Legal News

[Taxation] Foreign Contractor Tax (FCT) on Debt-Free Borrowing Interest

2024/08/29

Article 7.3 of Circular 103/2014/TT-BTC defines “loan interest income” as income arising from any form of borrowing, regardless of whether it is secured or unsecured and whether it benefits from the borrower.
According to this provision, if a Vietnamese enterprise enters into a borrowing agreement with a foreign organization (such as a foreign corporation or foreign bank), the interest on the loan paid by the Vietnamese enterprise is subject to foreign contractor tax in Vietnam.
However, if the foreign lender exempts the borrowing interest to the Vietnamese enterprise, then the lender does not derive income from the borrowing interest.
On August 15, 2024, the General Department of Taxation issued Official Letter No. 3602/TCT-CS to Long An Province Tax Department for guidance on the treatment of foreign contractor tax in this case. The specific contents of the letter are as follows

Foreign Contractor Tax:
As there is no payment of interest on borrowing to the foreign organization, Vietnamese enterprises are not required to file tax returns on behalf of the foreign organization.

Regarding the treatment of interest on borrowing in the accounting books:
Vietnamese enterprises should account for interest on debt forgiven as other income and include it in CIT taxable income.

 

References
Official Letter No. 3602/TCT-CS