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Tax Treaty between the U.S. and Vietnam Signed

On 7 July 2015, officials from the U.S. and Vietnam signed an income tax treaty. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers U.S. Federal income taxes imposed by the Internal Revenue Code (excluding social security and unemployment taxes), and the Federal taxes imposed on the investment income of foreign private foundations. It covers Vietnam personal income tax and business income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when a resident of a Contacting State furnishes services in the other State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 6 months within any 12-month period.

Withholding Tax Rates

  • Dividends (General) - 5% if the beneficial owner is a company that directly owns at least 25% of a U.S. paying company's voting stock or 25% of a Vietnam paying company's capital; otherwise 15%
  • Dividends (U.S. RICs and REITs, and Vietnam VREIF) - 15% if
    • Paid by a U.S. Regulated Investment Company (RIC);
    • The beneficial owner is an individual or pension fund holding an interest of not more than 10% in a Real Estate Investment Trust (REIT) or a Vietnamese Real Estate Investment Fund (VRIEF);
    • The dividends are paid with respect to a class of stock that is publicly traded and the beneficial owner of the dividends is a person holding an interest of not more than 5% of any class of the REIT's stock or the VREIF's stock; or
    • The beneficial owner of the dividends is a person holding an interest of not more than 10% in the REIT or VREIF and the REIT or VREIF is diversified (no single interest in immovable property exceeds 10% of total interests in immovable property)
  • Interest - 10%, although a 15% rate applies for interest determined with reference to receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person
  • Royalties -
    • 5% for royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment; excluding (i) payments for the rental on a bareboat basis of ships or aircraft if such ships or aircraft are operated in international traffic by the lessee; or (ii) payments for the use, maintenance or rental of containers (including trailers, barges, and related equipment for the transport of containers), except to the extent that those containers are used for transport solely between places within the other Contracting State; and
    • 10% for royalties paid for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including cinematographic films, films or tapes used for radio or television broadcasting), any patent, trademark, design or model, plan, secret formula or process

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of a U.S. real property interest;
  • Gains from the alienation of the capital stock of a company, or of an interest in a partnership, trust or estate, the total asset value of which is comprised directly or indirectly principally (greater than 30%) of immovable property situated in Vietnam; and
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Limitation on Benefits

The treaty includes a substantial article limiting the benefits of the treaty; Article 23 (Limitation on Benefits). The Article includes the provision that the benefits of the treaty will only be available for a resident of a Contracting State if the resident is a qualified person, which includes:

  • An individual;
  • A Contracting State;
  • A company whose shares are listed on a recognized stock exchange in a Contracting State or where at least 50% of its shares are held by qualified persons, and
  • Other persons, subject to a number of different conditions

Subject to certain conditions, however, a resident that is not a qualified person may still be eligible for the treaty benefits.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force. However, the provisions of Article 27 (Exchange of Information and Administrative Assistance) will apply from the date of its entry into force.

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