Shall foreign contractors operating in Vietnam pay personal income tax on fines and damages paid by parties breaching contracts?

Who are personal income taxpayers in Vietnam?

Based on Article 2 of Decree 65/2013/ND-CP, individuals subject to personal income tax include both resident and non-resident individuals who have taxable income as stipulated.

* The scope for determining taxable income for taxpayers is as follows:

- For resident individuals, taxable income is income generated both within and outside the territory of Vietnam, regardless of the place where the income is paid;

- For non-resident individuals, taxable income is income generated within Vietnam, regardless of the place where the income is paid.

* A resident individual is someone who meets one of the following conditions:

- Present in Vietnam for 183 days or more in a calendar year or within 12 consecutive months from the first day of presence in Vietnam;

An individual present in Vietnam as stipulated at this point is defined by their physical presence within the territory of Vietnam.

- Having a permanent residence in Vietnam in one of the following cases:

+ Having a registered place of permanent residence as per the laws on residence;

+ Having a lease for a house in Vietnam as per the housing laws, with lease contracts from 183 days or more in the tax year.

In the case where an individual has a permanent residence in Vietnam as stipulated at this point but is present in Vietnam for less than 183 days in the tax year and cannot prove to be a resident of another country, that individual is considered a resident in Vietnam.

* A non-resident individual is someone who does not meet the conditions for being a resident individual.

Shall foreign contractors operating in Vietnam pay personal income tax on fines and damages paid by parties breaching contracts? (Image from the Internet)

Shall foreign contractors operating in Vietnam pay personal income tax on fines and damages paid by parties breaching contracts?

Based on Article 7 of Circular 103/2014/TT-BTC, taxable income of foreign organizations and individuals doing business in Vietnam includes:

Taxable Corporate Income

...

3. Income generated in Vietnam by foreign contractors and foreign subcontractors includes income received in any form based on contractor or subcontractor contracts (except for cases stipulated in Article 2, Chapter I), regardless of the business activity location of the foreign contractor or foreign subcontractor. Taxable income of foreign contractors and foreign subcontractors in some specific cases includes:

- Income from the transfer of ownership, rights to use assets; transfer of participation rights in economic contracts/projects in Vietnam, transfer of property rights in Vietnam.

- Royalty income, which is income received in any form for the right to use, transfer intellectual property ownership, and technology transfer, software copyright (including: payments for the right to use, transfer author rights and ownership rights over a work; transfer of industrial property rights; technology transfer, software copyright).

"Authors’ rights, ownership rights over a work", "Industrial property rights", and "Technology transfer" are as defined in the Civil Code, Intellectual Property Law, Technology Transfer Law, and their guiding documents.

- Income from the sale, liquidation of assets.

- Interest income: includes income of the lender from loans in any form, whether the loan is secured by collateral or not, whether the lender enjoys the interest or not; income from deposit interest (except for deposit interest of foreign individuals and deposit interest generated from deposit accounts to maintain operations in Vietnam of diplomatic representative offices, representatives offices of international organizations, NGOs in Vietnam), including any associated reward payments (if any); income from deferred payment interests according to contract provisions; income from bond interest, bond discount (except for tax-exempt bonds), treasury bills; income from deposit certificates.

Loan interest also includes fees that the Vietnamese party has to pay as stipulated in the contract.

- Income from securities transfers.

- Penalties, fines and damages paid by parties breaching contracts.

- Other income as stipulated by law.

Therefore, foreign contractors operating in Vietnam have to pay personal income tax on fines and damages paid by parties breaching contracts.

What is the current income tariff in Vietnam?

* Whole income tariff

Based on Clause 1, Article 23 of the Personal Income Tax Law 2007, the whole income tariff applies to taxable income from investment capital, transfer of capital, real estate transfer, winnings, royalties, franchising, inheritance, and gifts.

According to Clause 2, Article 23 of the Personal Income Tax Law 2007, amended by Clause 7, Article 2 of the Law Amending Laws on Taxation 2014, the current whole income tariff is as follows:

* Partially progressive tariff

Based on Article 22 of the Personal Income Tax Law 2007, the partially progressive tariff applies to taxable income from business, salaries, and wages.

The current partially progressive tariff is as follows: