An article that discusses the current situation and complications for foreign individuals and their employers wishing to work yet remain compliant in Vietnam, despite the complexities and multitude of legal requirements and interpretations.
Work Permits, Salaries, Taxes and Banking: The Challenges for Foreign Individuals Working in Vietnam.
By Matthew Lourey, 15 March 2016
Vietnam can be an attractive location for foreign individuals to work, either through direct choice or by virtue of being approached by an employer. However, the simple desire to work in Vietnam does not always connect with the practicalities or the realities of being permitted to undertake employment, nor does it necessarily meet with the requirements to remain compliant with associated laws once in Vietnam.
There are intersecting areas of law here at play when dealing with foreign individuals working in Vietnam, with the discussions covering areas including:
- Immigration laws (ie, visas, Temporary Resident Cards, visa exemptions)
- Employment laws (ie, Work Permits, labour contracts)
- Taxation laws (ie, Personal Income Tax, tax residency)
- Banking laws
Surprisingly to many, Immigration laws are somewhat less relevant to these discussions as a foreign individual’s visa status or right to a certain status generally follows their employment rights, but the visa status rarely confirms employment rights. For example, a Work Permit commonly grants the right to a Temporary Resident Card (“TRC”) or a business visa, but a TRC or business visa themselves do not grant the right to a Work Permit. To put it more simply, visas are an immigration issue (ie, the right to enter Vietnam), whilst Work Permits and Work Permit laws cover employment rights in Vietnam.
Commencing with Work Permits, the initial principal is that all foreign individuals (ie, non-Vietnamese Citizens) require a Work Permit issued by the Department of Labour, Invalids and Social Affairs (“DOLISA”) before they commence and undertake any employment in Vietnam, unless they are subject to a specific Exemption Category. [i] [ii]
There are, at last count, 17 Exemption Categories that are available for foreign individuals seeking to undertake employment in Vietnam without a Work Permit.[iii] Ignoring the intergovernmental and similar Exemption Categories, the most relevant Exemption Categories to regular employment situations in Vietnam are:
a) Interns studying abroad at foreign education institutions;
b) Foreign lawyers registered with the Ministry of Justice;
c) Foreign owners of Vietnamese enterprises (ie, recorded on the Business License as an owner);
d) Members of the Board of Management of a Joint Stock Company;
e) Internal transfer from an international employer to their subsidiary in Vietnam, where the individual has been employed for greater than 12 months by the international employer;
f) Professionals who come to work in Vietnam for less than 30 days at a time and no more than 90 cumulative days in any 12-month period (the “30/90 Rule”);
g) Coming to Vietnam for a period of less than 3 months to offer services (the “3-month Rule”); and
h) Foreign students studying in Vietnam.
Other than items f) and g) above (the 30/90 Rule and the 3-month Rule), each of the Exemption Categories require an Exemption Certificate issued in advance by DOLISA before the exemption can be taken advantage of and a foreign individual can commence employment in Vietnam[iv]. Items f) and g) do not require an Exemption Certificate, and are available to employers/foreign individuals without prior approval from authorities (known as the “Exception” categories).
For the bulk of foreign individuals seeking employment in Vietnam, or employers seeking to employ foreign individuals in Vietnam, the options for paid employment can therefore be classified into three broad groups:
- Those with Work Permits
- Those with Exemption Certificates
- Those utilising the “Exception” categories.
The 3-month Rule Exception category is often seen as the most flexible or accessible option for recently arrived foreign individuals or for employers/foreign individuals seeking the easiest path to employment. However, it is also the most likely to be misunderstood or misused. The provisions require the foreign individual to be coming to Vietnam for a period of less than 3 months to offer services. The strict reading of this provision is (absent any other guidelines from the authorities) that this provision would potentially not be available to foreign individuals (and, consequently, their employer) if the foreign individual:
- Is intending to work for longer than 3 months in Vietnam without leaving;
- Is already in Vietnam providing services (either under a work permit, or a previous 3-month Rule), and therefore has not come to Vietnam to offer services for less than 3 months;
- If they come to Vietnam for tourism purposes, as they did not prima facie come to Vietnam to offer services;
It is also not clear what interpretation that authorities take in how long they require someone to leave Vietnam before returning to refresh the 3-month Rule, and what is regarded as acceptable here. Clearly repeated “coming to Vietnam” to provide services for 3 month periods in close succession would be regarded as against the spirit of the regulations, and this would be more obvious for any inspection if it was with the same employer. There are also no specific guidelines indicating whether this 3-month time period for working commences immediately when someone arrives in Vietnam or 3 months from when they first commence providing services, allowing them some time once they arrive to find work.
This lack of clarity does provide uncertainty over the reliance on this Exception, and exposes both individuals and employers to the interpretation of the authorities should an inspection occur.
From a taxation perspective, many of the implications relating to foreign individuals working in Vietnam revolve around the tax principal of “Residency”. In Vietnam, all individuals (both foreign and Vietnamese citizens) are either classified as “Tax Resident” or “Non-Tax Resident” for Vietnamese tax purposes.
Foreign individuals will be regarded as Tax Resident in Vietnam where[v]:
- They reside in Vietnam for 183 days or more a) in a Calendar year, or b) within 12 consecutive months from the date of first arrival, or
- Have a permanent residence in Vietnam (including where addresses are recorded in a temporary or permanent residence card), or
- Leasing a house/apartment in Vietnam for a period with a term of greater than 183 days or more in a tax year and unable to prove tax residence in another country.
Why is this important? Personal Income Tax rates differ depending on tax residency; Tax Residents are taxed on their world-wide income whereas Non-Tax Residents are only taxed on their Vietnam sourced income.
For clarity, only Vietnamese tax on employment income is the subject of discussion in this paper.
For Non-Tax Residents, employment income (income from personal services) is taxed at a withholding rate of 20%. This is a full and final tax, and nothing further needs to be done once it has been withheld and remitted to the authorities.
For foreign individuals seeking to avail the 30/90 Rule or the 3-month Rule exemptions, they would ordinarily be taxed as Non-Tax Residents at the tax rate of 20%. If someone was to argue that they are Tax Resident by virtue of the tax residency rules, and not subject to Non-Tax Resident taxation rates, it would make it much harder to argue (although not necessarily impossible) that they satisfy the intention of the Work Permit laws/exemptions which enable them to provide short-term services under these Exception categories. For example, if someone is “coming to Vietnam to provide services for less than 3 months” and rents a house for greater than 6 months to become Tax Resident, it would prima facie place some doubt on the intention of the individual that they are coming to Vietnam to provide services for less than 3 months.
Tax Resident individuals pay Personal Income Tax on employment income based upon the Vietnamese progressive/marginal Personal Income Tax system, which has rates ranging from 5% - 35%. In addition, there is compulsory government Social Insurance, Unemployment Insurance and Health Insurance levied as well on both the employer and employer. At the present time, Foreign individuals are only required to contribute the Health Insurance portion, although is scheduled to change from January 2018.
There is the provision within taxation laws for a 10% withholding tax to be levied on service contracts of less than 3 months in length entered into by Tax Resident individuals, however this is unlikely to be of application to most foreign individuals as establishing tax residency usually negates the ability to use the 30/90 Rule or 3-month Rule exemptions, and seeking a work permit for a contract of a short period makes little commercial sense (and the fact that Work Permits requires a labour contract not a service contract, again makes this difficult to argue).
At present, service (and employment) contracts with a period of less than 3 months are not subject to the Social, Health and Unemployment Insurance provisions, however from May 2016 the Government’s intention appears to be to apply these provisions for any contract longer than 30 days.
For taxes on personal (employment) services income in Vietnam, many individuals will be required to complete a tax finalisation each tax year (1 January to 31 December), or for an earlier period if the individual departs Vietnam and/or ceases to be a Tax Resident. Employers usually take responsibility for personal tax finalisations for their foreign employees, however this is not always the case where an individual has multiple employers in a year or has foreign income to declare, and in these cases the individual will have to finalise themselves.
Employers are required to provide all employees with pay slips, copies of personal tax finalisations (along with signed consents authorising the employer to undertake finalisations for the individuals), and confirmation of withholding amounts where they have withheld and submitted taxes to the Tax Office. If employers do not provide these, employees should follow up with their employer for copies to ensure they are in fact being paid correctly and having their personal tax compliance managed appropriately.
Bank accounts form part of the employment puzzle for foreign individuals seeking to work in Vietnam. The banking system works within an ever changing set of regulations and rules, and it does often appear that each bank interprets these rules differently.
Primarily, foreign individuals can receive deposits into a Vietnamese bank account where the income comes from a tax-paid source, or is a transfer into Vietnam from abroad. Foreign individuals are entitled to receive their salary in foreign currencies or Vietnamese Dong, as detailed in their labour contract.[vi] A labour contract is usually sufficient evidence that income is from a tax-paid source and permits an employer to transfer funds electronically through the banking system into a bank account held by a foreign individual, however certain banks may initially require Work Permit or Exemption confirmation as well. Tax withholding statements would be another source to permit the transfer of funds from the withholding party. Amounts held in Vietnamese bank accounts by foreign individuals, upon which tax has been paid, can be freely remitted abroad – including permitting the conversion of Vietnamese Dong into foreign currency for the purpose of remittance.[vii]
Historically, requirements for opening bank accounts and making cash deposits into the bank accounts of foreign individuals has varied dramatically in availability and procedures. In recent times, many banks have made this process much more regimented, with the provision of labour contracts and/or Work Permits required, and an enforcement by some banks of a “no-cash deposits permitted whatsoever” regardless of evidence that that particular cash is from a tax-paid source (ie, how do they know for certain that it was that specific cash you wish to deposit, and not the other cash in your wallet, that was taxed?). Further issues arise when individuals do not have labour contracts but have income from tax-paid sources, as certain banks may refuse to open a bank account for the individual to allow receipt of the funds into.
The inconsistencies with interpretation and enforcement of bank regulations between banks (and often their own branches) are a frustration to many foreign individuals, and do cause arguments from time to time with employees, employers and banks.
Implications & Problems
Although there may be some employers that hide their revenues and choose to pay cash salaries to their employees (and therefore they are likely not to be remitting any salary taxes, regardless what they indicate to their employees), most employers would be expected to be remitting taxes with a certain level of compliance. As employers generally seek a Corporate Income Tax deduction for their salaries paid, they would be withholding the appropriate employment taxes accordingly.
It is not uncommon, however, for Vietnamese companies wishing to avoid the difficulties of compliance with the Work Permit provisions and to decrease their costs, to pay foreign individuals cash and simply withhold a 10% tax from their salaries. For compliance purposes, they actually declare these salaries as payments to Vietnamese individuals. These employers commonly have a range of Vietnamese individuals that they can use to register short-term service agreements under their Vietnamese names, and remit and record the salary and the 10% tax as belonging to the Vietnamese individual, with no official record maintained of the foreigner undertaking any employment.
The potential problems and implications that arise with unlawful foreign employment and non-compliance in Vietnam include:
a) Deportation of individuals for working without a Work Permit or a valid Exemption. There is actually a positive obligation on individuals and organisations to report these cases to the authorities.
b) Inability to use the banking system, and remit funds earned in Vietnam abroad, by foreign individuals.
c) Prohibition and other penalties against employers from using foreign labour in the future.
d) Additional tax liabilities assessed to foreign individuals and/or employers where correct tax has not been withheld or paid on their earnings.
e) Potential Tax Office enforcement activities for non-finalisation of individual taxes each year or before departing Vietnam permanently (including, potentially, immigration controls preventing someone from departing).
Certain laws and regulations in Vietnam do remain somewhat vague or lacking in clarity and guidance, and therefore are open for some interpretation by authorities when it comes to inspection or enforcement. The twin issues of differences in implementation of the same rules across the country by employees, employers and officials, and the differences in penalties imposed or enforcement of these laws and regulations (if, in fact, penalties are enforced at all) do compound the confusion in the market.
Foreign individuals seeking to work in Vietnam, and employers seeking to engage foreign labour, should ensure that they are abreast of current regulations and laws, and should take the time to seek to comply with the laws as best they can. Most of the time compliance is not overly difficult (despite the documentation required appearing a little draconian at times), however there needs to be the desire from both the employer and employee to want to comply. If your employer or employee is not able to or does not wish to comply, then you should reconsider your relationship given the implications that can arise for non-compliance.
Matthew Lourey is the Managing Partner at Domicile Corporate Services, a licensed Vietnamese accounting firm that assists foreign-owned companies and individuals with accounting, tax and compliance services in Vietnam.
[i] Decree 11/2016/ND-CP, dated 3 February 2016 (“Decree 11”), Article 18.1 - Foreign labourers working in Vietnam without work permits or no written confirmation that they are not subject to a work permit are to be deported under Vietnam law.
[ii Decree 11, Article 12 - At least 15 working days before the date the foreign workers is expected to begin work for the employer, the employer must apply for a work permit at DOLISA where foreign workers are expected to work.
[iii] Decree 11, Article 7 and Article 172 of the Labor Code
[iv] Decree 11, Article 8
[v] There are also Double Tax Agreement (“DTA”) issues here where Vietnam has entered a DTA with another country, and which may further complicate the tax-residency determination and issues in certain specific situations.
[vi] Circular 32/2013/TT-NHNN dated December 26th 2013 of the State Bank of Vietnam, Article 4, Clause 14.
[vii] Decree 70/2014/ND-CP dated 7 July 2014, Article 7, Clause 3.