Preferential corporate income tax rates are always a concern of all businesses during production and business activities to minimize the amount of tax payable and increase after-tax profits. Normally, businesses have their relevant income subjected to the common corporate income tax (“CIT”) rate of 20%. With this tax rate, businesses have to pay a large amount of tax into the state budget, affecting their after-tax profits and business plans. Therefore, businesses always seek solutions to reduce tax rates while still ensuring compliance. As a management tool, the Vietnamese State uses tax policies to regulate the economy, maintaining a balance between industries and localities.
Some conditions for applying corporate income incentives are provided by Circulars 78/2014/TT-BTC and 96/2015/TT-BTC:
1. Adhere to accounting standards, invoicing, documentation, and self-declared corporate income tax payments
Tax Law states that: Compliance with accounting, invoice and document regimes, and payment of corporate income tax are the obligations and responsibilities of businesses. Therefore, the first condition for a business to enjoy corporate income tax incentives is to comply with its obligations and responsibilities.
2. Abide by separate corporate income tax (CIT) income declarations
Accordingly, while enjoying corporate income incentives, if an enterprise carries out many production and business activities, the enterprise must separately calculate income from production and business activities eligible for corporate income incentives (including preferential tax rates, exemptions, and reductions) and income from business activities not eligible for tax incentives can be declared and paid separately.
If the enterprise does not calculate its income separately for production and business activities that qualify for tax incentives and those that do not qualify for tax incentives during the tax period, then the income from production and business activities that does not qualify for tax incentives is determined by:
| Total taxable income= Total taxable income × (Percentage of tax-incentive production and business activities revenue or deductible expenses compared to total revenue or total deductible expenses of the enterprise in the tax period / 100) |
If there is a deductible revenue or expense that cannot be separately accounted for, the deductible revenue or expense is determined according to the ratio between the revenue or deductible expense of the production and business activities entitled to tax incentives on total revenue or deductible expenses of the enterprise.
3. Exclude CIT incentives and the standard 20% tax rate
CIT incentives and the 20% tax rate are not applied to the following types of income:
- From capital transfer, transfer of capital contribution rights;
- Income from real estate transfer (except income from investment in social housing business;
- From transferring investment projects, transferring rights to participate in investment projects,
- From transferring mineral exploration and exploitation rights;
- Received from production and business activities outside Vietnam;
- From search, exploration, and exploitation activities of oil, gas, and other rare and precious resources and income from mineral exploitation activities;
- From service business subject to special consumption tax according to the provisions of the Law on Special Consumption Tax
4. Qualify for CIT incentives with eligible investment projects
Enterprises with investment projects that are entitled to corporate income incentives because they meet the conditions for investment incentive fields will receive income from investment incentive fields and income such as liquidation of scrap and waste products of products in the fields eligible for investment incentives, exchange rate differences directly related to the revenue and costs of the preferential fields, interest on demand deposits at banks, and other directly related income others also enjoy corporate income incentives.
Enterprises with investment projects that enjoy corporate income incentives because they meet preferential conditions for the area (including industrial parks, economic zones, and high-tech zones), then the income eligible for corporate income incentives is the entire income arising from production and business activities in preferential areas, except for some income according to regulations.
5. The preferential corporate income tax rate of 10%
The following conditions must be met:
- The project was granted an Investment Certificate for the first time from January 1st, 2014, and generated revenue from that project after being granted Investment Certificate;
- Domestic investment projects associated with the establishment of new enterprises with investment capital of less than 15 billion VND and not on the List of conditional investment fields will be granted Business Registration Certificates from January 1st, 2020;
- Investment projects independent of active enterprise projects (including projects with investment capital of below 15 billion VND and not on the List of conditional investment fields) with an Investment Certificate Investment from January 1st, 2014, to implement this independent investment project.
New investment projects that enjoy corporate income incentives according to regulations must be granted an Investment License or Investment Certificate by a competent agency or be allowed to invest according to the Investment Law provisions.
It should be noted that new investment projects eligible for corporate income incentives under the new investment category do not include the following cases:
- Investment projects formed from division, separation, merger, consolidation, transformation of business form according to the legal provisions;
- Investment projects formed from the conversion of owners (including cases of implementing new investment projects but still inheriting the old enterprise’s assets, business location, and business lines to continue production and business activities; acquisition of active investment projects).
Established enterprises or enterprises with investment projects resulting from conversion of enterprise type, ownership conversion, division, separation, merger, or consolidation can inherit the corporate income incentives of the enterprise or investment project before conversion, division, separation, merger, or consolidation for the remaining period if it continues to meet the conditions for corporate income incentives.
Enterprises operating in the field of socialization established by converting the type of enterprise according to the provisions of law meet the criteria for socialization facilities according to the Prime Minister’s Decision that the enterprise before converting. If the conversion is not yet entitled to corporate income incentives according to the tax incentive field, it will be entitled to tax incentives like a new investment project since the conversion.
6. Apply for CIT incentives on expansion investments
Conditions for applying corporate income incentives for expansion investment projects include:
- The additional cost of fixed assets when the investment project is completed and put into operation is at least VND 20 billion for expansion investment projects in the field of corporate income tax incentives or from VND 10 billion for expansion of investment projects implemented in areas with difficult or extremely difficult socio-economic conditions;
- The proportion of additional cost of fixed assets must be at least 20% compared to the total cost of fixed assets before investment;
- The design capacity when investing in expansion increases by at least 20% compared to the design capacity according to technical and economic arguments before the initial investment.
Tax incentives specified in this Clause do not apply to cases of expanded investment due to division, separation, merger, or ownership conversion (including cases of implementing investment projects but still inheriting assets), business location, business lines of the old enterprise to continue production and business activities), buy back a business or buy back an active investment project.
7. Choose incentives
In the same tax period, if there is an income subject to preferential corporate income tax rates and tax exemption and tax reduction periods in many different cases, the enterprise can choose one of the most beneficial preferential corporate income tax cases.
In their first tax period, enterprises with investment projects (including new, expansion, high-tech, and high-tech agricultural enterprises) having a business duration of less than 12 months eligible for tax incentives, can opt to apply these incentives from the first tax period or defer to the next. If deferring, they must declare and pay taxes for the first period as per regulations.
From the above conditions, it can be seen that to enjoy preferential corporate income tax rates, businesses need to master many relevant legal regulations such as laws on enterprises, investment, and taxes. However, businesses should note that the prerequisite to enjoy these incentives is to ensure adequate accounting, invoices, and documents as well as to declare taxes in compliance with regulations. In addition, finding a professional tax consulting unit to support businesses is also essential.
