8 December, 2016
An important development in the interpretation of the foreign contractor tax could affect your trademark royalty income from Vietnam by 5 to 10%.
Income of companies outside of Vietnam who are receiving royalty payments from Vietnam are subject to corporate income tax (CIT) at a deemed rate of 10% to be withheld by the Vietnamese contracting party. The general view was that such income was not subject to value-added tax (VAT).
Recently, the Vietnamese Ministry of Finance has issued a series of official letters requiring Vietnamese parties to withhold 5% VAT under the deemed method (10% under the credit method) in addition to 10% CIT in case of a transfer of the right to use a trademark. Official Letters No. 10453/BTC-CST and No. 15888/BTC-CST. Note that Official Letters are not binding law but contain influential guidance. For more certainty, one has to apply to the competent tax authority.
Double taxation agreements (DTA) which cap the tax rate applicable to royalties at 10% (or lower) generally apply only to the CIT component of foreign contractor taxes, not to VAT.
If the Vietnamese party has correctly declared VAT on behalf of the foreign contractor, a VAT refund could be possible under certain circumstances. However, if the party did not declare sufficient VAT that refund may be forfeited.
The above official letters could evidently apply to franchise and other agreements that contain trademark licenses. However, it is conceivable that some tax authorities could apply those principles to other intellectual property rights, such as copyrights in software licenses.
We recommend that you consult with a licensed tax adviser on the applicable tax rate in your specific case. We can assist you to structure your contracts with Vietnamese parties to reduce the risk of penalties and unexpectedly lower net payments from Vietnam.
For further information, please contact:
Manfred Otto, Duane Morris
motto@duanemorris.com
