Personal Income Tax And Social Insurance Obligations For Foreigner Internally Transferring Within An Enterprise

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Personal Income Tax And Social Insurance Obligations For Foreigner Internally Transferring Within An Enterprise

The representative office of a foreign trader in Vietnam (hereinafter referred to as “Representative Office”) is a dependent unit of that foreign trader established under Vietnamese laws. When entering the Vietnamese market, foreign traders can choose many different forms to participate. However, establishing a Representative Office is an optimal test step to save costs, avoid risks from local procedures such as not applying value-added tax, income tax, corporate tax, no financial statements, no independent audit required…. in the early stages of joining. With the function of strengthening and assisting foreign traders in finding customers, promoting purchase and sale contracts with local partners, researching and developing products, foreign traders usually appoint the employee worked for foreign traders for a long time and understood their products to go to Vietnam, take the position of Head of the Representative Office and operating the activities of the Representative Office or work as an employee of Representative Office in Vietnam. These foreign employees are considered as Foreigners internally transferring within an enterprise.

Social insurance obligations for Foreigner internally transferring within an enterprise

Social insurance is a policy in the social security system mainly concerned by the government to ensure benefits for employees based on contributions of employees and employers. The essence of social insurance is a guarantee to partially compensate or replace the income of employees when they have a decrease or loss of income due to illness, maternity, work accident, occupational disease, unemployment, reaches the end of working age or dies based on contributions to the social insurance fund organized by the government. However, each employee will be applied to different social insurance policies. According to the provisions of Clause 1, Article 2 of Decree 143/2018/ND-CP of the Government on the subjects participating in compulsory social insurance: “Foreign employees working in Vietnam shall be required to participate in the compulsory social insurance if they have work permits, practicing certificates, practicing licenses issued in Vietnam, indefinite-term employment contracts or employment contracts valid for at least one year with employers in Vietnam.” In case of the foreign employee intra-company moving, foreign employees sign the labor contract with foreign traders and are not required to apply for a work permit as prescribed in Clause 3, Article 7 of Decree 152/2020/ND-CP: “intra-company moving within 11 sectors in the schedule of commitments in services between Vietnam and WTO, including business services, communication services, construction services, distribution services, educational services, environmental services, financial services, health services, tourism services, recreational and cultural services, and transport services.”

Therefore, foreigners internally transferring within an enterprise are not subject to compulsory social insurance.

The subjects participating in health insurance are employees working under definite-term labor contracts of total of 3 months or more, indefinite-term labor contracts. The monthly payment of Health Insurance is equal to 4.5% of the salary used as the basis for the amount of compulsory social insurance (monthly salary) with the employer payment of 3% and the employee payment of 1.5%. Accordingly, the subjects participating in health insurance do not discriminate against Vietnamese citizens or foreign employees. In addition, according to Clause 2, Article 1 of the Law on Social Insurance 2008 amended and supplemented in 2014 (hereinafter referred to as “Law on Health Insurance 2004”), foreign organizations and individuals in Vietnam also are subject to the provisions of the Law on Health Insurance 2004. Therefore, we believe that Foreigner internally transferring within an enterprise if working under an indefinite-term labor contract or a labor contract with a term of 3 months or more is also subject to in the Law on Health Insurance 2004 and must participate in health insurance under the laws.

However, according to Official Letter No. 288/BHXH-QLT dated February 18, 2020, of Social Insurance Agency of Ho Chi Minh City, Social Insurance Agency of Ho Chi Minh City instructs employers in Ho Chi Minh City that Foreigner internally transferring within an enterprise are not subject to take part in health insurance from February 01, 2020. Sharing the same opinion with the Social Insurance Agency of Ho Chi Minh City, in the online policy explanation on the Government Portal, Vietnam Social Insurance Agency also said that Foreigner internally transferring within an enterprise are not eligible to participate in health insurance because foreign workers in Vietnam are not specifically regulated to participate in health insurance under Article 12 of Law on Health Insurance 2004 and Decree 146/2018 dated October 17, 2018, of the Government on detailing and guiding the implementation of some articles of the Law on Health Insurance which not specific regulation the mechanism applicable to this group of subjects. However, the Official Dispatch is not a normative legal document and only is an internal administrative document or applicable to regions and localities. Therefore, in our opinion, to avoid risks in determining the social insurance obligations for the foreign employees performing intra-company moving, the representative office should send a written consultation to the social insurance agency where the office is located to consult, exchange views in advance to comply with regulations.

Personal income tax obligations of foreign employees performing intra-company moving 

Unlike other subjects, foreigners living and working in Vietnam have to declare and pay personal income tax. However, it is necessary to determine the foreigner’s residence status (resident or non-resident) to determine the foreigners’ payable personal income tax rate. 

Foreigner internally transferring within an enterprise are identified as residing in Vietnam. The Representative Office has to declare personal income tax similar to Vietnamese employees. 

For foreign workers who do not reside in Vietnam, it is the case that the employee (usually the Head of Representative Office) is a foreigner performing intra-company moving but has not been present in Vietnam for 183 days or more and does not have a regular address in Vietnam, so they are considered as a non-resident individual as prescribed in Clauses 2 and 3, Article 2 of Decree 65/2013/ND-CP. We can consider the personal income tax obligations of Foreigner internally transferring within an enterprise in two cases as follows:

  • Case 1: The Foreigner internally transferring within an enterpriseare not residing in Vietnam but generating income in Vietnam. The Representative Office has to declare personal income tax on the salary/wages incurred in Vietnam.
  • Case 2: The Foreigner internally transferring within an enterpriseare do not reside in Vietnam,  do not generate any income in Vietnam and are not entitled to salary/wages for work performed in Vietnam. Accordingly, foreigners are not subject to personal income tax. However, according to the provisions of Clause 2, Clause 3, Article 7 of Decree 126/2020/ND-CP, the Representative Office must still declare personal income tax for foreign workers quarterly whether or not they generate taxable income from October 1, 2020. On the other hand, Official Letter No. 2393/TCT-DNNCN dated July 1, 2021, of the General Department of Taxation on personal income tax declaration, in case organizations and individuals pay taxable income, they will be subject to personal income tax declaration. Therefore, if organizations and individuals do not generate and pay personal income taxable income, they are not subject to the Law on Personal Income Tax provisions. Accordingly, organizations and individuals that do not pay personal income taxable income in any month/quarter are not required to declare personal income tax for that month/quarter.

For this case, in our opinion, Official Letter 2393 is only used for reference. According to Official Letter 2393, The Representative Office can explain to avoid administrative penalties in case of failure in declaring personal income tax for foreign employees from July 1, 2020, until now. Then, the Representative Office should declare personal income tax for foreign employees whether or not having taxable income payments according to Decree 126/2020/ND-CP.

In addition, for the declaration of no income in Vietnam, we have encountered many cases in our consulting practice that the Representative Office declared no income. However, the tax authorities still applied personal income tax rates for the income paid by foreign traders. Therefore, in our opinion, you should consult the tax authority to do declare and pay personal income tax for foreign workers without income in Vietnam before doing to avoid the risk of tax penalties. 

The issues of personal income tax and social insurance obligations for foreign employees in Vietnam are complicated in terms of laws and practices, especially in the case of foreign employees performing intra-company moving. It becomes even more challenging to determine their obligations because they frequently change their residence address between their country and Vietnam. Therefore, Representative Offices of foreign traders in particular and employers, in general, need to carefully consider, understand legal regulations and regularly consult experts in determining personal income tax and social insurance obligations to avoid violations during implementation.