Is the director's salary a deductible expense when calculating corporate income tax in Vietnam

What does deductible expense mean?

"deductible expense" or "reasonable expense" is a term commonly used in businesses and in the field of accounting, referring to costs related to business operations that can be deducted when determining the taxable income for corporate income tax. However, currently, the law in general, and tax law in particular, do not provide an official definition of this concept.

Nevertheless, Clause 1, Article 6 of Circular 78/2014/TT-BTC (amended by Article 4 of Circular 96/2015/TT-BTC) stipulates that a deductible expense, in corporate income tax calculation, is a cost that meets the following conditions to be deductible:

- The cost actually arises and is related to the business operations of the enterprise.

- The cost is accompanied by legitimate invoices and documents as prescribed by law.

- For costs with goods and service purchase invoices each transaction valued at 20 million VND or more (inclusive of VAT), payment must be made by non-cash means.

Is the director's salary a deductible expense when calculating corporate income tax in Vietnam? (Image from the Internet)

Is the director's salary a deductible expense when calculating corporate income tax in Vietnam?

Regarding deductible salary expenses for corporate income tax, as stipulated in Article 6 of Circular 78/2014/TT-BTC (amended by Article 4 of Circular 96/2015/TT-BTC and Clause 2, Article 3 of Circular 25/2018/TT-BTC), the regulations are as follows:

Deductible and non-deductible expenses for Taxable Income Determination

1. Except for the non-deductible expenses stated in Clause 2 of this Article, enterprises are allowed to deduct all expenses if they meet the following conditions:

a) The expense actually arises and is related to the business operations of the enterprise.

b) The expense is accompanied by legitimate invoices and documents as prescribed by law.

c) For costs with goods and service purchase invoices each transaction valued at 20 million VND or more (inclusive of VAT), payment must be made by non-cash means.

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2. Non-deductible expenses for taxable income determination include:

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2.6. Salaries, wages, bonuses paid to employees in the following cases:

a) Salaries, wages, bonuses, and other payments to employees the enterprise has accounted for in production and business costs for the period but have not actually been paid or lack payment documents as prescribed by law.

b) Salaries and bonuses for employees not specifically recorded for eligibility and levels in documents such as labor contracts, collective labor agreements, financial regulations of the company, corporation, or group, reward regulations as determined by the Chairman of the Board, CEO, or Director as per the company's financial regulations.

c) Salaries, wages, and allowances payable to employees but not yet paid by the tax finalization deadline, except where the enterprise has set aside a reserve fund for adding to the next year's wage fund. The annual reserve level is decided by the enterprise but must not exceed 17% of actual wage fund executed.

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d) Salaries and wages of private enterprise owners, owners of single-member limited liability companies (owned by an individual); remuneration paid to founders, members of the board of members, board of directors who do not directly participate in the management of production or business operations.

In principle, the director’s salary can be considered a deductible expense deductible when determining taxable income for corporate income tax purposes, provided it meets the stipulated conditions. However, there are certain instances where the director's salary will not be deductible, including:

- Salary accounted for in expenses but not actually paid or lacks valid payment documentation.

- Salary not specifically recorded for eligibility and amounts in documents such as labor contracts, company financial regulations, or company reward systems.

- Salary not actually paid by the tax finalization deadline, except in cases where the enterprise has established a reserve fund for the next year's wage fund. The reserve level is decided by the enterprise but must not exceed 17% of the actual wage fund executed.

- Salary of a director who is the owner of a private enterprise, the owner of a single-member limited liability company (owned by an individual), or a director who is a founder, member of the board of members, board of directors who do not directly participate in managing business operations.

How to calculate corporate income tax in Vietnam?

Clause 1, Article 3 of Circular 78/2014/TT-BTC (amended by Article 4 of Circular 96/2015/TT-BTC) stipulates that the corporate income tax payable in a tax period is equal to the taxable income minus the deduction for the science and technology fund (if any) multiplied by the corporate income tax rate.

The corporate income tax payable is determined by the following formula:

Corporate Income Tax Payable = (Taxable Income - Deduction for Science & Technology Fund (if any)) x Corporate Income Tax Rate