On 19 October 2016, the Estonian parliament approved the ratification of the pending income tax treaty with Vietnam. The treaty, signed 26 September 2015, is the first of its kind between the two countries.
The treaty covers Estonian income tax, and Vietnamese personal income tax and business income tax.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services through employees or other engaged personnel if the activities continue for the same or connected project within a Contracting State for a period or periods aggregating more than 183 days within any 12-month period.
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Vietnam applies the credit method for the elimination of double taxation, while Estonia generally applies the exemption method. However, Estonia will apply the credit method in respect of income covered by Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and Fees for Technical Services). For dividends, application of the credit method is limited to dividends that would be subject to the 10% withholding tax rate.
A provision is also included for a tax sparing credit, whereby Estonia will deem tax paid in Vietnam to include any amount which would have been payable as Vietnamese tax for any year but was exempted or reduced under specified provisions of Vietnamese law. The tax sparring credit will be available for a period of 10 years beginning the date the treaty becomes effective.
The final protocol to the treaty includes the provision that in respect of Articles 10 (Dividends) and 11 (Interest), if after the Estonia-Vietnam treaty enters into force, Vietnam signs an agreement with a third state that is a member of the EU or the OECD and such agreement provides for a lower rate of withholding tax and lower participating percentages than provided in the Estonia-Vietnam treaty, then such lower rates and percentages will automatically replace those provided in the Estonia-Vietnam treaty from the date such other agreement enters into force.
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.
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