of transport and use this means for international transportation of passengers and/or goods (referred to as the means of transport directly operated by the enterprise).

Article 14. Determination of Income from International Transportation

Depending on the provisions of each Agreement, income from international transportation activities of the objects mentioned in Article 13 shall be exempted or reduced from tax in Vietnam or in the Contracting State with which Vietnam has an Agreement.

The scope of exemption or reduction of tax in Vietnam for enterprises of the Contracting State with which Vietnam has an Agreement includes:

1. Income from international transportation activities using means of transport directly operated by the enterprise and from related ancillary activities, specifically:

1.1. Revenue from international transportation activities using means of transport directly operated by the enterprise and issuing transportation documents (issuing tickets, bills of lading, or manifests for passenger and cargo transportation).

1.2. Revenue from leasing part of the means of transport (also called leasing space) or leasing the entire means of transport on a per-trip basis directly operated by the enterprise.

Example 19: Japanese shipping company A accepts to transport goods of company C from Vietnam to the Netherlands at a freight rate of 300 US dollars. Company A does not operate its own ship but leases space on Thai shipping company B's ship at a fee of 250 US dollars. In addition to transporting goods for company A, company B also directly transports goods for other customers on the same route, earning a freight of 200 US dollars. In this case:

- For company A: the amount of 300 US dollars earned from accepting to transport goods for company C or the difference of 50 US dollars earned from accepting to transport goods for company C and leasing space on company B's ship are not considered as income from international maritime transportation to be exempted from corporate income tax under the Agreement between Vietnam and Japan because company A does not directly operate ships (but only purchases full space on company B's ship), thus still having to pay the full corporate income tax.

- For company B: the amount of 450 US dollars in freight is considered as income from international transportation activities eligible for a 50% reduction in corporate income tax under the Agreement between Vietnam and Thailand.).

1.3. Revenue from transporting goods or passengers when participating in joint operation of international transportation routes, provided that the enterprise participates in the joint operation based on contributing means of transport directly operated by the enterprise or contributing costs for the operation of means of transport directly operated by the joint venture and each party uses separate transportation documents. In this case, revenue is determined based on transportation documents issued by the enterprise as a joint venture member but not exceeding the limit of available space on the means of transport that the enterprise is allowed to operate according to the joint venture agreement.

1.4. Revenue from transporting passengers or goods by the enterprise issuing international transportation documents carried on means of transport operated by another enterprise, subject to either of the following conditions:

a) That section of the transportation is part of an international maritime or air transportation journey directly operated by the enterprise and recorded in transportation documents issued by the enterprise itself;

Example 20: Also referring to Example 19 above, Japanese shipping company A accepts to transport goods of company C from Vietnam to the Netherlands at a freight rate of 300 US dollars. However, company A operates ship A1 directly to transport goods from Singapore to the Netherlands. For the first leg from Vietnam to Singapore, company A must lease a ship from Thai shipping company B to transport goods at a cost of 50 US dollars.

- For company A: the amount of 250 US dollars (300 - 50) earned from directly transporting goods in international transportation is eligible for exemption from corporate income tax under the Agreement between Vietnam and Japan.

- For company B: the amount of 50 US dollars in freight is considered as income from international transportation activities eligible for a 50% reduction in corporate income tax under the Agreement between Vietnam and Thailand.

b) Such carriage is carried out based on an agreement to swap part of the means of transport (called swapping space) directly operated by the enterprise in exchange for the enterprise being able to use a corresponding part of the means of transport operated by another enterprise. In this case, revenue is determined based on transportation documents issued by the enterprise itself but not exceeding the limit of free space that the enterprise can exploit on the partner's means of transport according to the space swap agreement.

1.5. Income from short-term (storage) container leasing if it is considered as ancillary activity accompanying the operation of means of transport directly operated by the enterprise as stipulated in the Agreement.

The ancillary activity accompanying the operation of means of transport of short-term (storage) container leasing is defined as containers accompanying the means of transport entering Vietnam's port, containers containing imported goods, and container usage fees included in the freight rate; short-term container leasing income arises from the consignee retaining the container beyond the free usage period.

1.6. Revenue from leasing bareboats (commonly referred to as bareboat chartering) of ships or aircraft that serve as ancillary to the international transportation activities conducted directly by the enterprise, if specifically provided for in the Agreement and satisfy all three conditions below:

a) The means of transport is being used by the enterprise for international transportation;

b) The total lease period is shorter than the time the means of transport is used by the enterprise for its own international transportation activities within a twelve-month period starting or ending with the calendar year; and

c) The lessee does not change the name and call sign of the means of transport.

Bareboat chartering is a form of leasing where the shipowner provides the lessee with a specific vessel without crew or flight crew.

Revenue mentioned in Points 1.5 and 1.6 above shall not be considered revenue from ancillary activities accompanying international transportation operations for the purposes of applying the Agreement if the enterprise does not generate revenue as specified in Points 1.1, 1.2, 1.3, or 1.4.

2. In cases where two or more enterprises engage in joint ventures to form a non-legal entity organization conducting international transportation using means of transport operated directly by the joint venture or partnership, and the transport documents are issued under the name of the joint venture or partnership, the scope of application of tax exemption or reduction under the Agreement will be determined separately for each joint venture or partnership party according to the Agreement signed between Vietnam and the country where the joint venture or partnership party is a resident or has actual management headquarters. The basis for determining exempt or reduced taxable income is similar to the provisions of Clause 1 and is allocated according to the ratio of income shared among the joint venture or partnership parties as stipulated in the joint venture or partnership agreement.

Example 21: The Scandinavian Airlines System (SAS) joint venture operates international passenger transportation in Vietnam to Nordic countries. Therefore, the income generated by the airline in Vietnam will be allocated to the capital-contributing joint venture partners residing in Norway, Denmark, or Sweden for application according to relevant Agreements.

When declaring tax obligations, these enterprises must separately account for the aforementioned income to be eligible for tax exemption or reduction on corporate income tax in accordance with regulations on income from international transportation activities. In all cases, the exempt or reduced taxable income does not exceed the taxable income from international transportation activities as defined in related regulatory documents.

Where the Agreement (such as the Agreement with Bangladesh, Philippines, and Thailand) specifies only a certain percentage reduction in income tax, the enterprise must pay income tax on international transportation income at the portion not subject to reduction.

These tax provisions on income from international transportation are set forth in the International Transport Article (usually Article 8) of the Agreement.

Section 4
INCOME FROM SHARE DIVIDENDS

Article 15. Definition of Share Dividends

According to the Agreement, share dividends are amounts deducted from post-tax income of limited liability companies, joint-stock companies paid to members of limited liability companies or shareholders of joint-stock companies, amounts deducted from post-tax income of joint ventures, wholly foreign-owned enterprises paid to foreign parties, income from indirect investments abroad (excluding interest income from loans as stipulated in Section 5, Chapter II of this Circular) of Vietnamese residents, and income distributed from direct foreign investments made by Vietnamese enterprises treated as share dividends by the Contracting State.

Example 22: Enterprise S of Vietnam invests in Countries X and Y with income and tax payment situations as follows:

Thus, within the scope of the Agreement with Country X, Enterprise S is considered to have foreign share dividends of 72; within the scope of the Agreement with Country Y, it is not considered to have foreign share dividends.

Article 16. Determination of Tax Liability on Income from Dividend Interest

1. Pursuant to the Agreement, Vietnam has the right to levy tax on dividend interest paid by a company that is a resident of Vietnam to a resident of the Contracting State according to a limited tax rate specified in each Agreement (usually not exceeding 15%) provided that the recipient is the actual beneficiary.

2. In the case where a resident of Vietnam receives dividend interest from a company that is a resident of the Contracting State, the Contracting State has the right to impose income tax as stipulated in Clause 1 of this Article; Vietnam has the right to levy tax on such income according to current Vietnamese tax laws; however, at the same time, Vietnam must implement measures to avoid double taxation on this income (as prescribed in Chapter III. Measures to Avoid Double Taxation in Vietnam of this Circular). 5. In the case where a resident receives dividend interest and current Vietnamese tax laws do not provide for the levying of income tax on such income or levy tax at a lower tax rate than that prescribed in the Agreement, the person receiving the income shall fulfill their tax obligations according to the provisions of current Vietnamese tax laws.

Example 23: A British company invested 14 million US dollars in a joint venture in Vietnam and received dividend interest from the joint venture in Vietnam in 2010. Although according to the Agreement between Vietnam and the United Kingdom (Clause 2.a, Article 10: Dividend Interest), Vietnam has the right to levy tax on income from dividend interest of this British company at a tax rate of 7%, but according to the current Tax Law, Vietnam does not levy tax on income from dividend interest of enterprises, so the British company does not have to pay tax on the aforementioned income from dividend interest.

Article 17. Determination of Actual Beneficiary

The Agreement on Income from Dividend Interest According to the Agreement, the provisions on tax on dividend interest only apply to residents who are both recipients and actual beneficiaries of the benefits of the shares – that is, shareholders. Therefore, except for certain cases where the benefit of the Agreement is not enjoyed as stipulated in Article 6. Certain Cases of Refusal to Apply the Agreement Based on the Principle of Benefit of the Agreement, the reduced tax rates or exemption from tax on income from dividend interest prescribed in the Agreement will not apply to:

1. Recipients of dividend interest payments who are not shareholders or are not residents.

Example 24: An investment fund registered in country S (established by members who are residents of countries with Agreements with Vietnam) participates in capital contribution to establish Joint Venture Company V in Vietnam. The investment fund is not a resident of country S. The dividend interest received by the investment fund from Joint Venture Company V and the income received by the fund's contributing members from the dividend interest distributed by the investment fund are not subject to the Agreement between Vietnam and country S and the countries where the members are residents.

2. Dividend interest paid by a company that is a resident of Vietnam to a permanent establishment located in Vietnam of a resident of the Contracting State.

Example 25: Branch CV of foreign bank C of France, operating in Vietnam, purchases shares in a Vietnamese joint-stock company and receives a dividend interest payment. At the request of branch CV, the dividend interest payment is transferred directly to bank C headquartered in Paris. In this case, the actual recipient of the dividend interest is branch CV, not bank C. Since branch CV is a permanent establishment of bank C in Vietnam, according to the Agreement between Vietnam and France (Clause 5, Article 10: Dividend Interest), the provisions on tax on dividend interest will not apply to bank C, but the provisions on tax on income from business operations will be applied (Article 7: Business Profit, Agreement between Vietnam and France).

3. Dividend interest paid by a company that is a resident of Vietnam to a permanent establishment of another Vietnamese company located in the Contracting State.

Example 26: Vietnamese Bank V has a branch VC in country L, which is a Contracting State with Vietnam. Under the law of country L, branch VC is considered a permanent establishment of Bank V in that country. Branch VC purchases shares of a company in Vietnam and receives dividend interest. In this case, the provisions on tax on dividend interest in the Agreement between Vietnam and L will not apply.

These provisions on tax on income from dividend interest are set forth in the Dividend Interest Provisions (usually Article 10) of the Agreement.

INCOME FROM INTEREST ON LOANED FUNDS

Section 5
INCOME FROM INTEREST ON LOANS

Article 18. Definition of Interest from Loans

According to the Agreement, "interest from loans" is income from loans of any form, secured or unsecured by collateral, and with or without the right to share in the borrower's profits, including income from government securities and interest from ordinary bonds, including bonuses and prizes attached to such securities, bonds, or ordinary bonds.

Article 19. Determination of Tax Liability for Income from Interest on Loans

1. According to the Agreement, Vietnam has the right to levy tax on interest from loans arising in Vietnam paid to a resident of a Contracting State at a limited tax rate (usually not exceeding 10%) as specified in each Agreement, provided that the recipient is the beneficial owner.

Interest from loans arising in Vietnam includes all interest from loans borne and payable by any resident of Vietnam, including interest borne and payable by the Government of Vietnam and local authorities of Vietnam or permanent establishments or fixed places of business of a foreign resident located in Vietnam.

Example 27: The branch of Bank Q, a foreign bank in Vietnam, pays Bank Q a loan interest amount. Since the branch is a permanent establishment of Bank Q in Vietnam, according to the Agreement between Vietnam and Thailand, this interest is considered to arise in Vietnam and is subject to tax in Vietnam at a rate of 10% (Clause 2.a, Article 11: Interest from Loans). However, since the current tax rate on income from interest on loans in Vietnam is 5%, this interest is taxed in Vietnam at a rate of 5%.

2. In the case where a resident of Vietnam receives interest from loans arising in a Contracting State, the Contracting State has the right to tax the income at source according to the provisions of Clause 1 above, and Vietnam also has the right to tax this income according to the current domestic tax laws, but at the same time, Vietnam must implement measures to avoid double taxation on this income (as stipulated in Chapter III. Measures to Avoid Double Taxation in Vietnam of this Circular).

3. In the case where current domestic tax laws in Vietnam do not provide for the taxation of this type of income or tax it at a lower rate than prescribed in the Agreement, the income recipient will fulfill their tax obligations according to the current domestic tax laws.

Example 28: Also with Example 27 above, but assuming the loan interest is paid to an individual resident in Thailand. Although according to the Agreement between Vietnam and Thailand (Clause 2.b, Article 11: Interest from Loans), Vietnam has the right to tax this interest at a rate of 15%, according to the Law on Personal Income Tax of Vietnam, the applicable rate is 5%. Therefore, Vietnam only taxes at a rate of 5% instead of 15%.

Article 20. Determination of Beneficial Owner For income from interest on loans under the Agreement

According to the Agreement, the provisions on taxation of income from interest on loans apply only to those who directly lend, directly receive interest from loans, and are simultaneously the beneficial owners of such interest - that is, the lender.

Example 29: A Vietnamese company enters into a loan agreement with Bank H of South Korea. According to the terms of the contract, the Vietnamese company receives the loan funds and repays both principal and interest to Bank H through an account opened by Bank H at Bank C in Country C. In this case, the beneficial owner of the interest is Bank H of South Korea regardless of whether Country C has a Double Taxation Treaty with Vietnam or not.

Example 30: Company A, residing in Vietnam, enters into loan agreements with Bank C in Country X, Bank D in Country Y, and Bank E in Country Z, and the loan proceeds are transferred directly from the accounts of these banks to Company A. Among them, Countries X and Y have signed Double Taxation Treaties with Vietnam. Company A may repay the loan interest in the following ways: (i) Company A transfers the loan interest directly to each respective Bank C, D, and E according to the proportion of capital contribution; or (ii) Company A transfers the entire loan interest to Bank C, then the distribution of the interest is agreed upon by the lenders (Banks C, D, and E). In this case, the repayment of loan interest for the syndicated loan of Banks C and D in scenario (i) and Bank C in scenario (ii) will be subject to the Agreement.

Example 31: Assuming in Example 30 above, Company A repays the loan interest in the following manner (iii): Company A transfers the entire loan interest to Bank E, then the distribution of the interest is agreed upon by the lenders (Banks C, D, and E). In this case, Banks C, D, and E are not eligible for the application of the Agreement.

In addition to certain cases not benefiting from the Agreement based on the principle of beneficial ownership as stipulated in Article 6. Certain Cases of Refusal to Apply the Agreement Based on the Principle of Beneficial Ownership, the reduced tax rates or exemption from tax on income from interest on loans prescribed in the Agreement shall not apply to:

1. The recipient of the payment of interest from loans who is not the lender.

Example 32: A Vietnamese company pays loan interest to Bank C of Thailand. At the request of this bank, the loan interest is transferred to Bank P of France headquartered in Paris. In this case, the beneficial owner of the interest is Bank C of Thailand, not Bank P of France. Therefore, Bank P does not have the right to request the application of the provisions of the Agreement between Vietnam and France to this interest from loans.

2. Interest from loans arising in Vietnam paid to a permanent establishment located in Vietnam of a resident of a Contracting State.

Example 33: A Vietnamese company pays interest on a loan to Branch V of Foreign Bank C, which is a resident of Thailand, operating in Vietnam. In this case, the interest from the loan received by Branch V of Foreign Bank C is considered ordinary business income (not interest income from a loan) of Branch V in Vietnam according to the Agreement between Vietnam and Thailand.

3. Interest from loans arising in Vietnam paid to a permanent establishment of another company of Vietnam located in a Contracting State with Vietnam.

Example 34: Bank V of Vietnam has a branch VC in Country L, which is a Contracting State with Vietnam. According to the laws of Country L, branch VC is considered a permanent establishment of Bank V in that country. Branch VC lends money to a company in Vietnam and receives interest from the loan. In this case, the provisions regarding tax on interest from loans in the Agreement between Vietnam and L will not apply.

4. Interest from loans arising in Vietnam paid to a permanent establishment of a third-country enterprise located in a Contracting State with Vietnam.

Example 35: A Vietnamese company pays interest on a loan to Branch N of Foreign Bank C, which is a resident of Thailand, operating in Country N. In this case, the interest received by Branch N does not apply the provisions of the Agreement between Vietnam and Thailand.

5. The loan is not directly transferred from the account of the lender who is a resident of a Contracting State with Vietnam.

Example 36: Assuming the situation described in Example 30 above, the entire amount of the loan under the Contract is transferred to Company A from the account of Bank E; in this case, the interest arising on this loan will not be subject to the provisions of the Agreement.

The provisions concerning taxation of income from interest from loans are set forth in the Interest Article (usually Article 11) of the Agreement.

Chapter 6
INCOME FROM ROYALTIES

Article 21. Definition of Royalties

According to the Agreement, royalties are payments made for the use of, or right to use:

1. Copyrights in literary, artistic, or scientific works, including cinematographic films and tapes or discs used for radio or television broadcasting;

2. Patents, trademarks;

3. Trade names;

4. Designs, models, plans, secret formulas, or processes;

5. Computer software;

6. Industrial, commercial, or scientific equipment;

7. Information concerning industrial, commercial, or scientific experience.

Article 22. Determination of Tax Liability for Income from Royalties

1. According to the Agreement, Vietnam has the right to tax royalties arising in Vietnam paid to a resident of a Contracting State with Vietnam at a limited rate (usually not exceeding 10%), depending on each Agreement, provided that the recipient is the beneficial owner.

Royalties arising in Vietnam are any royalties borne and payable by any resident of Vietnam, including royalties borne and payable by the Government and local authorities of Vietnam or permanent establishments or fixed bases that a foreign resident has in Vietnam.

2. If a resident of Vietnam receives royalties arising in a Contracting State with Vietnam, the Contracting State with Vietnam has the right to tax such income according to the provisions of Paragraph 1 above, and Vietnam has the right to tax such income according to current Vietnamese tax laws; however, simultaneously, Vietnam must implement measures to prevent double taxation on this income (as provided in Chapter III. Measures to Prevent Double Taxation in Vietnam of this Circular).

Example 37: A Vietnamese joint venture for lubricant blending enters into a contract with a Korean company stipulating that the company transfers its lubricant blending formula to the Vietnamese joint venture for 20 years. When the Vietnamese joint venture pays royalties to the Korean company, according to current Vietnamese tax laws, the joint venture must withhold tax on royalties at 10% of the total royalty amount to remit to the budget. However, based on the Agreement between Vietnam and Korea (Paragraph 2.a, Article 12: Royalties), the joint venture only needs to withhold at a rate of 5% instead of 10%.

3. If current Vietnamese tax laws do not provide for taxing this type of income or tax it at a lower rate than provided in the Agreement, the income recipient shall fulfill their tax obligations according to the provisions of current Vietnamese tax laws.

Example 38: Assuming the situation described in Example 37 above, the Korean company contributes capital to the Vietnamese joint venture through the transfer of the lubricant blending formula for 20 years. According to the Agreement between Vietnam and Korea (Paragraph 2.a, Article 12: Royalties), Vietnam has the right to tax the Korean company for transferring the use of the lubricant blending formula as monetary capital at a rate of 5%. However, according to Vietnamese law, if contributions of technology transfer are exempted from income tax, the Korean company is exempted from tax.

Article 23. Determining the Beneficiaries of the Agreement for Income from Royalties

According to the Agreement, tax provisions on royalties only apply to those who directly receive and simultaneously enjoy income from royalties - that is, the person who owns, uses, and exploits the rights. Therefore, it will not apply to:

1. The recipient of royalty payments but is not the owner, user, or exploiter of the rights; or

2. Royalties arising in Vietnam directly related to a permanent establishment located in Vietnam of a resident beneficiary of the Agreement with Vietnam; or

3. Royalties arising in Vietnam paid to a permanent establishment of another company of Vietnam located in the country that has signed the Agreement with Vietnam.

Example 39: A branch of an English tobacco company in Vietnam allows a Vietnamese company to use its formula and trademark in its products under the condition that the branch monitors the process of use. In this case, the royalties from using the formula and trademark of the English tobacco company are directly related to the branch. Since the branch is a permanent establishment in Vietnam of the English tobacco company, according to the Agreement between Vietnam and England (Clause 4, Article 12: Royalties), Vietnam has the right to levy taxes on this income as if it were business income (Article 7: Corporate Profits of the Agreement between Vietnam and England).

Tax provisions on income from royalties are stated in the Royalties Clause (usually Article 12) of the Agreement.

Section 7
INCOME FROM TECHNICAL SERVICES

Article 24. Definition of Technical Service Fees

According to the Agreement, technical service fees are payments of any kind made to any entity, other than employees of the paying entity, for any services of a technical, managerial, or advisory nature.

Article 25. Determination of Tax Obligations for Income from Technical Services

1. According to the Agreement, Vietnam has the right to levy taxes on technical service fees arising in Vietnam paid to a resident of a country that has signed the Agreement with Vietnam at a limited tax rate (usually not exceeding 10%) depending on each Agreement, provided that the recipient is the actual beneficiary.

Technical service fees arising in Vietnam are payments of any kind borne and payable by a resident of Vietnam, including technical service fees borne and payable by the Government and local authorities of Vietnam or permanent establishments or fixed places of business of foreign residents in Vietnam.

Example 40: Company X is a resident in Vietnam specializing in canned fruit production. To expand its market for goods in Europe, Company X hired Company M in Germany to provide legal advice on procedures for opening branches or finding distributors. This advisory service was performed in Germany, and Company M does not have a permanent establishment in Vietnam.

In this case, when paying the technical service fee to Company M, Company X has the obligation to withhold corporate income tax at a rate not exceeding 7.5% according to the Agreement between Vietnam and Germany (Clause 1.b, Article 12: Royalties and Technical Service Fees).

2. If a resident of Vietnam receives technical service fees arising in a country that has signed the Agreement with Vietnam, that country has the right to levy income tax as stipulated in Clause 1 above, while Vietnam has the right to levy taxes on this income according to current Vietnamese tax laws; however, Vietnam must also implement measures to prevent double taxation on this income (stipulated in Chapter III. Measures to Prevent Double Taxation in Vietnam of this Circular).

Tax provisions on income from technical service fees are stated in the Technical Service Fees Clause (usually Article 13) of the Agreement.

Section 8
INCOME FROM TRANSFER OF PROPERTY RIGHTS

Article 26. Definition of income from asset transfer

Income from asset transfer is income in all forms from selling, transferring (in whole or in part), or exchanging assets and rights to assets; including cases where assets are put into a business entity in exchange for rights in that business entity.

Article 27. Determination of tax liability on income from asset transfer

1. Tax liability on income from the transfer of immovable property in Vietnam

According to the Agreement, Vietnam has the right to levy income tax according to current Vietnamese tax laws on income from the transfer of immovable property in Vietnam by a resident of a country that has signed an Agreement with Vietnam.

Example 41: A French oil exploration company transfers the right to explore oil at a location in Vietnam's territorial waters, the income received will be subject to income tax according to Vietnamese law.

2. Tax liability on income from the transfer of movable property which is a business asset of a permanent establishment in Vietnam

According to the Agreement, Vietnam has the right to levy income tax according to current Vietnamese tax laws on income from the transfer of business assets of a permanent establishment or the transfer of a permanent establishment in Vietnam by a resident of a country that has signed an Agreement with Vietnam.

Example 42: Branch C of Bank P (a country that has signed an Agreement with Vietnam) operates in Hanoi. In 2010, the branch ceased operations and sold all equipment and assets used for its business purposes. The income derived from this transfer will be declared and taxed (after deducting the remaining value of the equipment and assets) at the current corporate income tax rate in Vietnam (25%).

3. Tax liability on income from the transfer of ships, boats, aircraft engaged in international transport

According to the Agreement, income from the transfer of ships, boats, or aircraft engaged in international transport (as defined in Article 12. Definition of International Transport of this Circular) operated by an international transport enterprise of a country that has signed an Agreement with Vietnam does not have to pay taxes in Vietnam. 4. Tax liability on income from the transfer of capital of foreign investors in foreign-invested enterprises, in a trust or a partnership where the value of immovable property constitutes a major portion of the total capital of the enterprise

In most Agreements between Vietnam and other countries, it is stipulated that Vietnam has the right to levy income tax in cases where a foreign party transfers capital in enterprises, trusts, or partnerships that are residents of Vietnam, where the value of immovable property constitutes a major portion of the total assets of the enterprise.

The ratio of the value of immovable property to the total assets of the enterprise is the simple average of the ratios of the value of immovable property to the total assets of the enterprise at the time of asset transfer, the beginning, and the end of the tax year immediately preceding the year in which the asset is transferred. The determination of the value of immovable property is based on the audited balance sheet of the enterprise at the aforementioned times.

The major portion of the value of immovable property in the total assets of the enterprise is determined as follows:

- If the Agreement specifies a specific ratio or a major portion, then the ratio specified in the Agreement shall apply, such as Clause 4, Article 13 of the Agreement between Vietnam and Spain stipulates a ratio of over 50%, or Clause 4, Article 14 of the Agreement between Vietnam and Oman and Clause 4, Article 13 of the Agreement between Vietnam and the United Arab Emirates stipulate a major portion of over 50%.

- If the Agreement does not specify a specific ratio or a major portion, then a ratio of over 50% shall be considered as a major portion.

Example 43: On March 30, 2012, an Indonesian resident investor transferred their share of capital in Enterprise V in Vietnam. The ratio of the value of immovable property to the total assets of Enterprise V at the times of March 30, 2012, January 1, 2011, and December 31, 2011 were 60%, 40%, and 53%, respectively. The determination of the major portion of the value of immovable property in the total assets of Enterprise V for the purpose of determining the tax liability of the Indonesian investor is as follows:

Clause 4, Article 13: Income from Asset Transfer, the Agreement between Vietnam and Indonesia provides:

"4. Income derived by a resident of a Contracting State from the transfer of shares or similar interests in a company whose assets consist wholly or mainly of immovable property situated in the other Contracting State may be taxed in that other State."

The provision above does not specify a specific ratio of the value of immovable property in the assets of the company, so a ratio of over 50% will be considered as a major portion.

The simple average of the ratios of the value of immovable property to the total assets of the enterprise is calculated as follows:

Therefore, in this example, the value of immovable property constituted a major portion of the assets of Enterprise V.

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

5. Tax liability on income from the transfer of shares in a company in Vietnam

At some Agreements, income from the transfer of shares of a resident of a country that has signed an Agreement with Vietnam in a company that is a resident of Vietnam must be taxed in Vietnam.

Example 44: Clause 5, Article 13: Income from Asset Transfer, the Agreement between Vietnam and Indonesia provides:

"Income from the transfer of shares in a company that is a resident of a Contracting State other than those referred to in paragraph 4 may be taxed in that State."

According to the provision above, if a resident of Indonesia has income from the transfer of shares in a company that is a resident of Vietnam, that income will be taxed in Vietnam.

6. Tax liability on income from the transfer of other assets in Vietnam

6. Tax liability on income from the transfer of other assets in Vietnam

According to the Agreement, income from the transfer of assets other than those specified in Clauses 1 to 5 above, derived in Vietnam by a resident of a Country that has signed an Agreement with Vietnam, is not subject to income tax in Vietnam.

Example 45: A Chinese construction company brings machinery to Vietnam for a three-month construction project. After completing the work, the company returns home and sells the aforementioned machinery in Vietnam. Under the Agreement between Vietnam and China, this company does not have a permanent establishment in Vietnam (Clause 3.a, Article 5: Permanent Establishment), and therefore is not subject to tax in Vietnam (Clause 6, Article 13: Income from the Transfer of Assets).

The provisions on taxation of income from the transfer of assets are set forth in the Income from the Transfer of Assets Clause (usually Article 13) of the Agreement.

Section 9
INCOME FROM INDEPENDENT PERSONAL SERVICES

Article 28. Definition of income from independent personal services

According to the Agreement, income from independent personal services is income derived by an individual who is a resident of a Country that has signed an Agreement with Vietnam, from independent activities providing services such as scientific, literary, artistic, educational, or teaching services, specifically the independent practice of professions such as doctors, lawyers, engineers, architects, dentists, accountants, and auditors.

Income from independent personal services does not include employment activities (regulated under the Employment Income Clauses), director's fees (regulated under the Director's Fees Clause), pension income (regulated under the Pension Income Clause), government service (regulated under the Government Service Income Clause), student income (regulated under the Student Income Clause), teacher and professor income (regulated under the Teacher and Professor Income Clause), and independent performance activities of artists and athletes (regulated under the Artist and Athlete Income Clause).

Article 29. Determination of tax liability for income from independent personal services

According to the Agreement, a resident of a Country that has signed an Agreement with Vietnam who provides independent personal services in Vietnam must pay individual income tax in Vietnam in the following cases:

1. The individual practices independently through a fixed place of business.

The term "fixed place of business" refers to a location or address that is regular or stable within the territory of a country through which an individual carries out professional services (for example, a consulting room, architect's office, or lawyer's office, etc.). The principle of determining a "fixed place of business" is similar to the principle of determining a "permanent establishment" of a business as stipulated in Point 1.2, Article 11, of this Circular.

2. The individual is present in Vietnam for 183 days or more during the tax year or within a period of 12 months from the date of arrival in Vietnam, depending on each Agreement.

3. The individual receives a certain total amount of income, as specified in each Agreement, from carrying out independent activities in Vietnam over a specific period of time (typically within a fiscal year).

Example 46: In 2012, a doctor who is a resident of Bangladesh performed a surgery at an international hospital in Vietnam and received a fee of 50,000,000 VND. The doctor was present in Vietnam for five days to perform the surgery. According to the Agreement between Vietnam and Bangladesh (Clause 1c, Article 15: Independent Personal Services), since the doctor's income is 50,000,000 VND (exceeding $1,500), the doctor is liable to pay individual income tax in Vietnam.

The provisions on taxation of income from independent personal services are set forth in the Independent Personal Services Clause (usually Article 14) of the Agreement.

Section 10
INCOME FROM DEPENDENT PERSONAL SERVICES

Article 30. Definition of Income from Dependent Personal Services

According to the Agreement, income from dependent personal services activities is income in the form of remuneration received by an individual who is a resident of the State party to the Agreement with Vietnam for performing work in Vietnam and vice versa. Income from dependent personal services activities does not include the income of individuals acting as independent professionals (as defined in the Independent Professions Clause), members of a company's board of directors (as defined in the Directors' Fees Clause), artists and athletes (as defined in the Artists and Athletes Income Clause), government employees serving foreign governments (as defined in the Government Service Income Clause), and remuneration in the form of retirement pensions (as defined in the Retirement Pensions Clause).

Article 31. Determination of Tax Liability on Income from Dependent Personal Services

1. According to the Agreement, an individual who is a resident of the State party to the Agreement with Vietnam and earns income from performing work in Vietnam shall pay tax on that employment income in Vietnam in accordance with the current regulations on personal income tax in Vietnam.

Example 47: In 2012, Mr. A was a resident of France working for Branch F, a branch of a French bank operating in Vietnam, for two months. All of Mr. A’s salary and other income were paid by Branch F. In the year before and after, Mr. A did not reside in Vietnam. In this case, Mr. A has the obligation to pay personal income tax on the income received during his time working in Vietnam according to the current regulations on personal income tax in Vietnam. 2. If the individual referred to in Clause 1 simultaneously satisfies all three conditions below, the remuneration earned from work performed in Vietnam will be exempt from personal income tax in Vietnam:

a) The individual is present in Vietnam for less than 183 days in a period of twelve months beginning or ending in the tax year; and

b) The employer is not a resident of Vietnam regardless of whether the remuneration is paid directly by the employer or through an entity representing the employer; and

c) The remuneration is not borne and paid by a permanent establishment which the employer has in Vietnam.

Example 48:

Company N of Japan participates in establishing Joint Venture S specializing in distributing goods in Vietnam. In 2012, Company N sent Mr. Z to Vietnam as its representative to negotiate a contract regarding Company N providing "trade secrets" to Joint Venture S for a period of one month. In the year before and after, Mr. Z did not reside in Vietnam. All of Mr. Z’s income and expenses during his time working in Vietnam were paid by Company N. In this case, Mr. Z simultaneously satisfied all three conditions mentioned in Clause 2 above, so he is exempt from personal income tax in Vietnam. 3. The term "employer" referred to in Point 2.b) refers to the actual user of labor. Typically, an entity is considered the actual employer if it has the following rights and obligations:

a) That entity has rights over the products and services created by the employee and bears responsibility and risks for that labor;

b) That entity provides instructions and supplies means of labor to the employee;

c) That entity has control and responsibility over the place of work.

Example 49: Also with Example 48 mentioned above, in 2013, Mr. Z came to Vietnam as an expert of Joint Venture S to guide the application of "trade secrets" for a period of three months. In the year before and after, Mr. Z did not reside in Vietnam. With the spirit of assisting Joint Venture S, all of Mr. Z’s income and expenses during his time working in Vietnam were paid by Company N. In this case, formally, Mr. Z simultaneously satisfied all three conditions of Clause 2 above, but essentially, for the criteria of the actual employer, the actual employer of Mr. Z during his time working in Vietnam was Joint Venture S, not Company N. Therefore, Mr. Z is not exempt from personal income tax in Vietnam.

4. In the case where a Vietnamese individual is a resident of the State party to the Agreement with Vietnam does not earn income from performing work in Vietnam but only earns income from performing work abroad, such income will not be subject to personal income tax in Vietnam.

Example 50: In 2011, Construction Company V of Vietnam sent workers to Laos to work at a project of the company in Laos for the entire period of twelve months. The income from wages of these workers for their work in Laos will not be taxed in Vietnam.

5. An individual working on ships, boats, aircraft (crew) in international transportation operations of a business that is a resident or has a real place of management in Vietnam must pay personal income tax in Vietnam.

Example 51: Company S is a Vietnamese marine transport company that hires ships and crews of foreign nationals to operate an international shipping route between China and Singapore. Company S has the obligation to withhold personal income tax according to Vietnamese law on wages paid to individuals who are members of the crew, even though this wage is part of the cost of hiring the ship.

These provisions on taxation of income from dependent personal services activities are set forth in the Dependent Personal Services Activities Clause (usually Article 15) of the Agreement.

INCOME FROM DIRECTORS' FEES

Section 11
INCOME FROM DIRECTORS' FEES

Article 32. Definition of income from director's fees

According to the Agreement, director's fees are income received by a resident of the State party to the Agreement with Vietnam in the capacity of a member of the company's board of directors, company's board of management, or a high-level managerial position in a business entity that is a resident of Vietnam; and vice versa. This income does not include salaries received by such individuals for performing other functions within the business entity as employees, consultants, advisors, and salaries of foreign nationals holding positions in representative offices of foreign companies located in Vietnam. Such ordinary incomes are considered as dependent personal service income (as provided in Section 10. Dependent Personal Service Income, Chapter II, this Circular).

Article 33. Determination of tax liability on income from director's fees

According to the Agreement, where an individual who is a resident of the State party to the Agreement with Vietnam receives fees in the capacity of a member of the company's board of directors, company's board of management, or in the capacity of a high-level managerial position in a company that is a resident of Vietnam, such individual shall be subject to taxation on such income according to the provisions of the Law on Personal Income Tax in Vietnam (regardless of whether the individual is present in Vietnam or not).

Example 52: A resident of the United Kingdom is a member of the board of directors of a joint venture in Vietnam. In 2012, the individual visited Vietnam for work totaling 60 days and received fees in the capacity of a member of the board of directors. Based on the Agreement between Vietnam and the United Kingdom and the current regulations of the Law on Personal Income Tax in Vietnam, this individual must pay personal income tax on the fees received in the capacity of a member of the board of directors at the current tax rate in Vietnam (20%) on the total income received by a non-resident of Vietnam.

The provisions regarding taxation on income from director's fees are set forth in the Director's Fees Clause (usually Article 16) of the Agreement.

Section 12
INCOME FROM PERFORMANCES OF ARTISTS AND ATHLETES

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

According to the Agreement, income from performances of artists and athletes is income from artistic and sports performances in Vietnam by artists and athletes who are residents of the State party to the Agreement with Vietnam; and vice versa.

Article 35. Determination of tax liability on income from performances of artists and athletes

1. Despite the provisions in Sections 9. Income from Independent Professional Activities and Section 10. Dependent Personal Service Income, Chapter II, this Circular, where an individual who is a resident of the State party to the Agreement with Vietnam conducts artistic and sports performances in Vietnam and receives income from such performances, such individual shall be subject to taxation under Vietnamese law.

Example 53: In 2012, upon invitation from Performance Company V in Vietnam, a singer who is a resident of South Korea performed in Vietnam and received a fee of 500,000,000 VND. The time the singer was present in Vietnam for the performance was 3 days. According to the Agreement between Vietnam and South Korea (Clause 1, Article 17: Artists and Athletes), the singer is obligated to pay personal income tax in Vietnam.

2. Despite the provisions in Sections 2. Income from Business Operations, Section 9. Income from Independent Professional Activities, and Section 10. Dependent Personal Service Income, Chapter II, this Circular, in cases where income from artistic and sports performances in Vietnam of an individual who is a resident of the State party to the Agreement with Vietnam is paid not to the performer but to another party, such income shall be subject to taxation in Vietnam according to Vietnamese law.

Example 54: Also as in Example 53 above, the Korean singer came to perform in Vietnam based on a contract (negotiated and signed in South Korea) between Performance Company V in Vietnam and Star Company in South Korea. According to the Agreement between Vietnam and South Korea (Clause 2, Article 17: Artists and Athletes), the income of Star Company from this contract will be subject to corporate income tax in Vietnam.

3. Where artistic and sports performances of an individual or company who is a resident of the State party to the Agreement with Vietnam are conducted within the framework of a cultural exchange program between the two governments, income from such performances in Vietnam by the foreign individual or company will be exempt from tax in Vietnam if the Agreement between Vietnam and that State provides for such exemption.

Example 55: In 2012, within the framework of a cultural exchange program signed between the Government of Vietnam and the Government of South Korea, a singer who is a resident of South Korea performed in Vietnam and received a fee of 500,000,000 VND. According to the Agreement between Vietnam and South Korea (Clause 3, Article 17: Artists and Athletes), the singer is not obligated to pay personal income tax in Vietnam.

The provisions regarding taxation on income of artists and athletes are set forth in the Artists and Athletes Clause (usually Article 17) of the Agreement.

Section 13
INCOME FROM PENSION

Article 36. Definition of income from pension from salary

According to the Agreement, income from pension is the pension received by the resident of the country that has signed the Agreement with Vietnam for work previously done in Vietnam; and vice versa. The income from pension specified in this Article does not include pension paid by the Government, local authorities of Vietnam and the country that has signed the Agreement with Vietnam, as such income is considered as income from government service (as provided in Section 14: Income from Government Service, Chapter II, this Circular).

Article 37. Determination of tax liability on income from salary

Depending on each specific Agreement, pension income will be subject to tax:

a) Only in the country where the pension recipient resides; or

b) Only in the country where the pension is paid; or

c) Simultaneously in the country of residence of the pension recipient and in the country where the source of the pension arises if the payer of the pension is a resident or a permanent establishment in that country.

Example 56: Mr. F is a French citizen working for the private sector in France, and upon retirement moved to live in Vietnam. According to Article 17: Pension, the Agreement between Vietnam and France, income from pension received from France will only be taxed in Vietnam regardless of which French pension fund pays it.

Example 57: Mr. M is a citizen of Oman working for the private sector in Oman. During his employment, Mr. M contributed to the Government of Oman's Pension Fund. Upon retirement, he moved to live in Vietnam. According to Clause 2, Article 19: Pension and Social Insurance Payments, the Agreement between Vietnam and Oman, income from pension received from this Pension Fund will only be taxed in Oman.

Example 58: Mr. M is a resident of Denmark working for the private sector in Denmark, and upon retirement moved to live in Vietnam. According to Article 18: Pension and Similar Payments, the Agreement between Vietnam and Denmark, income from pension received from Denmark will be taxed in both Vietnam and Denmark if Danish national law provides for taxation of such pension.

The provisions regarding tax on income from pension are set out in the Pension clause (usually Article 18) of the Agreement.

Section 14
INCOME FROM GOVERNMENT SERVICE

Article 38. Definition of income from government service

According to the Agreement, income from government service is the remuneration, salary, and pension paid by the Government or local authorities of a country that has signed the Agreement to an individual for performing tasks for that country.

Article 39. Determination of tax liability on income from salary from government service

1. In the case of foreigners sent by the Government of a country that has signed the Agreement with Vietnam to work in Vietnam for organizations of their Government located in Vietnam or for joint economic, cultural, and aid programs between the two countries, the salary and wages paid by the foreign Government to such individuals will be exempt from personal income tax in Vietnam, even if such individuals become residents of Vietnam due to the performance of such duties.

Example 59: Mr. J is a Japanese citizen working for the JICA office (under the Japanese Government) in Vietnam. Income from salary of Mr. J during his time working in Vietnam will be exempt from personal income tax in Vietnam (Clause 1.a, Article 19, Agreement between Vietnam and Japan).

2. Salary and wages paid by the Government of a country that has signed the Agreement with Vietnam will only be subject to tax in Vietnam if paid to an individual who is a resident of Vietnam to perform work for the foreign Government in Vietnam and such individual satisfies one of the following conditions:

a) Holds Vietnamese citizenship; or

b) Was a resident of Vietnam before performing work in Vietnam for the foreign Government.

Example 60: Mr. V is a Vietnamese citizen working for the JICA office (under the Japanese Government) in Vietnam. Income from salary of Mr. V during his time working at the JICA Vietnam office will be subject to personal income tax in Vietnam according to the Law on Personal Income Tax of Vietnam (Clause 1.b(i), Article 19, Agreement between Vietnam and Japan).

Article 40. Determination of tax liability on income from pension from government service

When an individual receives pension paid from a fund established by the State of Vietnam or local authorities of Vietnam (hereinafter referred to as the State of Vietnam), or directly paid by the State of Vietnam for previous work for the State of Vietnam, such pension will only be subject to tax in Vietnam; except when the individual is both a resident of the country that has signed the Agreement with Vietnam and holds citizenship of that country. In such a case, the individual’s pension income will only be subject to tax in that country.

Example 61: Mr. V is a Vietnamese citizen working for the Government of Vietnam. Upon retirement, Mr. V moved to live in Japan. At that time, pension from work for the Government of Vietnam will be exempt from personal income tax in Japan (Clause 2.a, Article 19, Agreement between Vietnam and Japan).

Example 62: Mr. J is a Japanese citizen working for the Embassy of Vietnam in Japan. Upon retirement, Mr. J continued to reside in Japan. At that time, pension from work for the Government of Vietnam will only be subject to personal income tax in Japan (Clause 2.b, Article 19, Agreement between Vietnam and Japan).

Article 41. Determination of tax liability on income salary and pension from government business operations

Notwithstanding the provisions set forth in Articles 39 and 40 above, taxation on salaries, wages, or pensions paid by foreign governments to individuals for participating in business activities of foreign governments in Vietnam, such as railway transportation enterprises, postal services, or state performance companies, shall be applied according to the provisions under Sections 10. Income from Dependent Personal Services, Section 11. Income from Director's Fees, Section 12. Income of Artists and Athletes, and Section 13. Income from Pensions, Chapter II, of this Circular, depending on each specific case.

The tax regulations concerning income from serving the government as mentioned above are stipulated in the Government Service Activities Clause (usually Article 19) of the Agreement.

Section 15
INCOME OF STUDENTS, INTERNS AND APPRENTICES AND VOCATIONAL STUDENTS

Article 42. Definition of income of students, interns, and vocational students

According to the Agreement, the income of foreign students, interns, and vocational students in Vietnam for the purpose of studying, researching, and learning trades in Vietnam, within the scope regulated by this clause, includes:

1. Income received from sources abroad to serve the purpose of studying and living in Vietnam.

2. Income received from work in Vietnam directly related to their study, research, and vocational training activities in Vietnam (as provided for in the Agreement). In some Agreements, this income is exempted from tax only up to a certain amount.

Article 43. Determination of tax liability on income of students, interns, and vocational students

In cases where foreign students, interns, and vocational students were residents of the contracting State before coming to Vietnam for study, research, or vocational training, those foreign students, interns, and vocational students will be exempted from personal income tax in Vietnam for the types of income specified in Article 42.

Example 63: A student who is a resident of China comes to Vietnam to study folk art for four years. During his research in Vietnam, he receives a scholarship of 800,000 VND per month from China, teaches Chinese at a school in Hanoi with a monthly income of 50 USD, and participates in performances of Vietnamese folk art with an annual income of 2,500 USD. According to the Agreement between Vietnam and China (Article 20: Students, Vocational Students, and Interns), this student is exempted from personal income tax on the scholarship and performance income up to 2,000 USD; and pays tax on teaching income and the portion exceeding 2,000 USD of performance income.

The tax regulations concerning the income of students, interns, and vocational students as mentioned above are stipulated in the Clause on Students, Interns, and Vocational Students (usually Article 20) of the Agreement.

Section 16
INCOME OF TEACHERS, PROFESSORS AND RESEARCHERS

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

Some Agreements provide specific provisions regarding the tax treatment of income of foreign teachers, professors, and researchers from teaching, lecturing, and research activities in Vietnam. This income includes income arising from teaching, lecturing, and research activities at universities or educational institutions recognized by the Vietnamese Government.

Article 45. Determination of tax liability on income of teachers, professors, and researchers

1. Income of foreign teachers, professors, and researchers from teaching, lecturing, and research activities in Vietnam as stipulated in Article 44 above shall be exempted from tax in Vietnam (within the period specified in the Agreement) if the following conditions are met:

- Immediately prior to coming to Vietnam for teaching, lecturing, or research, the foreign teacher, professor, or researcher was a resident of the Contracting State with Vietnam; and

- The teaching, lecturing, or research activities are conducted at universities or educational institutions recognized by the Vietnamese Government.

Example 64: Under a joint program between University V of Vietnam and University P of the Philippines starting from the academic year 2012, University P sent a teacher to teach at University V for three years. This teacher will be exempted from personal income tax in Vietnam on income from teaching at University V for two years from the date of arrival in Vietnam and will have to pay personal income tax in Vietnam on income from teaching at University V in the third year (Clause 1, Article 21: Teachers, Professors, and Researchers, Agreement between Vietnam and the Philippines).

2. The aforementioned tax exemption does not apply to cases where teaching or research activities are carried out for the personal benefit of an individual or a private organization.

Example 65: Under a contract signed with a private hospital V in Vietnam, a professor who is a resident of the Philippines (as a party to the contract) came to conduct research at this hospital for 12 months in 2012. This professor must pay personal income tax in Vietnam on income from research activities under the contract.

The tax regulations concerning the income of teachers, professors, and researchers as mentioned above are stipulated in the Clause on Teachers, Professors, and Researchers (usually Article 21) of the Agreement.

Section 17
OTHER INCOME

Article 46. Definition of Other Income

According to the Agreement, other income refers to all income not covered under other provisions of the Agreement, such as income from lottery winnings, casino gambling winnings, alimony payments pursuant to marital obligations, etc.

Article 47. Determination of Tax Liability for Other Income

1. According to the Agreement, a resident of a Contracting State with Vietnam who derives other income from Vietnam shall be subject to tax according to the current Vietnamese tax laws. However, in some Agreements (such as the Agreement between Vietnam and France, Vietnam and the United Kingdom), Vietnam commits to exempting other income from taxation in this case.

Example 66: Mr. H is a resident of China and Mr. P is a resident of France. During a two-week trip to Vietnam, both men won a lottery prize of 20 million Vietnamese dong in Hanoi. According to Vietnam's personal income tax regulations, this is non-recurring income, so both men are liable to pay taxes in Vietnam on their winnings. Under the Agreement between Vietnam and China (Clause 2, Article 22: Other Income), Vietnam may levy tax on Mr. H's income. Under the Agreement between Vietnam and France (Clause 1, Article 20: Other Income), Mr. P's income is exempt from tax in Vietnam.

2. In cases where other income is related to a permanent establishment of a resident of a Contracting State in Vietnam, Vietnam has the right to tax that income according to the current Vietnamese tax laws and in accordance with the provisions of Sections 2. Business Income and 9. Independent Personal Services Income, Chapter II, of this Circular.

Example 67: Branch V of Bank J, a Japanese bank, purchased a car from a company in Country X and won a promotional prize of $10,000. The car is used for the business purposes of Branch V. Although according to internal policy of Bank J, such income must be considered income of the head office and transferred to the account of Bank J in Japan, this prize income is still considered actually related to Branch V - a permanent establishment of Bank J in Vietnam under the Agreement between Vietnam and Japan (Clause 2, Article 21) and therefore Vietnam has the right to tax this income according to the current Vietnamese tax laws and in accordance with the provisions of Section 2. Business Income, Chapter II, of this Circular (Article 7 of the Agreement between Vietnam and Japan).

The provisions regarding taxation of other income are set forth in the Other Income Provisions (usually Article 22) of the Agreement.

Chapter III
MEASURES TO AVOID DOUBLE TAXATION IN VIETNAM

According to the Agreement, when a taxpayer is a resident of Vietnam and derives income from a Contracting State and has paid tax there (according to the Agreement and the laws of that state), Vietnam may still have the right to tax those incomes but at the same time Vietnam also has the obligation to implement measures to avoid double taxation so that the taxpayer is not taxed twice.

Depending on each signed Agreement, Vietnam may implement one measure or combine several measures to avoid double taxation as provided in Articles 48, 49, and 50 of this Circular.

Article 48. Tax Deduction Measures

When a resident of Vietnam derives income and has paid tax in a Contracting State, if Vietnam commits to implementing tax deduction measures in the Agreement, when the resident declares tax in Vietnam, those incomes will be included in taxable income in Vietnam according to the current Vietnamese tax laws, and the amount of tax paid in the Contracting State will be deducted from the tax payable in Vietnam. Tax deductions are carried out according to the following principles:

a) The tax paid in the Contracting State that can be deducted is the tax rate specified in the Agreement;

b) The amount of tax deducted does not exceed the tax payable in Vietnam calculated on income from the Contracting State according to the current Vietnamese tax laws, but also does not deduct or refund more tax paid abroad;

c) The tax paid in the Contracting State that can be deducted is the tax arising within the tax year in Vietnam.

Example 68: Mr. A is a citizen of Laos and a resident of Vietnam in 2011. In 2011, Mr. A earned taxable income from working for eight months in Vietnam, totaling 40,000,000 Vietnamese dong, and four months (from September 2011 to December 2011) in Laos, totaling 80,000,000 Vietnamese dong. Laos' tax year runs from October 1 to September 30 of the following year. According to the Agreement between Vietnam and Laos (Clause 1, Article 15: Dependent Personal Services Activities), Mr. A must pay tax in Laos on income derived from that country at the rate prescribed by Laos' tax law (20%). Assuming Mr. A has no other sources of income besides those mentioned, his tax declaration and deduction of tax paid in Laos in Vietnam would be as follows:

- Determine Mr. A's taxable income for the 2011 tax year (according to current Vietnamese tax laws):

(40,000,000 Vietnamese dong + 80,000,000 Vietnamese dong) = 120,000,000 Vietnamese dong

- Determine Mr. A's income tax for the 2011 tax year (according to current Vietnamese tax laws):

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

- Amount of tax paid in Laos (according to Laos' tax law):

80,000,000 Vietnamese dong x 20% = 16,000,000 Vietnamese dong

- Tax calculated according to Vietnamese law on income generated in Laos:

9,000,000 Vietnamese dong / 12 months x 4 months = 3,000,000 Vietnamese dong

Therefore, Mr. A can only deduct 3,000,000 Vietnamese dong from the total tax of 16,000,000 Vietnamese dong paid on 80,000,000 Vietnamese dong income generated in Laos.

Example 69: Company V of Vietnam has a permanent establishment in Laos. In 2010, this permanent establishment was determined to have an income amounting to US$100,000. According to the Agreement between Vietnam and Laos (Clause 1, Article 7: Business Profits), Company V is obligated to pay corporate income tax according to Lao Law on the determined income of this permanent establishment (tax rate of 20%). In this case, the declaration of tax payment and deduction of tax paid in Laos by Company V in Vietnam is as follows:

- Determination of the tax paid in Laos (according to Lao Law):

US$100,000 x 20% = US$20,000

- Determination of the tax payable in Vietnam (according to current Vietnamese tax laws):

US$100,000 x 25% = US$25,000

- The remaining tax payable in Vietnam:

US$25,000 - US$20,000 = US$5,000

Example 70: Also with the above Example 69, assuming that Company V is a joint venture company and enjoys a corporate income tax rate of 10% in Vietnam. In this case, the declaration of tax payment and deduction of tax paid in Laos by Company V in Vietnam is as follows:

- Determination of the tax paid in Laos (according to Lao Law):

US$100,000 x 20% = US$20,000

- Determination of the tax payable in Vietnam (according to current Vietnamese tax laws):

US$100,000 x 10% = US$10,000

- Maximum tax deduction in Vietnam: US$10,000

In this case, Company V can deduct US$10,000 from the total US$20,000 of tax paid in Laos. The difference of US$10,000 (US$20,000 - US$10,000) cannot be deducted from the corporate income tax on domestic income (if any) of Company V and also cannot be carried over to the next year.

Article 49. Deduction of Tax Credit

In the case where a resident of Vietnam has income and is required to pay tax in a Contracting State under the Agreement with Vietnam (at a tax rate exempted or reduced as a special benefit), if Vietnam commits to implementing the Tax Credit Method under the Agreement, when the resident declares income tax in Vietnam, such income will be included in taxable income in Vietnam according to current Vietnamese tax laws, and the tax credit amount will be deducted from the tax payable in Vietnam. The tax credit amount is the tax that the resident of Vietnam would have had to pay in the Contracting State on the income generated there, but which is exempted or reduced according to the law of the Contracting State as a special benefit measure.

The deduction of tax shall be carried out according to the following principles:

a) The tax paid or deemed to be paid in the Contracting State must be the tax specified in the Agreement;

b) The amount of tax deducted shall not exceed the tax payable in Vietnam calculated on the income from the Contracting State according to current Vietnamese tax laws;

c) The tax paid in the Contracting State that can be deducted is the tax arising within the tax year in Vietnam.

Example 71: Company Q of Vietnam has a permanent establishment in Uzbekistan. In 2010, this permanent establishment was determined to have an income amounting to US$100,000. According to Uzbekistan's Tax Law, this income is exempted from tax as a special benefit measure (if not exempted, it would have been subject to a tax rate of 33%). Company Q is required to pay tax in Vietnam at the current tax rate (25%). According to the Agreement between Vietnam and Uzbekistan (Clause 5, Article 24: Elimination of Double Taxation), Vietnam is obligated to deduct the tax credit amount (i.e., the tax that should have been paid but was exempted in Uzbekistan). In this case, the declaration of tax payment and deduction of the tax credit amount of Company Q in Vietnam is as follows:

- Determination of the tax credit amount in Uzbekistan (according to Uzbekistan's Tax Law):

US$100,000 x 33% = US$33,000

- Determination of the tax payable in Vietnam (according to current Vietnamese tax laws):

US$100,000 x 25% = US$25,000

Thus, although Company Q does not actually pay tax, it is considered to have paid US$25,000 (out of the total US$33,000 calculated under Uzbekistan's tax law before the benefit was applied) and this amount is deducted from the tax payable in Vietnam (i.e., no tax needs to be paid in Vietnam).

Article 50. Indirect Deduction Method

1. In the case where a resident of Vietnam has income from a Contracting State under the Agreement with Vietnam, and such income has already been subject to corporate income tax before being distributed to the resident, and Vietnam commits to implementing the indirect tax deduction method under the Agreement, when declaring income tax in Vietnam, such income will be included in taxable income in Vietnam according to current Vietnamese tax laws, and the indirect tax already paid in the Contracting State will be deducted from the tax payable in Vietnam. However, in all cases, the amount of tax deducted shall not exceed the tax payable in Vietnam calculated on foreign income according to current Vietnamese tax laws.

The indirect tax deducted is the corporate income tax paid by a joint-stock company, which is a resident of the Contracting State under the Agreement with Vietnam, in the Contracting State before distributing dividends to the resident of Vietnam, provided that the resident of Vietnam directly controls a minimum percentage of voting rights in the joint-stock company (usually 10%).

Example 72: Company V of Vietnam invests US$10,000,000 (equivalent to 20% of the share capital) in Company N of the Russian Federation. In 2010, Company N earned an income of US$100,000 and paid tax according to the Russian Federation's Tax Law (tax rate of 30%). The post-tax profit of Company N was distributed to Company V according to its shareholding ratio and was subject to a tax rate of 10% in the Russian Federation (Clause 2.a, Article 10: Dividend Income, Agreement between Vietnam and the Russian Federation). Company V is required to pay tax according to current Vietnamese tax laws at the current tax rate (25%). In this case, the declaration of tax payment and deduction of indirect tax of Company V in Vietnam is as follows:

- The pre-tax profit of Company V of Vietnam received from the total profit of Company N in the Russian Federation is:

US$100,000 x 20% = US$20,000

- The corporate income tax paid by Company N in the Russian Federation on the aforementioned profit of Company V according to the Russian Federation's Tax Law is:

US$20,000 x 30% = US$6,000

- The post-tax dividend received by Company V is:

20,000 US dollars - 6,000 US dollars = 14,000 US dollars

- The corporate income tax that Company V must pay to the Russian Federation on distributed dividends according to the Agreement between Vietnam and the Russian Federation is:

14,000 US dollars x 10% = 1,400 US dollars

- The total tax that Company V must pay to the Russian Federation (including both the direct tax paid by Company V on dividends and the indirect tax paid by Company N on its income due to Company V's investment) is:

1,400 US dollars + 6,000 US dollars = 7,400 US dollars

- The corporate income tax that Company V must pay in Vietnam according to current Vietnamese tax laws is:

20,000 US dollars x 25% = 5,000 US dollars

In this case, Company V can only deduct up to 5,000 US dollars from the total 7,400 US dollars already paid to the Russian Federation. The difference of 2,400 US dollars (7,400 US dollars - 5,000 US dollars) cannot be deducted from the domestic income tax (if any) of Company V.

2. Although under the above provisions, Vietnam only implements indirect tax deduction measures when there is a commitment in the Agreement, if according to Vietnamese law, foreign income of a resident in Vietnam is subject to indirect tax deduction, then this provision will still be implemented.

Example 73: Also with the above Example 72, assuming the investment in Company N in the Russian Federation is a Direct Foreign Investment Project of Company V according to Vietnamese law, even though the investment ratio of Company V accounts for less than 10% of the capital shares of Company N, the indirect tax deduction measures will still be implemented (Point 21, Article 7, Chapter II, Circular No. 123/2012/TT-BTC dated July 27, 2012 of the Ministry of Finance guiding the implementation of some articles of the Law on Corporate Income Tax No. 14/2008/QH12 and guiding the implementation of Decree No. 124/2008/NĐ-CP dated December 11, 2008, Decree No. 122/2011/NĐ-CP dated December 27, 2011 of the Government detailing the implementation of some articles of the Law on Corporate Income Tax) although the Agreement between Vietnam and the Russian Federation (Clause 2, Article 23: Measures to Avoid Double Taxation) does not provide for it.

Despite the above provisions regarding the implementation of double taxation avoidance measures, if according to the Agreement, foreign income of a resident in Vietnam is exempted from tax in Vietnam, such income will be exempted from tax and the tax already paid abroad will not be deductible (meaning it is taxed only once and double taxation avoidance measures will not be applied). For example, scholarships of foreign students during their study period in Vietnam (Section 15. Income of Students, Trainees, and Vocational Students, Chapter II, this Circular).

The provisions on double taxation avoidance measures mentioned above are set forth in the Double Taxation Avoidance Clause (usually Article 23) of the Agreement.

Chapter IV
RESPONSIBILITIES AND LIMITATIONS OF THE AUTHORIZED OFFICIAL

Article 51. Authorized Official

According to the Agreement, the Authorized Official of Vietnam in the Tax Treaty is the Minister of Finance or his authorized representative.

The Minister of Finance authorizes the General Department of Taxation to perform the responsibilities and powers stipulated in Article 52.

Article 52. Responsibilities and powers of the General Department of Taxation in implementing the provisions of the Agreement

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

1. Issuing notifications on the entry into force or termination of the effectiveness of each Agreement in the field of taxation after receiving notifications of the Ministry of Foreign Affairs;

2. Organizing guidance, inspection, and supervision of the Tax Departments, Tax Branches, and entrusted collection organizations in the implementation of the Agreement;

3. Being the "Authorized Official" of Vietnam in handling matters related to the Agreement, including:

a) Studying and resolving disputes, complaints, suggestions, and related issues during the implementation of the Agreement with the Authorized Official of the country signing the Agreement with Vietnam through the bilateral agreement procedures provided for in the Agreement;

b) Exchanging information with foreign tax authorities, utilizing information provided by foreign tax authorities, and being responsible for keeping such information confidential as prescribed by the Agreement;

c) Implementing administrative management tax support measures as prescribed by the Agreement and consistent with Vietnamese law.

Chapter V
IMPLEMENTATION

Article 53. This Circular takes effect from February 6, 2014, replacing Circular No. 133/2004/TT-BTC dated December 31, 2004 of the Ministry of Finance guiding the implementation of Double Taxation Avoidance Agreements on income and property taxes between Vietnam and countries with such agreements in effect in Vietnam. Procedures for applying the Agreement shall be carried out in accordance with the Law on Tax Administration and current guiding documents.

Any difficulties encountered during implementation should be promptly reported to the Ministry of Finance for research and resolution./.