Economic zones are organized into functional areas, including: non-tariff zones, tariff-reserved zones, industrial zones, export processing zones, entertainment zones, tourist zones, urban zones, residential zones, administrative zones and other functional zones in accordance with each economic zone’s characteristics.

Vietnam’s Law on Enterprise Income Tax generally grants newly established businesses pursuing projects in economic zones a preferential tax rate of 10% for fifteen consecutive years commencing from the year in which the enterprise starts to generate revenue. The preferential tax rate and duration for tax preference will be  prescribed in the investor’s Investment Certificate. Two points are noteworthy:

• The preferential tax rate period commences from the first year in which revenue from the new investment is earned.
• While a Vietnamese entity’s revenue is its total sales, processing remuneration, service provision charges, subsidies and surcharges, its profit is revenue minus deductible expenses for production and business activities.

Moreover, business income from new projects in economic zones are eligible for tax exemption for 4 years commencing from the year  in which the enterprise starts to generate revenue and are eligible for a 50% reduction for the following 9 years.

The duration of the tax exemption or reduction period for newly established businesses in economic zones is counted from the first year an enterprise has taxable income. In case an enterprise has no taxable income for the first 3 years from the first year it has revenue, the tax exemption or reduction duration is counted from the fourth year.

Significantly, the 2013 Amendments to the Law on Enterprise Income Tax enacted changes to rules on taxable income, tax-exempt income, how taxable income is determined, tax rates, and corporate income tax incentives.

Taxable Income

The updated Law on Enterprise Income Tax includes amendments to rules on taxable income, including income gained from transfers of capital contribution rights, transfer of investment projects, investment project participation rights, mineral exploration, extraction, and processing rights, as well as income from intellectual property rights and asset transfers, leases, and liquidations including commercial papers.

Exempt Income

The following are now forms of income of cooperative and enterprises exempt from taxation:

• Income from goods or services from businesses whose employees are disabled people, recovering substance abusers, or individuals afflicted with HIV/AIDS;
• Income from the transfer of Certified Emissions Reductions (CERs);
• Income from the performance of state-assigned tasks of the Vietnam Development Bank;
• Other additional cases of tax-exempt income for cooperatives and enterprises.

Calculation of Taxable Income

Income from transfers of real estate, investment projects, investment project participation rights, and mineral exploration, extraction, and processing rights must be separately calculated for tax declaration and payment purposes.

Deductible and non-deductible expenses

The updated Law on Enterprise Income Tax amends and supplements the non-deductible expenses as follow:

1. repeal of the costs of raw materials, materials, fuel, energy, excess goods consumed by construction companies, inform the tax authorities and the actual cost of inventory;
2. modify expenses on advertising, marketing, promotion, commissions, receptions, ceremonies, conferences, marketing support, support costs directly related to production activities and business;
3. detailed regulations on grants and supplementation on additional payment to voluntary retirement funds or other funds with the nature of social security; purchase additional voluntary pension insurance for employees and expenses of business activities.

Tax Rate

As regulated in the updated Law, new enterprise income tax rate is at 22% and shall switch to 20% from January 01, 2016. In addition, any enterprise of which the total revenue does not exceed 20 billion VND per year are eligible for the tax rate of 20%.

Corporate Income Tax Incentives

The updated Law has amended and supplemented applicable subjects to (i) 10% tax rate;(ii) 10% tax rate for 15 years;(iii) 20% tax rate for 10 years then reduced to 17% since January 1st, 2016; (iv) this Law also regulates that the tax rate of 20% is applicable to incomes of People Credit Funds and microfinance institutions. From January 1st, 2016, such incomes are eligible for 17% tax rate; (v) the period of time during which preferential tax rates are applicable.

The updated Law also regulates specifically on the time  period of tax exemption and tax deduction; other tax deductible cases; loss transfer; and specifies the conditions to apply tax incentives.

PLF Law Firm