Foreign tax payment deduction for tax withholding on the income of a subsidiary in Vietnam
This article was originally published on February, 2017 and written by the Vietnam Practice Group of Lee & Ko.
In such case, the tax amount withheld in Vietnam is deducted in Korea. According to the tax treaty between Korea and Vietnam, if the Korean parent company did not provide the services through a fixed business establishment in Vietnam, the withholding exemption under the tax treaty is not automatic and the tax payer shall provide relevant supporting documents.
Vietnamese tax law defines the tax withholdings on foreign corporation or foreigner as “foreign contract tax.” This is not a separate tax item such as a corporate tax or income tax, but a way of levying tax (i.e., income tax, VAT) for foreign corporation or foreigners income generated in Vietnam. If the foreign corporation does not have a separate business establishment in Vietnam, a Vietnamese subsidiary which provide the income will withhold taxes.
Until recently, the National Tax Service of Korea (“NTS”) regarded the foreign contract tax of Vietnam as a separate tax item and viewed that the foreign contract tax paid by the Vietnamese subsidiary is not subject to the tax treaty between Vietnam and Korea and the foreign contract tax paid for the income from Vietnam subsidiary cannot be deducted as taxes paid in foreign country. Based on this interpretation, NTS is raising issue of inappropriate deduction for the deduction of foreign contract tax by the Korean parent company.
However, as discussed above the foreign contract tax withheld in Vietnam and the income tax on the subsidiary in Vietnam are deductible as taxes paid in foreign country under the Korea-Vietnam tax treaty. Therefore, if NTS imposes additional tax for inappropriate deduction of foreign contract tax, it is advised to raise objection to such decision.