The laws of Vietnam are complex and new legislation is constantly being introduced. What follows is no more than an introductory overview that we hope will assist investors to decide which areas of law they will need to research further.

This summary is, necessarily, selective and is no substitute for detailed legal advice.

1. Structure

There is no tax code, as such, and the relevant provisions are contained in a not inconsiderable number of different items of legislation whose relationship with each other is not always clear. Changes in the law are not infrequent and sometimes have retrospective effect.

2. Profits Tax

We refer to this tax as "profits tax", although other descriptions are used. The Law on Foreign Investment in Vietnam in its most recent version of 23 December 1993 ("FIL") and the Decree giving it much of its detail, Decree 18 of 16 April 1993 ("Decree 18") set out the tax rates applicable to projects with foreign invested capital and when they apply. Investors must settle the rate applicable to their project with the SCCI based upon the criteria set out in Decree 18. The standard rate is twenty five per cent. A lower rate of twenty per cent is available if the project complies with two of the following standards:-

(i) it employs more than five hundred people;

(ii) advanced technology is introduced;

(iii) at least eighty per cent of the products are exported;

(iv) the capital is at least US$ ten million.

A fifteen per cent rate applies to :-

- infrastructure construction projects;

- exploitation of natural resources (except oil, gas and a number of rare and precious resources);

- heavy industries;

- cultivation of perennial industrial crops;

- investment in inclement regions;

- projects where the assets pass to the State upon termination.

A ten per cent rate applies to :-

- infrastructure projects in inclement regions;

- re-afforestation projects;

- projects of "special significance".

Hotel projects do not benefit from the lower rates except in inclement regions or where the project passes to the State upon termination.

A two year tax holiday may be available beginning from the first year of profit and with a reduced rate of half of the tax rate for two years after that, and further concessions may be available where the lower tax rates apply.

The rate for a project is set out in the Investment Licence.

There is a detailed Circular, No. 51 TC-TCT, which sets out how taxable profit is to be calculated and what deductions are to be permitted. We do not try to summarise this in detail but would mention in particular that losses can be carried forward and that tax is payable on a provisional basis every three months based upon the declaration submitted at the end of the previous tax year.

If profits are reinvested for a period of more than three years, the tax paid on the sums reinvested will be repaid.

3. Turnover Tax

This is levied on gross sales and the rates vary widely (from 0% to 40%) depending upon the sector
of the economy concerned.

If the turnover is in a foreign currency, the Decree provides that the enterprise may pay in Vietnamese Dong or the foreign currency but if the former, it will have to convert the foreign currency at the official rate on making payment.

4. Special Consumption Tax

This is levied on sales of specific products such as cigarettes and beer. The tax is calculated by reference to gross revenue. The tax is levied instead of Turnover Tax.

5. Import and Export Duties

These are complex but there are relatively few categories of exports that are subject to export taxes. There are exemptions for the contributions of parties to, for example, a joint venture, where the investment is being made in equipment, not cash. Materials imported for re-export after processing will not bear duty, although duty may have to be paid and then refunded. Equally, imported materials used in capital construction to establish the enterprise or forming part of the fixed assets will not be subject to import tax.

6. Personal Income Tax

The rates are high and there is now a criterion of residence based upon the number of days spent in the country.

Essentially, the law is as follows:-

(1) if a foreigner is not a permanent resident and remains in Vietnam for less than thirty days, he is non taxable in Vietnam.

(2) if a foreigner is resident in Vietnam for between thirty and one hundred and eighty three days in a year, the tax rate is ten per cent;

(3) above one hundred and eighty three days, the standard rate applies. If the monthly income exceeds approximately US$ seven hundred per month, the tax rate is fifty per cent.

The definition of income which is subject to tax is:

"Regular income in the form of salaries, wages, allowances and bonuses; and all other income not included in salaries or wages derived from business production or provision of services which is not subject to profits tax but is not exempt income as specified in Article 3 of this Ordinance".

There are further provisions to catch irregular income.

The legislation is intended to apply to worldwide Vietnamese related income of foreigners, including benefits in kind up to a maximum of 15 % of salary. An employer will be limited to the same expense as the amount of benefits in kind that can be deducted for tax purposes.

The interpretation given, apparently, to (2) above is that if a foreigner arrives with the intention of staying more than six months, he will be deemed to be resident from the start and will not enjoy the benefit of the one hundred and eighty three day lower rate.

7. Withholding Tax

This is payable on profits remitted. The rates applicable to remittances abroad of profits depend on the size of the project. The Investment Licence will record the applicable rate. If the foreign party contributes at least US$ ten million, the rate is five per cent; if US$ five million, seven per cent and, if less, ten per cent.

There is also a withholding tax on payments made as fees under technical assistance agreements or technology transfer contracts. The rates are ten per cent for contract periods of less than five years and fifteen per cent if the period is more than five years.

We have seen it suggested that the Government is considering the imposition of withholding tax on interest payments under loan agreements.

8. Royalty Tax

There is a tax on the exploitation of mineral resources and a tax on oil exploitation.

9. Contractor Taxes

These apply to contractors who may be carrying out a project in Vietnam and which are not investors under the FIL or otherwise taxable in Vietnam and bring them into the tax net. The express intent of the legislation is that foreign contractors and local contractors should be taxable on the same basis.

10. Tax Treaties

At present Vietnam has relatively few tax treaties but the number is increasing and Vietnam is, we understand, seeking to negotiate others.

There are tax incentives available for investors in Industrial Zones and Export Processing Zones and for export industries and if a project is a BOT Contract.

11. Land Tax

The law is that the landlord pays the taxes on the property leased. Foreign invested enterprises are normally now granted the right to use land on a lease basis.

NOTE: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor".