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Dec-07-2009 Hong Kong/Vietnam Double Tax Agreement

A double taxation agreement between Hong Kong and Vietnam (“the HK/Vietnam DTA”) was signed on 16 December 2008.  It will apply to Hong Kong tax residents for any year of assessment beginning on or after April 1 2010. 

Given that Hong Kong has a simple territorial-based tax system with relatively low tax rates compared to other developed economies, and with capital gains, interests and dividends being exempt from profits tax, double taxation of income does not generally arise out of operations.  Nevertheless, the HK/Vietnam DTA has been welcomed as it does create some incentives and legal avenues for Hong Kong businesspeople doing business in Vietnam, as well as for foreign companies that may invest in Vietnam through a Hong Kong intermediary company.

 

Summary of the HK/Vietnam DTA

  1. The HK/Vietnam DTA provides limited benefits in withholding tax rates.  The following table sets out the withholding tax rates for dividends, royalties and interest with or without the treaty.

 

Dividends

Royalties

Interest

Vietnam non-treaty rate

Nil

10%

10%

HK non-treaty rate

Nil

4.95%/4.5%1

Nil

HK/Vietnam DTA rate

10%2

7%/10%

0/10%3

 

  1. Without the HK/Vietnam DTA, foreign companies carrying out business in Vietnam or having contracts with Vietnamese customers without establishing a legal entity in Vietnam are subject to “Foreign Contractor Withholding Tax” (“FCWT”), which taxes the foreign company at various rates depending on the business activities performed.  Going forward, the corporate income tax component of such FCWT will be eliminated under the HK/Vietnam DTA provided that a Hong Kong company does not carry out business in Vietnam through a permanent establishment in Vietnam.
  2. Under Article 5 of the HK/Vietnam DTA, a PE is defined as including the provision of services by an enterprise if the services continue (for the same or a connected project) for a period or periods aggregating more than 180 days within any 12-month period.
  1. Generally, there is a capital gains exemption for gains derived by a Hong Kong resident, except for gains on:
  1. the sale of immovable property situated in Vietnam;
  2. the sale of movable property forming part of the business property of a permanent establishment in Vietnam;
  3. the sale of the shares of, or equivalent economic stake in, a company that mainly derives its assets value directly or indirectly from immovable property in Vietnam4.
  1. Hong Kong employees working in Vietnam will be exempt from Vietnamese personal income tax provided that: (1) they do not spend more than 183 days in Vietnam in any 12-month period commencing or ending in the fiscal year concerned; (2) their remuneration is not paid by, or on behalf of, an employer who is a resident of Vietnam; and (3) the remuneration is not borne by a PE in Vietnam.

Unfortunately, the HK/Vietnam DTA does not provide any significant benefits for Mainland Chinese investors who invest in Vietnam via Hong Kong, as the China/Vietnam double tax agreement contains similar withholding rates for dividends and interests as those under the HK/Vietnam DTA.

 

 

1.The 4.95% rate applies to corporations, whereas the 4.5% rate applies to unincorporated
businesses/partnerships.

2.Currently, there is no withholding tax on dividends in Vietnam after tax is paid on the profits out of which the dividends are declared.  The 10% treaty rate represents the maximum rate applicable to dividends received by a Hong Kong resident should a withholding tax on dividends be levied in Vietnam in the future.

3.The 0% rate applies to interest payments to the HKSAR Government and recognised institutions.  The 10% rate applies in all other cases.

4.Unless the gain relates to a transfer of less than 15% interest in a company that derives less than 50% of its asset value from immovable property situated in Vietnam.


 

 

 

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