Written by Dao Nguyen (Partner) and John Hickin (Solicitor)

Summary

In an effort to provide for a uniform tax system applicable to both Vietnamese and foreign-invested enterprises, thereby, to abolish the differences between the two types of businesses in Vietnam, at its XI Session from 3 May to 17 June 2003, the National Assembly passed Law No. 09/2003/QH11 On Corporate Income Tax (the "2003 Law") which took effect from 1 January 2004. To implement the 2003 Law, on 22 December 2003, the Government issued Decree No. 164/2003/ND-CP Guiding in Detail The Implementation of the 2003 Law ("Decree 164"). Foreign-invested enterprises that are licensed from 1 January 2004 will be subjected to the 2003 Law and Decree 164.

Full article

The following summarises major features of Decree 164.

Scope Of Application

Corporate income tax ("CIT") rates provided for by Decree 164 will apply to all business establishments including foreign-invested enterprises (joint venture companies, business-co-operation contracts and wholly foreign-owned enterprises), foreign companies and organisations operating in Vietnam other than under the umbrella of the Foreign Investment Law, foreign individuals carrying out business and having income generated in Vietnam and foreign companies operating in Vietnam via their resident establishments.

Taxable Income

Decree 164 provides details on how to calculate the income for tax purposes for all businesses in general and also in special cases, such as those businesses which carry out the leasing of assets and credit extension, etc.

Reasonable Expenses Deducted From Taxable Income

Decree 164 provides for 13 types of reasonable expenses that may be deducted from taxable income. One of the most positive provisions introduced by the 2003 Law and Decree 164 is the previous maximum permitted expenses spent by a business on advertising, marketing and trade promotion is increased from 7% of the total expenses to 10%.

CIT Rate

The 2003 Law and Decree 164 abolish the various tax rates provided for by the 1997 Law and introduce one uniform tax rate of 28% which will apply to all businesses including foreign-invested enterprises except for projects engaging in exploration and exploitation of oil and gas (on which a tax rate from 28% to 50% will be imposed depending on each project). In respect of lottery businesses, the CIT rate will be 28%.

CIT Applicable To Transfer/Sale Of Land Use Rights

Another the significant changes brought about by the 2003 Law and Decree 164 is CIT is imposed on the transfer/sale of Land Use Rights ("LURs"). Transfers/sales of LURs that are subject to CIT include transfer/sales of LURs with and without infrastructure facilities and architectural works. The taxpayers are those having income generated from the assignment/sale of LURs (i.e. the LURs assignor). Decree 164 also provides for cases of transfer/sale of LURs in which the CIT is not imposed including when LURs are used by a business to contribute to a joint venture company with local and foreign organisations and individuals or when LURs are transferred upon a split, division, merger or bankruptcy of a business, etc. In respect of income generated from the transfer of LURs by households and individuals, personal income tax will be payable instead of CIT. The CIT rate applicable to the transfer/sale of LURs is 28%. In addition, after the tax rate of 28% has been paid, the taxpayer will also have to pay additional progressive tax rates ranging from 10% to 25% for the remaining income.  

CIT Incentives

Decree 164 contains a long list of circumstances in which CIT incentives may be granted. To enjoy these preferential rates, businesses must invest in sectors and industries listed in Appendix A issued in conjunction of Decree 164 or invest in sectors that are not prohibited by law and use a certain number of employees. The preferential tax rates are: 20%, 15% and 10%. In certain circumstances, tax holidays and tax reductions may also be available for newly- established businesses and businesses that move their locations. Investors contributing equity in the form of patents, technical know-how, technological processes and technical services are exempted from CIT. A tax reduction of 50% will be made in respect of income generated from the transfer by a foreign investor of his/her equity to Vietnamese enterprises established in accordance with the law of Vietnam, etc. It is worth noting that tax incentives are available the transfer/sale of LURs. 

Transitional Provisions Applicable To Foreign-Invested Enterprises

According to Decree 164, foreign-invested enterprises and parties to business-cooperation contracts that have been licensed under the Foreign Investment Law will enjoy the CIT incentives as stated in their investment license.  If the tax incentives stated in the investment license are less favourable than those provided for in Decree 164, the respective business will enjoy the tax incentives provided for in Decree 164. Businesses paying the CIT rate of 25% shall continue to pay this tax rate until the expiry of their investment license.

Validity

Decree 164 will be valid 15 days from the date its publication in the Official Gazette (which has not yet been made at the time of this Legal Update) and will replace Decree No. 30/1998/ND-CP dated 13 May 1998 and Decree No. 26/2001/ND-CP dated 4 June 2001. The provisions regarding the CIT refund for enterprises, which have paid the CIT for income generated from reinvestment, the profit remittance tax and the provisions on tax incentives  applicable to foreign-invested enterprises, are abolished.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.