On 7 July 2015, The Socialist Republic of Vietnam (Vietnam) and The United States of America (US) signed the first income tax treaty – Double Taxation Avoidance Agreement (DTAA or the Treaty) – and adopted a Protocol between the two countries for the avoidance of double taxation and prevention of fiscal evasion of taxes on income. This Treaty will take effect after being ratified by each country and exchanged the instrument of ratification by the two jurisdictions. According to Deputy Minister Do Hoang Anh Tuan, Ministry of Finance, the ratification period will take approximately one year.
DTAA aims to eliminate the double taxation of income or gains arising in one contracting state and paid to the other contracting state and prevent the fiscal evasion regarding income taxes of any persons or companies from the contracting states.
For Vietnam, the applicable taxes shall include personal income tax and business income tax, likewise, the applicable taxes in the US are the Federal income taxes imposed by the Internal Revenue Code and the Federal taxes imposed on the investment income of foreign private foundations.
The DTAA also provides a number of key provisions on how to avoid the double tax.
- The broader definition of “resident status of a contracting state” and “permanent establishment”
The Treaty provides similar manners to determine a resident of a country to Vietnam’s provisions. Notably, the term of “residence of an individual” is also defined as the established and maintained place of the pension fund or organization that his incomes or gains are derived from.
Under the Treaty, permanent establishment consists of building sites, construction, exploration, assembly or installation of project, supervisory activities which last more than 06 months in a contracting state. The definition is expanded to encompass the place of providing consultancy services for the same and connected project within a contracting state for a period or periods computing more than 06 months within any by an enterprise of the other contracting state.
2. The maximum allowable tax rates of dividends, interests and royalties
The Treaty regulates the maximum allowable tax rates of dividends, interests and royalties as follow:
- The maximum tax rate on dividends is 5% if the beneficiary is a Vietnamese company owning directly at least 25% of the voting stock of an American distributing company or an American company owning directly at least 25% of the capital of a Vietnamese distributing company. Such dividends are taxed in the country of which the distributing company is considered as resident. All other cases are taxed 15% of the gross amount of dividends.
- The Treaty also provides that dividends paid by an American Regulated Investment Company (RIC) have maximum tax rate at of 15%. However, the dividends paid by an American Real Estate Investment Trust (REIT) or Vietnamese Real Estate Investment Fund (VREIF) are subject to a maximum tax rate of 15% if only the specific thresholds are met.
- Article 11 of the Treaty provides that the maximum allowable tax rate of interest is at 10% of the gross amount. However, if interest payments are determined with references to receipts, sales, income, profits or other cash flow of the debtor, to any change in the value of any property of the debtor or to any dividends, partnership distribution or similar payment made by the debtor, the maximum rate can increase up to 15%.
- Under the Treaty, royalties are sourced to the residence of the payer. The payments specified in the Article 12.3(a) of the Treaty are taxable at a maximum rate of 5%. Royalties paid for the use of or the right to use any copyright of literary, artistic, scientific or other work or any patent, trademark, design or model, plan, secret formula or process will be subject to a maximum allowable 10% tax rate.
Effect of eliminating double taxation in Vietnam
Individuals or companies who are considered as Vietnamese residents are granted the benefits of a credit for income taxes paid on income, profits and gains in the US. Moreover, Vietnamese companies owning at least 10% of the voting rights of a company which is a resident of the US can obtain an indirect tax credit in the US.
By Vietnam Law Insight (LNT & Partners)
Disclaimer: This Briefing is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases. For more information, please contact us or visit the website: Http://LNTpartners.com