What You Need To Know About IT Company Tax Incentives In Vietnam

IT industry in Vietnam - Tax incentive
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For many years, inexperienced market entry consulting firms have recklessly listed IT for Vietnam tax incentives without providing any further explanation, leading many investors to an incomprehensive understanding of the law. This eventually led to the registration of incorrect business lines or putting the companies at risk of tax penalties from the Vietnam tax authority in the future. Read more to avoid this situation happening to your business.

The flourishing IT industry in Vietnam

Vietnam’s information technology sector is expanding rapidly in the last two decades, owing to low labor costs and high labor quality in the IT field. Vietnam is now the world’s 8th largest provider of IT services.
Furthermore, the government intends to accelerate the growth of the IT industry through policies that allow for a quick incorporation process, simple business conditions to establish, and some incentive programs. As a result, an increasing number of people want to start an IT company in Vietnam.

In comparison to other fields, establishing a foreign IT company, tech company, or software development company in Vietnam is the simplest thing to do. This company does not require a minimum amount of paid-up capital.
The investor is free to choose any number he believes is appropriate. It also does not necessitate any additional requirements (besides the business address and the resident director). The process of establishing a company in Vietnam for this industry adheres to the standard timeline and procedure.

The Myth: IT is subject to Tax incentives in Vietnam

The Vietnam Tax incentive for IT companies appears to play an important role in encouraging foreign investors to establish a business in Vietnam in this field. Many investors have been told that the IT industry is subject to a very appealing tax exemption and deduction program as in the law on corporate income tax Vietnam, such as:

  • VAT exemption for sales of IT products or services
  • CIT exemption for the first 4 years of income generation
  • 15 years with a reduced tax rate (CIT) – 10% (Vietnam corporate tax rate for all industries is 20%).
  • 50% additional reduction from the reduced tax rate (which makes the CIT only 5%) for 9 years.

Doesn’t it sound tempting?

Many investors admitted that the tax incentive information significantly influenced their decision to establish an IT company in Vietnam. In fact, this is what investment consulting firms in the Vietnam market have stated in their websites or blog posts. It sparked a lot of hope and expectation among investors. However, Is it really as delicious as it sounds in reality?

Read more from here about: Corporate taxation in Vietnam – a comprehensive understanding

Cracking the myth of Vietnam Tax Incentive for IT industry

The incentive program will not apply to all IT companies in Vietnam.
An IT company in Vietnam can choose from a variety of business lines/codes during the company registration process. The following IT sectors are open for business registration:

  1. Computer Programing (code 6201)
  2. IT consulting and system administration service (Code 6202)
  3. IT service and other services relating to computers (Code 6209)
  4. Data processing and hosting rental (Code 63110)
  5. Software publishing (Code 58200)

An IT business is any company that registers one of these business groups. Among those groups, “Software publishing” is not open to foreign investment. Foreign investors can join the other 4 sectors, but only “Computer programming” can offer them the Tax incentive benefits.
Furthermore, only the function “Software production” is the real catch within this “Computer programming” group. If this is not specified in the company’s business license, the company will be excluded from the Government’s incentive.

Conditions to qualify for Vietnam tax incentive in the IT industry

For an IT company to be eligible to tax incentives, it must:

  1. Obtain the specific “ Computer Programming – Details “Software production” line into the company’s business license.
  2. The software type must belong to the specific list prescribed by the Ministry of Information and Communications.
  3. Prove that it implements the 7-step procedure of software production specified by the law (usually only need to show the evidence of the first 2 steps).
Is a Software outsourcing company in Vietnam subject to tax incentives?

Software outsourcing has grown in popularity in Vietnam over the last decade. According to a survey conducted by BetterCloud, a software vendor based in the United States, 73 percent of organizations will use software outsourcing. When compared to traditional outsourcing destinations like China and India, Vietnam has emerged as a more cost-effective option.

Despite the fact that Vietnam software outsourcing has grown significantly in terms of both quantity and quality. Unfortunately, there is still no tax incentive for IT outsourcing in Vietnam. The reason for this is, those companies may successfully add the “Computer Programming – Details “Software production” line to its license, but it fails to demonstrate the 7-step software production procedure or the software they develop is not in the list given by the Government of Vietnam.

Software Outsourcing, by definition, means that a company is hired to complete a portion of the entire software for another company. It differs from a Software Production company, which begins, designs, and develops its own product through the entire process from start to finish. The law established two distinct definitions, but only one was designated as the subject of the Vietnam tax incentive program. This act, by definition, excludes software outsourcing from the game.

Many outsourcing companies have recently claimed that, despite the fact that they make products for other companies, they follow the full process as if they were a production company. They advocated for legislative changes to be incorporated into the tax incentive program. This request is still being considered. A formal decision has yet to be made. That day, hopefully, will come soon. Currently, a software outsourcing company in Vietnam is not eligible for tax breaks.

What to do if your company is eligible for Vietnam tax incentive?

Congratulations if your company meets all of the criteria listed above! In the next 15 years, your company could benefit from tax exemption and reduction.

What should your company do to get those benefits?

Will you receive your tax returns at some point?

To answer these questions, you need a good accountant. He/she will help you to indicate the tax exempted or deducted amount in the tax reports.

The company, if it sees fit, can exempt itself from paying tax, however should prepare for a guarantee inspection from the authority afterward. Just to make sure you have enough documents/evidence to prove the satisfaction of the above conditions to the Vietnam Tax authority when being asked. If the calculation is wrong, and if the company is concluded of underpaying tax, then it will be subject to enormous penalties. Therefore, having a good accountant who understands thoroughly about tax policies is recommended. Or you must ensure the company receives proper advice from professional accounting services.

Summary

since its WTO commitment in 2007, Vietnam has implemented a number of policies to encourage foreign investment. Many industries, including IT and other high-tech industries, are subject to tax breaks as part of Vietnam’s plan to become fully integrated into the global economy.

However, not all IT sectors are eligible for Vietnam tax incentives. This is something that not all consulting firms informed you about. IT is a broad field comprising at least four distinct sectors, only one of which, “Software production,” which is also open to foreign investment, is subject to the incentive program. Furthermore, the company must provide evidence that it is a legitimate production company.

For many years, inexperienced market entry consulting firms have recklessly listed IT for Vietnam tax incentives without providing any further explanation, leading many investors to an incomprehensive understanding of the law. This eventually led to the registration of incorrect business lines or putting the companies at risk of tax penalties from the Vietnam tax authority in the future.

Contact us to get further consultation on the topic if you are planning to open an IT company in Vietnam.

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Micheal Dinh

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