Guidance on the policy of foreign contractor tax in trademark licensing activity in Vietnam

According to guidance under Official Letter No.10453/BTC-CST dated 27 July 2016 (“Official Letter 10453”), and Official Letter No. 15888/BTC-CST dated 7 November 2016 (“Official Letter 15888”), after consulting with the Ministry of Science and Technology, the Ministry of Finance supposes that where a foreign party allows a Vietnamese party to use their trademark, such activity shall be considered as the transfer of right to use IP objects  in accordance with the Intellectual Property Law, but not a technology transfer which benefits from VAT tax exemption. As a result, in addition to the CIT portion of 10%, the royalty of trademark license agreement should be subject to VAT at 10% (applicable for cases declaring VAT under credit method), or 5% (applicable for cases declaring VAT under deemed method). Therefore, the foreign contractor tax (FCT) on income from the transfer of right to use trademark shall consist of both CIT and VAT portions.

Practically, prior to the issuance of Official Letter 10453 and Official Letter 15888, certain rulings on the related FCT policies have been unclear and inconsistent on the VAT portion. Throughout tax audits, some local tax authorities have concurred with the current treatment of enterprises that 10% CIT and no VAT would be imposed on similar transactions.

Official Letter 10453 and Official Letter 15888 are silent on the retrospective application for the tax-paid royalties, and the letters themselves are the private ruling for a specific case. Therefore, when a company enters into an agreement of trademark license, it is recommended that the company should carefully review its current FCT declaration. The company should also review the conclusion of the recent tax audit carried out by the tax authorities to supplement the VAT declaration in accordance with the current regulations for the license fees dated from 07 November 2016. The royalties of which VAT has not been paid up to the date of 07 November 2016 are also applied this rate of VAT. In case there is any uncertainty, the company should seek specific guidance from the tax authorities/Ministry of Finance.