Vietnam-Singapore Double Tax Treaty
Singapore firms have steadily invested in Vietnam throughout the years. According to the Ministry of Planning and Investment of Vietnam, Singapore was the leading foreign investor in Vietnam over the first eight months of 2020, with investments of more than US$6.54 billion. The seven Vietnam-Singapore Industrial Parks in Binh Duong, Hai Phong, Bac Ninh, Quang Ngai, Hai Duong, and Nghe An are concrete symbols of the close economic cooperation between the two countries.
The expansion of trade and business links between Singapore and Vietnam over the years has made it necessary to regulate tax issues arising in cross-border business between corporations and individuals of the two countries, particularly the possibility of taxing the same sources of income twice. This article will describe the Singapore-Vietnam Avoidance of Double Taxation Agreement (DTA), the main regulatory instrument for resolving this issue.
It includes the following topics:
What is the Vietnam-Singapore Double Tax Treaty?
The Vietnam-Singapore Double Tax Treaty is a bilateral agreement concluded by two countries to eliminate double taxation without creating opportunities for nontaxation or tax evasion (including treaty-shopping arrangements). Without a DTA, income is liable to be double taxed — i.e., two countries levy their own taxes on the same income. Under the DTA, income will be taxed in only one of them. However, such arrangements are liable to be misused by clever parties to eliminate taxes; the DTA includes provisions to safeguard against such misuse.
The DTA between Singapore and Vietnam was first signed on March 2, 1994. In January 2013, the treaty was amended by a Protocol (the “2013 Protocol”), which updated certain key subjects, such as the treatment of interest, capital gains, permanent establishment, and royalties.
Scope of the Treaty
The DTA applies to residents of both contracting states, i.e. to corporate entities and individuals who reside in Vietnam, or Singapore, or both countries.
Types of taxes covered
The treaty covers all taxes on income levied by the tax authorities of the two countries. Taxes on income include all taxes imposed on total income, or on elements of income, including taxes on gains from selling movable or immovable property.
In the case of Vietnam, the treaty applies to "Vietnamese tax", namely:
- Personal income tax;
- Profit tax;
- Profit remittance tax;
- Foreign petroleum subcontractor tax; and
- Foreign contractor tax.
For Singapore, the treaty applies to the "Singapore tax", namely:
- Income tax.
The DTA also applies to any identical or substantially similar taxes that are imposed in addition to, or in place of, the existing taxes.
Given the considerably simpler tax regime in Singapore, many international companies choose to incorporate here. If you are interested in registering a new company in Singapore and want to know the benefits that may accrue to you from its various DTA’s and from the taxation system here, contact our specialists, who can provide you with advice and consultancy that is tailored to your situation.
Key Provisions of the DTA
To avoid situations of double taxation, the DTA provides for the rule of residency-based taxation, i.e. persons are taxed or at least bear the main tax burden in the state where they reside. The residency determination rules are established by the national laws of taxpayers. The DTA, however, provides regulations to determine residency in a case where a person is a resident in both of the contracting states.
Where an individual is a resident of two countries, his or her status is determined by the following rules:
- An individual is resident in the state where he or she has a permanent home;
- If he or she has a permanent home in both States, such person is a resident of the state with which his or her personal and economic relations are closer (a centre of vital interests);
- If the above cannot be determined, an individual is a resident of the state where he or she has a habitual abode;
- If the person has a habitual abode in both countries or in neither, the tax authorities of two states are obliged to settle the question by mutual agreement.
In the case where a company is a resident of both states, it should be considered a resident of the state in which its place of effective management is situated (usually this is determined by the place where the Board of Directors meets). If the place of effective management cannot be determined, the tax authorities of the both countries will settle the question by mutual agreement.
Income From Immovable Property
Income from immovable property (including income from agriculture or forestry) is taxed in the state in which the property is situated.
The term “immovable property” should be defined in accordance with the law of the state in which the property is situated. Ships and aircraft should be considered as movable property.
The profits of an enterprise are taxable only in the state in which the enterprise is resident, unless it carries on business in the other state through a Permanent Establishment (PE) situated in that state (see below).
If an enterprise that is a resident of State A carries on business in State B through a PE, only the profits that are attributable to the PE are taxed in State B.
The term PE can apply to any one of the following:
- A place of management;
- A branch;
- An office;
- A factory;
- A workshop;
- A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
- A building site, construction or installation project is considered as a PE only if it lasts more than 6 months.
Shipping and Air Transport
Profits from the operation of ships or aircraft used in international traffic are taxable only in the state where the enterprise that owns the vehicle is a resident.
Two enterprises located in different states are considered by the tax authorities to be Associated Enterprises where:
- An enterprise residing in State A participates directly or indirectly in the management, control, or capital of an enterprise residing in State B, or
- The same persons participate directly or indirectly in the management, control, or capital of enterprises of State A and State B, and
- The commercial relations of the two enterprises are different from the relations of independent ones.
The DTA says that the taxation authorities of a contracting state may, for the purpose of calculating tax liabilities of associated enterprises, adjust the profits of the enterprises if, as a result of the special relations between them, the accounts do not show the true taxable profits arising in one of the states. The above provisions apply only if special conditions have been made between the two enterprises. No such adjustment is authorised if the transactions between the enterprises have taken place on normal open market commercial terms (on an arm’s length basis).
Dividends, Royalties, Interest
Under the DTA provisions, dividends, royalties, and interest are taxed in the state of a recipient's residency (income tax) and in the state of residency of the enterprise that is paying the dividends (withholding tax). To lower the tax burden, taxpayers may use a tax credit scheme and enjoy the reduced withholding taxes on dividends, interest, and royalties established by the DTA. The table below illustrates this:
|Regular withholding tax in Vietnam||Regular withholding tax in Singapore||Treaty tax rate|
Corporate shareholder — exempt.
Individual shareholder — 5%.
|Singapore does not impose withholding tax||The treaty provides for higher minimum tax rates than those imposed currently by two states, i.e. the ordinary tax rates shown on the left will apply.|
|Interest||5%||10%||The treaty provides for higher minimum tax rates than those imposed currently by two states, i.e. the ordinary tax rates shown on the left will apply.|
Avoidance of double taxation
The main instrument in avoiding double taxation provided by the DTA is a Foreign Tax Credit (FTC) scheme. The FTC is a dollar-for-dollar reduction towards the taxes paid abroad.
For example, you as a Singapore resident received a $1,000 payment of interest from an investment into a Vietnamese company. The Vietnamese withholding tax rate on interest income is 10% ($100). This means that you can subtract $100 from your Singapore tax bill.
Usually, gains from selling any property are taxable only in the state where the seller is a resident. However, there are certain exceptions:
- Gains received by a resident of State A from the sale of immovable property situated in State B are also taxed in State B.
- Gains from the sale of movable property forming part of the business property of a PE are also taxed in the state where such PE is situated.
Independent Personal Services
Income received by an individual for professional services or other activities of an independent nature is taxable only in the state where he or she resides, unless such a person has an office abroad (effectively a PE) for the purpose of performing such services. In the latter case, the income is also taxed in the state where an office is situated, but only so much of the income as is attributable to that office (similar to the PE treatment).
The term "professional services" includes especially independent scientific, literary, artistic, educational, or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants.
Dependent Professional Services
Salaries, wages, and similar payments to a person residing in State A for professional services performed in State B are taxable only in State A if all of the below conditions apply:
- The recipient is present in State B for less than 183 days during the year; and
- The payment is made by an employer who is not a resident of State B.
Directors' fees received by a resident of State A for service as a member of the board of directors of a company which is a resident of State B are taxed in State B.
Artists and Athletes
Income received by an individual who is a resident of State A as an artist working in theatre, radio, or TV, or who is a musician or sports person, for personal activities exercised in State B is taxed in State B.
Pensions and other similar remuneration for past employment are taxable only in the state where the recipient resides.
Payments for Governmental Functions
Payments for governmental functions are taxable in the state paying such funds.
However, if the payment is made by the government of State A, but a recipient is a resident and a national of State B, and the services were rendered in State B, such payments are taxable only in State B.
A student who was a resident of State A before visiting State B and is temporarily present in State B for the purpose of education is exempt from tax in State B regarding money transfers for the purpose of his or her maintenance, education, or training.
In addition, payments for services rendered by a student or business apprentice in State B are tax-exempt if such services are in connection with the studies or training and the amount of payment does not exceed the equivalent of US$2,500 per year.
Teachers and Researchers
An individual who is a resident of State A and who, at the invitation of any university, college, or school, visits State B for up to two years for the purpose of teaching or research is exempt from tax in State B on his or her remuneration.
DTA — At A Glance
|Types of Income/Payments||Where is the income taxed?|
|Income from immovable property||Taxed in the state where the property is situated.|
|Business profits||Taxed in the state where a company is
managed and controlled — typically, the country of the company's Board of Directors meetings.
|Permanent Establishment profits||Taxed in the state where it carries on business activities, but only in the amount attributable to that PE.|
|Profits from shipping and air transport||
Taxed in the state where a company is
|Dividends||May be taxed in the state where the recipient resides and in the state where dividends arise.|
|Interest||May be taxed in the state where the recipient resides and in the state where interest arises.|
|Royalties||May be taxed in the state where the recipient resides and in the state where royalties arise.|
|Capital gains||Taxed in the state where the seller is a resident.|
|Independent Personal Services||Taxed in the state where the person is a resident and in certain cases in the state where the work is performed.|
|Dependent Professional Services||Taxed in the worker’s state of residency and in certain cases in the state where the work is performed.|
|Directors’ fees||Taxed in the state where the company (paying the directors’ fees) resides.|
Income of artists and sports persons
|Taxed in the state where activities are performed.|
|Pensions||Taxed in the state where the recipient resides.|
|Payments for Governmental Functions||Taxed in the state that pays the remuneration.|
|Payment to students, teachers, and researchers||Tax exempted.|
The Singapore-Vietnam DTA was designed to further develop economic relations and enhance cooperation in tax matters between the two countries. Indeed, the DTA has provided significant advantages to individuals and corporate entities of both states, making it possible to eliminate the double tax burden in cross-border business activities. Singapore’s favourable tax framework has made it an even more desirable location for business vehicles for cross-border investment in South-East Asia.
As an investor or business person with interests within South-East Asia, you should be aware of existing DTAs in force, which can influence the proper business structure for your enterprise in order to avail tax exemptions or reductions in taxes, payable either in Vietnam or in Singapore. If you are interested in learning more about the optimal business structure in Singapore for your needs, please contact our corporate services team.
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