Tax Incentives For Software Development Companies In Vietnam

To support and encourage the development of the information technology industry, especially in the field of software development, the Vietnamese Government has implemented several attractive tax incentives. Below are the special tax policies that software companies need to be aware of in order to maximize these benefits.

Is Software Development Subject To Value-Added Tax (VAT)?

According to Article 4 of Circular 219/2013/TT-BTC, software products are exempted from VAT. 

This means that the software companies do not need to charge VAT on the sale of their products, which helps lower overall customer costs and boosts industry competitiveness.

What Are The Corporate Income Tax (CIT) Incentives?

Software Development companies are entitled to significant CIT incentives, as stipulated in Circular 78/2014/TT-BTC (amended and supplemented)

Preferential CIT Rate: Income derived from software production is subject to a preferential CIT rate of 10% for a period of 15 years, instead of the standard 20% rate.

Tax exemption and reduction: 

• Exemption: The company is exempted from CIT for the first four years.
• Reduction: The company enjoys a 50% reduction in CIT for the following nine years.

Determining The Tax Incentive Period

According to Clause 2, Article 12 of Circular 96/2015/TT-BTC, the tax exemption and reduction period is calculated continuously from the first year in which the enterprise generates taxable income from the new investment project.

In cases where the enterprise does not generate taxable income within the first three years from the initial year of revenue generation from the new investment project, the tax exemption and reduction period will commence from the fourth year when revenue is first generated.

What Is The Scope Of Tax Incentives?

It is important to note that these tax incentives apply only to income derived from software production activities. If a company engages in multiple business activities, such as both software development and hardware trading, only the income from software production is eligible for the tax incentives. 

The company must ensure that their financial records clearly separate income from eligible and non-eligible activities.

What Are The Conditions For Enjoying Tax Incentives?

To qualify for the tax incentives, a company must ensure that its software production activities comply with the regulations and guidelines issued by the Ministry of Information and Communications (now the Ministry of Science and Technology). These guidelines determine whether a company’s activities constitute software production, based on the nature of its services and its periodic compliance reports.

How Does The Self-Declaration System Work And What Are The Compliance Risks?

Vietnam operates on a self-declaration system for tax reporting. Companies must actively claim the tax incentives if they believe they are eligible. However, if tax authorities later determine that a company does not meet the required conditions, it could face tax arrears and penalties.

Common Challenges For It Companies

Base on our practical experience, software companies often face the following challenges when applying for tax incentitives:

Uncertainly in Eligibility: Many companies hesitate to claim tax incentives due to concerns about whether they fully meet the legal requirements and fear potential penalties in the future.

Incorrect Application: Some companies claim tax incentives without fully satisfying all conditions, lead to tax audits, retroactive tax assessment, and penalties.

How Can Software Companies Ensure Compliance And Maximize Tax Benefits?

To maximize the benefits of tax incentives while ensuring compliance, software companies should:

Carefully review the eligibility criteria and relevant legal provisions.

Maintain proper documentation and financial records to substantiate their software production activities.

Seek professional tax to mitigate risks associated with tax incentives.

Conclusion

By understanding the available tax incentives and ensuring full compliance with the applicable regulations, software companies in Vietnam can take advantage of significant benefits, reducing their tax burden and improving their competitiveness in the market. Always ensure proper documentation, review legal provisions, and consult experts to make the most of these opportunities.