Every quarter, the Vietnamese subsidiary remits a trademark royalty to its foreign parent. That seemingly internal flow sits squarely within the Vietnamese tax authority’s reach on two levels: contractor tax withheld at source on royalty income, and the arm’s length principle for related-party pricing. This article explains the withholding duty, the conditions for relief under double tax treaties, and the price of skipping withholding.
Tax character of royalties: royalty income under contractor tax
A fee paid by a Vietnamese enterprise to a foreign organisation for the use of a trademark is royalty income under the foreign contractor tax rules classifying royalty income (formerly Clause 3, Article 7 of Circular No. 103/2014/TT-BTC; note that the corporate income tax part of that Circular was repealed with effect from 12 March 2026, and the current basis is the Corporate Income Tax Law No. 67/2025/QH15 and current contractor tax guidance), being payment for the use of industrial property rights. The income arises in Vietnam and is subject to foreign contractor tax. Under the direct method, the contractor CIT rate on taxable revenue for royalty income is 10 percent; royalty income is outside the scope of VAT, so no contractor VAT arises on a pure trademark royalty.
Two practical determinations must be locked into the licence contract. First, taxable revenue: if the fee is stated as the net amount the parent actually receives, it must be grossed up for tax purposes, making the real tax cost higher than the nominal figure; if the fee is gross, the parent bears the tax through the withholding. Second, the scope of the payment: licence contracts often bundle technical support, training and marketing services; those service components may attract different rates (and possibly contractor VAT), so separating each component’s value in the contract directly determines the correct total tax.
Double tax treaties: when they reduce the tax, and how
Most double tax treaties signed by Vietnam contain a royalties article capping the withholding the source state may apply; in many treaties that cap equals or sits below the domestic 10 percent, so the practical benefit of treaty relief varies by the parent’s residence state and must be checked in the specific treaty text, never assumed. Where the fee is routed through an intermediary company in a third state mainly to capture a treaty, the beneficial ownership condition is the main barrier the tax authority will test.
To apply a treaty rate, the Vietnamese party must complete the treaty application notification procedure under the Ministry of Finance guidance (Circular No. 205/2013/TT-BTC) before the withholding point, with a core dossier comprising the parent’s certificate of tax residence issued by its home tax authority for the relevant tax year, the licence contract, and documents evidencing the treaty conditions. The residence certificate is the document that most often causes delay, as it must be obtained abroad and legalised and translated; the subsidiary’s tax team should start requesting it at the beginning of the fiscal year rather than at the first payment date.
The second control layer: intra-group royalty rates and transfer pricing
Beyond contractor tax on revenue, the royalty rate between parent and subsidiary is a related-party price governed by Decree No. 255/2026/ND-CP on tax management of related-party transactions. The tax authority may ask: would an independent party agree to pay that rate for this mark, on this revenue, in this industry? If the rate is judged abnormally high against benchmarks, the excess may be disallowed as a deductible cost of the subsidiary, creating two stacked losses: contractor tax still paid in full on the whole fee, while the deduction is cut at the domestic CIT level.
The standard defence is a transfer-pricing file prepared in the same year as the transaction, in which the royalty rate is supported by comparable data from independent licence agreements. Groups commonly leave licence contracts unreviewed for years: a rate that was reasonable at low revenue becomes hard to defend as revenue grows, and mid-course rate adjustments need a clearly effective contract addendum, together with consideration of re-recording the amended licence.
Consequences of failing to withhold, or withholding wrongly
If the subsidiary pays the full royalty abroad without withholding contractor tax, the tax authority collects the pay-on-behalf amount from the subsidiary itself as the Vietnamese payer, plus late-payment interest for the delay and administrative tax penalties under the Law on Tax Administration. An internal understanding that ‘the parent bears the tax’ has no force against the tax authority: the withholding duty belongs to the Vietnamese party and cannot be contracted away.
At the payment-execution stage, the commercial bank processing the outbound remittance of a royalty will require contractor tax withholding and payment documents; without them the transfer stalls and the payment deadline in the licence contract itself is breached. The correct internal sequence is: determine income classification and treaty availability before the first payment period, complete the treaty dossier where applicable, withhold and remit the tax, keep the payment vouchers for the parent’s home-country credit, and re-test the royalty rate in the annual transfer-pricing file.
Frequently Asked Questions
How much contractor tax applies to trademark royalties paid to a foreign parent?
Trademark royalties are royalty income under the current foreign contractor tax rules on royalty income, subject to contractor CIT at 10 percent of taxable revenue under the direct method. Royalty income is outside the scope of VAT. Bundled service components are rated separately, and a net-of-tax fee must be grossed up to determine taxable revenue.
Can a double tax treaty reduce the tax?
Possibly, if the treaty between Vietnam and the parent’s residence state has a royalties article with a maximum withholding rate below the domestic rate and the parent meets the treaty conditions, notably beneficial ownership. The exact cap must be checked in the applicable treaty, and the treaty application notification procedure must be completed before the withholding point.
What documents are needed to apply a treaty?
Under the guidance in Circular No. 205/2013/TT-BTC, the core dossier comprises the Vietnamese party’s treaty application notification; the parent’s certificate of tax residence issued by its home tax authority for the relevant tax year (legalised and translated as required); the licence contract; and documents evidencing the treaty conditions, including beneficial ownership information when requested.
What happens if contractor tax is not withheld?
The Vietnamese subsidiary, as payer, is assessed for the full pay-on-behalf contractor tax, plus late-payment interest and administrative tax penalties under the Law on Tax Administration; an internal agreement that the parent bears the tax does not change this duty vis-a-vis the authority. In addition, the bank will hold the outbound remittance until valid withholding and payment documents are produced.
FLAT designs the contractor-tax withholding workflow for trademark royalty flows to parent companies: income classification under the current contractor tax rules, treaty application dossiers, and annual royalty-rate testing in the transfer-pricing file.
This article has been quality-reviewed by the FLAW AI Legal Council