Royalties flowing from a Vietnamese manufacturer to a Korean licensor — a trademark, production technology or technical know-how — pass through two filters: Vietnam’s domestic contractor tax on royalties, and the Vietnam–Korea double tax treaty. The order of work matters: the treaty position must be established before the payment leaves, not argued after the money is gone.
The domestic baseline: 10% CIT, no VAT
Under domestic rules, royalty income of a foreign licensor bears foreign contractor CIT at 10% of taxable revenue, under Clause 3, Article 12 of Decree 320/2025/ND-CP with Circular 20/2026/TT-BTC guidance from 12 March 2026. Royalties are outside the scope of VAT in Vietnam, so the domestic total is the 10% CIT alone — materially different from a technical service fee, which adds 5% VAT. The Vietnamese licensee withholds and pays on the licensor’s behalf. Where one contract bundles the licence with training and technical assistance, the service component must be split out in pricing, because bundling pulls the whole amount towards the more heavily taxed characterisation.
The treaty filter: what the Vietnam–Korea DTA can and cannot do
The Vietnam–Korea double tax treaty (in force since the 1990s) allocates taxing rights over royalties and caps the source-country rate in paragraph 2 of its Article 12 by category, for qualifying Korean-resident licensors who are the beneficial owners of the royalties: 5% for royalties paid for a patent, design or model, secret formula or process, for the use of or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience — this 5% rate is directly illustrated in Example 37 of Article 22 of Circular 205/2013/TT-BTC, citing Article 12(2)(a) of the Vietnam–Korea treaty, where royalty payments for a secret oil-blending formula to a Korean company are withheld at 5% instead of the 10% domestic rate; and 10% in all other cases, such as trade marks and copyright, under the Second Protocol amending the treaty (signed on 27 November 2019, applied in Vietnam from 1 January 2022), which replaced the original 15% rate in the 1994 treaty. Measured against the 10% domestic baseline, only the 5% category sits below the domestic rate; the 10% category equals it, so for those royalties the treaty confirms the ceiling rather than reducing it further — relief arithmetic must start from classifying the royalty correctly, because relief is denied for arithmetic built on the wrong cap as surely as for a missing file. Where the Korean licensor has a PE in Vietnam to which the licence is effectively connected, the treaty route changes entirely: business profits attributable to the PE, not the royalty article, decide the tax.
Procedure: notify before paying, or refund after
Treaty relief in Vietnam is procedural: the payer files a notification/application dossier for treaty relief with the managing tax authority before the tax payment deadline of the relevant payment, attaching the Korean licensor’s certificate of tax residence for the relevant year, the licence agreement, and declarations on beneficial ownership and the absence of a Vietnamese PE. If the dossier cannot be assessed in time, the safe sequence is to withhold at the full domestic rate and then claim the excess back through the refund route once relief is confirmed — over-withholding is recoverable; under-withholding becomes the Vietnamese payer’s assessment, interest and penalty. Advance preparation with the Korean licensor (residence certificates take time in Korea) should start when the licence is signed, not when the first royalty falls due.
Frequently Asked Questions
How much contractor tax applies to royalties paid to Korea?
Domestically, royalty income bears contractor CIT at 10% of revenue (Clause 3, Article 12 of Decree 320/2025/ND-CP) and royalties are outside VAT. The Vietnam–Korea treaty caps the rate by category in paragraph 2 of Article 12: 5% for patent, secret-formula-or-process, industrial, commercial or scientific equipment and industrial-or-scientific-experience royalties (the 5% pinpoint appears in Example 37 of Article 22 of Circular 205/2013/TT-BTC, citing Article 12(2)(a) of the Vietnam–Korea treaty: royalties for a secret oil-blending formula withheld at 5% instead of 10%), and 10% in all other cases — the correct category must be confirmed in Article 12 of that treaty before filing for relief.
How much does the Vietnam–Korea treaty reduce?
The saving depends on the royalty’s category under paragraph 2 of Article 12 of the Vietnam–Korea double tax treaty: the 5% cap category (patents, secret formulas or processes, equipment and industrial or scientific experience information — pinpointed in Example 37 of Article 22 of Circular 205/2013/TT-BTC, citing Article 12(2)(a) of the Vietnam–Korea treaty, where royalties for a secret oil-blending formula are withheld at 5% instead of 10%) saves five percentage points against the 10% domestic rate, while the 10% cap in all other cases equals the domestic rate and produces no saving. The company must confirm the category and the beneficial-ownership conditions in the current treaty and the Second Protocol before computing any saving.
What is the procedure for claiming treaty relief?
File the treaty-relief notification/application dossier with the managing tax authority before the payment due date: the Korean licensor’s certificate of tax residence, the licence agreement, beneficial-ownership and no-PE statements, and supporting documents. If relief cannot be assessed in time, withhold at the domestic rate and claim a refund afterwards.
This article has been quality-reviewed by the FLAW AI Legal Council