Vietnam-Singapore DTAA: Double Tax Avoidance Agreement

This article is a guide to the Vietnam-Singapore Double Tax Treaty, one of the numerous bilateral agreements between the two countries. It summarises the scope of the treaty, types of taxes covered, specific regulations on taxation of different types of income, rules that govern the elimination of double taxation, and other important points to consider for someone who is dealing with cross-border business activities.

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Vietnam-Singapore DTAA: Double Tax Avoidance Agreement

This article covers the following topics:

Vietnam-Singapore Relations
Overview of Vietnam-Singapore Double Tax Treaty
Scope of the Singapore-Vietnam Tax Treaty
How is Tax Residency Defined Under the Singapore-Vietnam DTA?
Key Provision of the Vietnam-Singapore DTAA
Vietnam-Singapore DTAA at a Glance

Vietnam-Singapore Relations

Singapore and Vietnam have shared excellent bilateral relations since 1973. The economic ties between the two countries are robust, with bilateral trade growing steadily over the last decade. The overarching framework for bilateral economic cooperation was laid down by the Connectivity Framework Agreement (CFA) in 2006. It covers cooperation across six sectors, namely education and training, finance, investments, information technology and telecommunications, trade, services, and transportation.

Since the implementation of the CFA there was great progress in creating a conducive environment for Singapore companies to invest in Vietnam. According to the Ministry of Planning and Investment of Vietnam, Singapore was the leading foreign investor in Vietnam for the past two years with investments of about US$7 billion. The seven Vietnam-Singapore Industrial Parks in Binh Duong, Hai Phong, Bac Ninh, Quang Ngai, Hai Duong, and Nghe An are concrete symbols of the close economic cooperation between the two countries.

The expansion of trade and business links between Singapore and Vietnam over the years has made it necessary to regulate tax issues arising in cross-border business between corporations and individuals of the two countries, particularly the possibility of taxing the same sources of income twice. The Singapore-Vietnam Avoidance of Double Taxation Agreement (DTAA) is the main regulatory instrument for resolving this issue.

What Is the Vietnam-Singapore Double Tax Treaty?

The Vietnam-Singapore DTAA was designed to eliminate double taxation without creating opportunities for nontaxation or tax evasion. Without a DTAA, income is liable to be double taxed — i.e., two countries levy their own taxes on the same income. Under the DTAA, income will be taxed in only one of them. The DTAA includes provisions to safeguard the misuse of the agreement.

The agreement was first signed on March 2, 1994. In January 2013, the treaty was amended by a Protocol (the “2013 Protocol”), which updated certain key subjects.

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Scope of the Vietnam-Singapore Tax Treaty

The treaty covers all taxes on income levied by the tax authorities of the two countries. Taxes on income include all taxes imposed on total income, or on elements of income, including taxes on gains from selling movable or immovable property.

In the case of Vietnam, the following taxes are covered:

Personal income tax
Profit tax
Profit remittance tax
Foreign petroleum subcontractor tax
Foreign contractor tax

For Singapore, the treaty applies to the following taxes:

Income tax

The DTAA also applies to any identical or substantially similar taxes that are imposed in addition to, or in place of, the existing taxes.

Given the considerably simpler tax regime in Singapore, many international companies choose to incorporate here. If you are interested in registering a new company in Singapore and want to know the benefits that may accrue to you from its various DTAA’s contact our specialists and we will be glad to provide you with tailored advice.

The main instrument for avoiding double taxation provided by the DTAA is a Foreign Tax Credit (FTC) scheme. The FTC is a dollar-for-dollar reduction towards the taxes paid abroad.

Under the DTAA provisions, dividends, royalties, and interest are taxed in the state of a recipient's residency (income tax) and in the state of residency of the enterprise that is paying the dividends (withholding tax). To lower the tax burden, taxpayers may use FTC and enjoy the reduced withholding taxes on dividends, interest, and royalties established by the DTAA.

For example, you as a Singapore resident received a $1,000 payment of interest from an investment into a Vietnamese company. The Vietnamese withholding tax rate on interest income is 10% ($100). This means that you can subtract $100 from your Singapore tax bill.

How is Tax Residency Defined Under the Vietnam-Singapore Tax Treaty?

To avoid situations of double taxation, the DTAA provides for the rule of residency-based taxation, i.e. persons are taxed or at least bear the main tax burden in the state where they reside. The residency determination rules are established by the national laws of taxpayers. The DTAA, however, provides regulations to determine residency in a case where a person is a resident in both states.

Where an individual is a resident of two countries, his or her status is determined by the following rules:

An individual is a resident in the state where he or she has a permanent home;
If he or she has a permanent home in both states, such person is a resident of the state with which his or her personal and economic relations are closer (a center of vital interests);
If the above cannot be determined, an individual is a resident of the state where he or she has a habitual abode;
If the person has a habitual abode in both countries or in neither, the tax authorities of the two states are obliged to settle the question by mutual agreement.

What Taxes Will I Owe Under the Vietnam-Singapore Double Tax Avoidance Agreement?

The tax you owe will depend on the country where you have to pay the tax which further depends on the type of income involved. Taxes on various types of income are described in the following sections.

If an enterprise that is a resident of state A carries on business in state B through a PE, only the profits that are attributable to the PE are taxed in state B.

The term PE can apply to any one of the following:

A place of management
A branch
An office
A factory
A workshop
A mine, an oil or gas well, a quarry, or any other place of extraction of natural resources
A building site, construction, or installation project is considered as a PE only if it lasts more than 6 months

Two enterprises located in different states are considered by the tax authorities to be associated enterprises where:

An enterprise residing in state A participates directly or indirectly in the management, control, or capital of an enterprise residing in state B, or
The same persons participate directly or indirectly in the management, control, or capital of enterprises of state A and state B, and
The commercial relations of the two enterprises are different from the relations of independent ones.

The DTAA says that the taxation authorities of a contracting state may, for the purpose of calculating tax liabilities of associated enterprises, adjust the profits of the enterprises if, as a result of the special relations between them, the accounts do not show the true taxable profits arising in one of the states. The above provisions apply only if special conditions have been made between the two enterprises. No such adjustment is authorized if the transactions between the enterprises have taken place on normal open market commercial terms (on an arm’s length basis).

Dividends are traditionally taxed in the country of a recipient's residency. However, they may be also taxed in the country of residency of the company that is paying the dividends.

The DTAA provides for higher minimum tax rates than those imposed currently by two states. Singapore does not impose a withholding tax on dividends. As such, dividends will be taxed at the ordinary tax rate imposed by Vietnam, which is 5% for the individual shareholders. Corporate shareholders are exempt from dividend tax in Vietnam.

Royalties refer to payments to an owner for the use of copyright for any patent, trademark, design or model, plan, secret formula, etc.

When the DTAA applies, royalties are taxed only in the country of the recipient's residency. Singapore imposes a 10% withholding tax on royalties, the same 10% is also imposed by Vietnam.

In case of payments for the use of a patent, design or model, plan, secret formula or process, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience royalties are taxed at a reduced rate of 5% in both countries.

Usually, gains from selling any property are taxable only in the state where the seller is a resident. However, there are certain exceptions:

Gains received by a resident of state A from the sale of immovable property situated in state B are also taxed in state B.
Gains from the sale of movable property forming part of the business property of a PE are also taxed in the state where such PE is situated.

Income received by an individual for professional services or other activities of an independent nature is taxable only in the state where he or she resides unless such a person has an office abroad (effectively a PE) for the purpose of performing such services. In the latter case, the income is also taxed in the state where an office is situated, but only so much of the income is attributable to that office (similar to the PE treatment).

The term "professional services" includes especially independent scientific, literary, artistic, educational, or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants.

In Which Country Will the Income be Taxed?

The DTAA specifically states where different types of income of a resident of either Singapore or Vietnam will be subject to tax. The following table states the type of income or payments made and the state where the income is taxed. This is important since the place of taxation will determine the rate of tax applicable to that type of income under the DTAA.

Type of income or payment

Where it is taxed

Income from immovable property

Taxed in the state where the property is situated.

Business profits

Taxed in the state where a company is managed and controlled — typically, the country of the company's board of directors meetings.

Permanent Establishment profits

Taxed in the state where it carries on business activities, but only in the amount attributable to that PE.

Profits from shipping and air transport

Profits from the operation of ships or aircraft used in international traffic are taxable only in the state where the enterprise that owns the vehicle is a resident (i.e. where a company is managed and controlled).

Dividends

May be taxed in the state where the recipient resides and in the state where dividends arise.

Interest

May be taxed in the state where the recipient resides and in the state where interest arises.

Royalties

May be taxed in the state where the recipient resides and in the state where royalties arise.

Capital gains

Taxed in the state where the seller is a resident.

Independent personal services

Taxed in the state where the person is a resident and in certain cases in the state where the work is performed.

Dependent professional services

Taxed in the worker’s state of residency and in certain cases in the state where the work is performed.

Directors’ fees

Taxed in the state where the company (paying the directors’ fees) resides.

Income of artists and sports persons

Taxed in the state where activities are performed.

Pensions

Taxed in the state where the recipient resides.

Government payments

Taxed in the state that pays the remuneration. However, if the payment is made by the government of state A, but a recipient is a resident and a national of state B, and the services were rendered in state B, such payments are taxable only in state B.

Payments to students, researchers, and scientists

Tax exempted.

In addition, payments for services rendered by a student or business apprentice are tax-exempt if such services are in connection with the studies or training and the amount of payment does not exceed the certain amount.

Protect Your Income From Excessive Taxation

To effectively grow your business and maximize profits, it’s essential to understand the tax benefits available to you and your business. If you’re considering incorporating your company in Singapore, CorporateServices.com can help you navigate the process by helping select the correct corporate structure that will minimize your taxes while fully complying with all government laws, regulations, and DTAAs.

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Conclusion

The Singapore-Vietnam DTAA was designed to further develop economic relations and enhance cooperation in tax matters between the two countries. Indeed, the DTAA has provided significant advantages to individuals and corporate entities of both states, making it possible to eliminate the double tax burden in cross-border business activities. Singapore’s favorable tax framework has made it an even more desirable location for business vehicles for cross-border investment in South-East Asia.

As an investor or business person with interests within South-East Asia, you should be aware of existing DTAAs in force, which can influence the proper business structure for your enterprise in order to avail tax exemptions or reductions in taxes, payable either in Vietnam or in Singapore. If you are interested in learning more about the optimal business structure in Singapore for your needs, please contact our team.

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