International Turnkey Contracting in ASEAN: EPC-Projects in Vietnam

published on 16 March 2022 | reading time approx. 7 minutes

The importance of turnkey or EPC-projects (short for: Engineering, Procure­ment and Construction) has increased significantly in the Southeast Asia region – this also applies to Vietnam. Various factors play an important role in the realisation. In the following article, we take a closer look at tax, investment and manpower conside­rations in Vietnam.

• Tax Considerations »

• Investment Considerations »

• Labour law Considerations »

Tax Considerations

When is a permanent establishment (PE) generally established for on-site works? Does a double taxation agreement (DTA) between Vietnam and Germany affect this aspect?

According to the DTA, a building site-, construction- or installation-project constitutes a PE only if it lasts more than six months. It should be noted that under the Vietnamese guidance on DTAs, the period of six months is calculated from the date the contractor commences the preparation for the construction in Vietnam, such as establishing its office and planning the construction design. The duration then extends to the completion and transfer of the entire construction project in Vietnam, including the time of discontinuance of the project for any reasons.

If there are sub-contractors engaged, the execution time of projects for the determination of the PE for main contractors, shall be the sum of the time required for the execution of all contractual components by sub-contractors and the time of execution by the main contractor.

Although this is not explicitly expressed in the written guidelines of the tax authorities, the applied local tax administration laws are based on the rule “substance over Form”. This means that if there are connected activities carried out at the same building or construction site, assembly or installation project in different periods of time, these different periods shall be added together for the calculation of the project period.

Is it a common approach in Vietnam to split EPC-contracts in on- and offshore parts to mitigate tax risks?

The Foreign Contractor Withholding Tax (FCWT) is applicable to foreign business organizations doing business in Vietnam, or earning income in Vietnam under contracts, agreements or commitments between the foreign contractor and a Vietnamese entity, or between a foreign contractor and a foreign sub-contractor to perform parts of a main contract. FCWT is a combination of Value Added Tax (VAT) and Corporate Income Tax (CIT) components; both are applied together.

EPC contractors can choose to declare FCWT under one out of three methods: the “Withholding Method”, the “Hybrid Method” and (c) the “Credit Method”.

• The default method is the “Withholding Method” by which deemed VAT and CIT rates apply on gross income, and all administration and tax payment responsibilities rest with the Vietnamese customer. This is the most commonly adopted method.
• The “Credit Method” entails the foreign contractor to register for tax in Vietnam and to pay VAT on actual input and output invoices, and to pay CIT based on actual net profits.
• The “Hybrid Method” is a combination of the two methods mentioned above whereby the contractor registers for tax in Vietnam, pays VAT on actual input and output invoices, but is subject to CIT based on deemed rates.

Generally, the “Credit Method” and “Hybrid Method” are applicable where the foreign entity fulfills certain conditions for the tax registration, including that there must be a PE in Vietnam, a sufficient duration of the PE’s existence, as well as the adoption of Vietnamese accounting standards for such PE. If EPC contractors apply the “Credit Method”, the split of EPC contracts in on- and offshore parts would not further mitigate tax risks.

In the “Withholding Method” or “Hybrid Method”, splitting EPC contract in on- and offshore parts might optimize FCWT. This is especially the case when machinery and equipment are supplied by the EPC contractors while other services like construction or supervision are performed by onshore personnel.

Are there any specific taxes to be observed for EPC contracts in Vietnam?

The general tax to be applied to foreign contractors is FCWT. Furthermore, import tax will be applied to machinery and equipment (M&E) that is imported for the purpose of executing the Vietnamese project. Personal Income Tax (PIT) shall be applied on income earned by individuals working for the projects in Vietnam.

Investment Considerations

Are there specific investment conditions or permits/licences required for EPC-works in Vietnam?

“Engineering, Procurement and Construction”-works (short: EPC) must be formalized in an EPC-contract by the parties. The EPC-contract is usually regarded as sub-category of a construction contract according to the “Construction Law”.

Unlike domestic contractors, foreign contractors must be granted a construction operation license (in Vietnamese: giấy phép hoạt động xây dựng) as a key license for their construction activities in Vietnam. A foreign entity undertaking EPC activities in Vietnam without the required license does act illegally. Certain formal requirements are obligatory in regard to the issuance of a construction license. These include profes­sional licenses and minimum experience requirements of the key staff involved but also the awarding of sub-contracts to local contractors.

Would a mere tax registration of a PE be sufficient or is a certain investment vehicle required in Vietnam?

As mentioned above, the creation of a PE in Vietnam is principally determined by the application of the do­mestic laws and the tax treaties signed between Vietnam and other countries, i.e. DTAs.

Vietnamese regulations contain a very wide definition of PE, which is why many activities of a foreign company will be regarded as constituting a PE in Vietnam. In particular, a PE is defined as a production or business establishment through which a foreign enterprise conducts all or a part of their production and business activities in Vietnam. This includes, among others, branches, operational offices, plants, workshops, con­struction sites, construction, installation and assembly works, etc. Almost all EPC activities require an opera­tional office to be established subject to the relevant licensing (see above), which in turn constitutes a PE.

Tax registration is optional for EPC contractors, regardless if there is a PE or not. A tax registration is only required if the EPC contractor applies the “Credit Method” or the “Hybrid Method”. With both of these me­thods, EPC contractors will directly file and pay taxes with the tax authority.

For the “Withholding Method”, EPC contractors are not required to register for tax purposes. Instead, it is the Vietnamese customer who will be required to register for tax purposes, to withhold and pay FCWT on the income of the EPC contractor, when making payments to EPC contractors.

Can the PE get own bank accounts and handle local currency payments as well as FOREX transactions for the project?

According to the regulations, the law on investment and other guidance instruments of the State Bank of Vietnam, it is stated that an organization legally established in Vietnam is entitled to open a payment trans­action account in Vietnam.

Thus, a PE operated in a specific form (i.e. branches, operational offices under PCA) that has all required establishment licenses can open bank accounts in Vietnam.

With regard to foreign exchange transactions, the opening of payment accounts in foreign currency is generally permitted. The relevant procedures and conditions shall be subject to the regulations of the respective licensed bank in Vietnam.

Labour Law Considerations

Which immigration requirements commonly apply for foreign staff temporarily deployed to work on-site in Vietnam?

In Vietnam, foreign employees are normally required to obtain a visa and a work permit, which are two separate documents and used for different purposes. A visa is an official endorsement allowing a foreigner to enter and to remain within Vietnam, while a work permit is the permission for a foreign worker to work in Vietnam. A visa can be replaced by a temporary residence card (TRC) which grants a foreign worker the right to stay in Vietnam for a certain period of time. If a foreigner wants to stay and to work in Vietnam, a work permit and a visa or a TRC will be required.

The validity of a visa for working is usually three months, while in compliance with the duration of a work per­mit, a TRC is valid for a period of two years maximum.

Foreign employees temporarily deployed to work on-site, however, are not subject to a work permit if the duration of their stay in Vietnam is less than 30 days per stay, and not more than three times a year, or when they have a spouse who is a Vietnamese citizen.

Usually, the issuance of visa takes seven days. However, under the impact of Covid-19, the procedure to obtain a visa has become more complicated and time consuming. The average processing time for issuing a work permit is currently about one month, for a TRC mostly seven days.

Can work permits, if required, be applied for by an overseas company or the foreign individuals directly or is the involvement of a local entity required?

The general principle is that all foreign individuals (that is non-Vietnamese citizens) require a work permit issued by the Department of Labor, Invalids and Social Affairs (DOLISA) before they commence and undertake any employment in Vietnam, unless they fall into work permit exemption cases mentioned above. The local entity must be the sponsor who is to sign the necessary documents so that the foreign individuals can obtain a work permit.

Are there taxes or social security contributions applicable for foreign staff temporarily working on-site in Vietnam? Under which conditions are foreigners required to pay income tax?

Under current regulations, the employees of EPC contractors working for the Vietnamese project are subject to PIT (Personal Income Tax) in Vietnam, regardless of their actual presence in the country. The Vietnamese customer has to notify EPC contractors of the obligations to pay Personal Income Tax incurred by the foreign employees. There is also the obligation to provide information to the tax authorities about the foreign em­ployees, including their names, nationalities, passport numbers, working duration, positions, and incomes for the Vietnam customer. The Vietnamese customer has to provide such information for the tax authority at least seven days before the foreign employee starts working in Vietnam.

Vietnam has a compulsory social and health insurance scheme (SIHI) applicable to foreign individuals working in Vietnam under labor contracts with an employer in Vietnam. Contributions are to be borne by both, the employer and the employee. If the operational office signs labor contracts with the employees (it is not compulsory for executive offices to sign labor contracts with the employees), the executive office in Vietnam is obliged to withhold the contribution portion of the employee and to transfer the amount together with the employer's portion.