Corporate income tax: China 25%, Vietnam 20% — the headline figures make Vietnam look 5 points “cheaper”. But sophisticated investors decide on the effective tax burden, not the headline rate: after incentives, after deductible/non-deductible items, after the global minimum tax, how much of each profit dong is actually lost to tax in each country? This article compares the two CIT frameworks, the incentive mechanics, and how to compute the real burden for a typical manufacturing project.
Rate frameworks: 25% vs 20% — and the important exceptions
China: uniform 25%, 15% for high-tech
China’s 2007 EIT Law applies a uniform 25% to domestic and foreign-invested enterprises alike. The notable exception: High and New Technology Enterprises (HNTE) enjoy 15% — but HNTE recognition is demanding (R&D ratios, IP ownership, technical staff) and subject to periodic re-examination. Small low-profit enterprises have their own preferences. Zones and regions (development zones, FTZs, the western region) add further incentives — but the mechanics are complex and shift with periodic policy.
Vietnam: 20% standard, project-based incentives
Vietnam’s standard 20% starts 5 points below China. Incentives run by project: preferential 10%/15%/17% rates for defined periods plus time-bound exemptions, keyed to location (IPs, EZs, difficult areas) and sector (high-tech, renewables, electronics components, and so on). Vietnam’s strength: incentives attached to the investment certificate — transparent and predictable upfront, so investors know their deal before committing capital.
The real burden: four factors beyond the rate
One — deductible expenses: both countries disallow categories of expenses (administrative fines, costs without valid invoices, and the like). Vietnam caps related-party interest deductions (the EBITDA rule under Decree 132/2020/ND-CP); China has analogous thin-capitalisation rules. Two — depreciation: fixed-asset depreciation schedules differ, affecting early-year tax cash flows. Three — incentives actually enjoyed: headline preferential rates must be netted against “condition-compliance costs” (annual reporting, inspections) and clawback risk if conditions fail. Four — Pillar Two: for large groups (EUR 750 million+ revenue), the Vietnamese effective rate cannot fall below 15% (QDMTT under Resolution 107/2023/QH15) — incentives pushing below 15% are partly “topped up”.
A quick way to compute your project’s burden
The practical formula: effective burden = (CIT payable + withholding taxes + Pillar Two top-up if any − refundable incentives) / pre-tax profit. For an electronics-components project in a Vietnamese IP on a 15% preferential rate for 12 years plus 2-year exemption and 4-year 50% reduction: the early-year effective burden can be just 0–7.5% — far below China’s 25% (or 15% HNTE). But for a Pillar Two in-scope group, the Vietnamese effective burden floors at 15% — narrowing Vietnam’s edge, so the relocation decision must rest on total cost (labour, land, power, logistics), not tax alone.
Where the comparison misleads: three traps
Trap one — comparing HNTE 15% with Vietnam’s 20%: HNTE status is hard-won and revocable; Vietnam’s 20% is unconditional. The honest comparison is each project’s expected ETR over the investment horizon, not the best-case certificate rate. Trap two — ignoring the “cost of incentives”: Chinese zone incentives often come bundled with local-government negotiation and unwritten commitments; Vietnamese certificate incentives come with annual compliance checks — both have friction costs that belong in the model. Trap three — static analysis: both countries adjust incentive policies periodically (China’s zone policies shift with five-year plans; Vietnam’s incentive framework evolves with each investment-law cycle). Model two scenarios — incentives-as-promised and incentives-partially-withdrawn — and check whether the location decision survives both. If the decision only works with the rosiest tax assumptions, it is a tax gamble, not a strategy.
The pre-exit profit repatriation timeline — year by year
Year N-2: start “milking” profits
Once exit intent exists (even before formal decision), start declaring full annual dividends instead of retaining for reinvestment. Why: profits retained at dissolution become liquidation proceeds — taxed and processed more complexly than annual dividends. A little each year shrinks the profit “pile” left at exit.
Year N-1: accelerate and clean up
Special dividends (from accumulated prior-year profits) — “sweeping” retained earnings. Simultaneously clean up: recover doubtful receivables (don’t let them become liquidation losses), clear inventory (sell, not scrap), settle intercompany advances. Goal: by exit day, a “lean” company — few assets, little debt, few complications.
Year N: exit with a “light bag”
At formal exit, profits have flowed home gradually — the amount left to remit through dissolution is small, procedures fast, risks low. Compare: company A retaining USD 5M then dissolving at once (tax + procedures + time) vs company B distributing USD 5M over 3 years (simple annual procedures) — B is faster, cheaper, safer.
Tax traps — don’t let “milking” become “dodging”
Pre-exit dividends are fully lawful — but need proper procedures (resolutions, audits, yearly tax settlement). Don’t: “paint” costs to shrink pre-dividend profits (abusive transfer pricing) — tax authorities scrutinise pre-exit years closely. Principle: “milk” via lawful dividends — not accounting tricks.
The headline-rate trap — 20% vs 25% means little
Quick compare: CIT Vietnam 20% (incentives: holidays for encouraged projects) vs China 25% (15% for high-tech enterprises). Never conclude “Vietnam is cheaper” — compare tax actually paid: (1) tax bases (deductible expenses differ); (2) real incentives (what does your project get?); (3) withholding taxes (fees back to China — on top); (4) compliance costs (accounting, audit, advisory).
Modelling the total burden — a practical template
Build a 5-year model with both jurisdictions side by side: year-by-year CIT (with actual incentive schedules — holidays expire), withholding on outbound payments (dividends, royalties, services — DTA rates applied), VAT/GST irrecoverable portions, and compliance spend. Include the exit year (capital-gains on sale — often forgotten, sometimes the largest tax). Sensitivity: run profitability variants (low/base/high margins — incentives matter less when profits are thin). The headline rate decides headlines; the model decides investments.
China–Vietnam tax burden checklist
(1) Pin down the nominal rate per project in each country (any HNTE/incentive); (2) list qualifying incentives and their durations per country; (3) model deductible/non-deductible costs and depreciation under each country’s rules; (4) compute the 5–10 year effective burden per option; (5) add Pillar Two impact if the group is in scope (15% floor in Vietnam); (6) set the ETR beside total operating costs (labour, land, power, logistics) to decide. Don’t: decide on “25% vs 20%” alone — the headline is the tip of the iceberg.
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FLAT Law Firm advises Chinese investors in Vietnam across the full lifecycle: investment structuring, IRC/ERC procedures, tax, labour, intellectual property and dispute resolution. Contact us for advice tailored to your case.
This article has been quality-reviewed by the FLAW AI Legal Council
