Periodically, we will highlight a DTA to which Vietnam is a signatory. In this Tax Pointer, we highlight the main points under the DTA between Austria and Vietnam which became effective on 1 January 2010.
Tax Treatment of Service Fees
As with most other DTAs to which Vietnam is a signatory, a permanent establishment (“PE”) under the DTA between Vietnam and Austria includes the following (Article 5):
1. A place of management;
2. A branch;
3. An office;
4. A factory;
5. A workshop;
6. A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
In addition, a PE also encompasses a building site, construction, assembly or installation project or supervisory activities in connection therewith but only where such site, project or activities continue for a period of more than six months.
Thus, an interesting note is that the term PE also includes “an installation structure, or equipment used for the exploration of natural resources”. Most of DTAs of Vietnam do not provide for this provision as constituting a permanent establishment.
This DTA also contain a “Technical Services” provision (Article 12). Such provision provides that:
“Technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or of the fees for technical services the tax so charged shall not exceed 7.5% of the gross amount of such fees.”
In other words, if technical fees are paid by a Vietnam resident (even if the services are performed offshore), then Vietnam will have taxing authority over such fees, but the tax is limited to 7.5% of the gross amount of the fees.
This DTA joins a handful of DTAs that include a provision on technical services (including Malaysia, Germany, Canada, India and Italy).
Tax Treatment of Dividends
With respect to the tax treatment of dividends, Article 10 of the DTA reads as follows:
1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:
a) 5% of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 70% of the capital of the company paying the dividends;
b) 10% of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25% of the capital of the company paying the dividends;
c) 15% of the gross amount of the dividends in all other cases.
In other words, the DTA will limit the withholding tax rate up to 15%. For now, this issue is a moot point since Vietnam does not apply a withholding tax in its domestic tax law which exceeds the DTA rates.
Tax Treatment of Interest
In relation to tax treatment of interest, Article 11 provides as follows:
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10% of the gross amount of the interest.
This means that Vietnam will limit the withholding rate at 10% for interest paid to a beneficial owner in Austria (except for interest paid to a state or central bank, in which case, Vietnam is not allowed to tax).
However, under the Vietnam’s domestic law, a withholding tax rate of 10% is also applicable for interest paid to foreign entities under the foreign contractor tax regime. It is clear that the application of the DTA offers no additional benefit in this case.
Tax Treatment of Royalties
With respect to the tax treatment of royalties, Article 12 provides as follows:
“Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 7.5% of the gross amount of such fees.
The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematographic films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.”
Similarly to interest, a withholding tax rate of 10% is also applicable for royalties paid to foreign entities. Since both the rates under domestic law and the DTA are similar, the application of the DTA offers no additional benefits.
Tax Treatment of Gain on Sale of Shares
With respect to the gain on sale of shares in a Vietnamese company, Article 13 provides as follows:
1. Gains derived by a resident of a Contracting State from the alienation of shares or comparable interests in a company, the assets of which consist wholly or princip
ally of immovable property situated in the other Contracting State, may be taxed in that other State.
2. Gains from the alienation of a participation of 25% or more in shares, other than those mentioned in paragraph 4, in a company which is a resident of a Contracting State may be taxed in that State.
In other words, Vietnam will have taxing authority if (1) the assets of the Vietnamese company consists “wholly or principally” of immovable property (i.e. real estate) or (2) if the Austria resident owns 25% or more in shares of the Vietnamese company.
“Most favored nation” clause
The Protocol to the DTA also provides for a “most favored nation” clause with respect to dividends (Article 10), interests (Article 11), royalties and technical services (Article 12). Specifically, the Protocol provides that “if after the entry into force of this Agreement, Vietnam has signed an Agreement or Convention for the avoidance of double taxation with a third State which is a member of the European Union, and that Agreement or Convention contains lower withholding tax rates (including zero rates) than those provided under this Agreement, these rates will automatically replace the rates of this Agreement”.
6 September 2011
