On 07th July 2015, the United States and Vietnam signed an income tax treaty with Vietnam, the first ever between the two countries. The Double Taxation Agreement applies to personal income tax and enterprise income tax in the case of Vietnam.
What is a permanent establishment?
Under the Double Taxation Agreement, a company is considered to have a permanent establishment if its business is wholly or partly carried out through a fixed place.
Permanent establishment does not include the following: (1) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (2) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (3) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (4) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information for the enterprise; (5) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; and (6) the maintenance of a fixed place of business solely for any combination of the activities mentioned in subparagraphs (1) through (5), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
A broker, general commission agent or any other agent of an independent status will not be considered as a permanent establishment of an enterprise of the United States or Vietnam merely because such enterprise carries on business in that other contracting country through these persons. However, where a person other than an agent of an independent status is acting in a contracting state on behalf of an enterprise of the other contracting state and habitually exercises in that contracting state an authority to conclude contracts in the name of the enterprise, that enterprise would be considered to have a permanent establishment in the first-mentioned contracting state.
The fact that a company that is a resident of a contracting state controls or is controlled by a company that is a resident of the other contracting state, or that carries on business in that other contracting state (whether through a permanent establishment or otherwise), does not of itself constitute either company a permanent establishment of the other.
Enterprise income tax
The enterprise is subject to taxation in Vietnam if it derives certain income as defined by the Double Taxation Agreement in Vietnam, however, only to the extent that such profits are attributable to the permanent establishment. Executive and general administrative expenses so incurred, whether in the contracting state in which the permanent establishment is situated or elsewhere, or other deductible expenses, are taken into the determination of the profits of a permanent establishment for tax purposes.
Personal income tax
The Agreement applies to persons who are residents of one or both of the contracting states. The applicability of the Agreement does not depend on the nationality. The term “person” means an individual or corporate body.
Article 14, paragraph 1 stipulates that “Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that state unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing of his activities or his stay in the Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days within any twelve-month period commencing or ending in the taxable year concerned.” The income may be taxed in the other country to the extent that it is attributable to the fixed base.
Income from salaried work derived by a resident of a contracting country should be taxable in that country unless the employment is exercised in the other country (Article 15, paragraph 1). Notwithstanding of this, “remuneration derived by a resident of the Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State, if the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State and the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.” (Article 15, paragraph 2).
Methods for eliminating double taxation
Where a resident of a contracting state generates profits, income, or gains which under the law of the other contracting state and in accordance with the Double Taxation Agreement, the former will allow a credit against its tax on the income, profits or gains an amount equal to the tax paid to the later. It is possible to get the credit for already paid income tax on dividends by the contracting state if a company in one contracting state owns at least ten percent of the voting stock of the company which is a resident of the other contracting state.
Special regulations apply to, among others, entertainers and sportsmen, pensions, social security, annuities, alimony and child support, students and apprentices.
Automatic protection under the Agreement?
Residents of Vietnam and the United States wishing to be protected under the Agreement need to file an application to relevant tax authority. Please do not hesitate to contact us so that we can advise you on how to apply for such protection according to Vietnam laws.
Please do not hesitate to contact Mr. Oliver Massmann under firstname.lastname@example.org if you have any questions or want to know more details on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
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