A common question arising from enterprises is how to efficiently and effectively pay individuals for work that is undertaken for the business, whilst staying compliant, where a contractor arrangement is sought?

There are a number of issues that arise with this simple question, and these can have significant implications.

Key takeaways in this article:

1. Individuals can easily be deemed an employee, regardless what you call the agreement!

2. Tax law may require a deduction of 10% “withholding” tax, but individuals without business registrations are likely to have up to 35% tax rates applied (ie, same as for wages for employees).

3. Foreign individuals can’t (as a practical matter) register for an individual business registration

4. Foreign individuals need a work permit if acting (or deemed acting) as an employee.

Consideration of labour/employment laws for engaging with an individual for services.

Where an enterprise seeks to engage with an individual for services, there will be an agreement of some sort, with outcomes and obligations. Often, this will be an explicit employment agreement, and will be drafted in the context of the Vietnam Labour Code. Alternatively, the individual could be a registered business individual and engage as business through a contract. The third outcome is what is regularly referred to as a “freelance” or services contract arrangement, which encompasses the intent for an individual to receive compensation without creating an employment relationship.

The Labour Code defines an employee as an individual that works “…under an agreement; is remunerated [for the work]; and is managed, directed and supervised by the employer”.

This definition is broad, the reference here in the Labour Code to an “agreement” is specifically defined so that an agreement can be deemed to be an employment contract regardless of what the parties use as its title. Therefore, simply calling something a “Freelance Services Agreement” (for example), would not stop this agreement being an employment agreement under the code.

This can present a number of specific issues if an unintended employment relationship is deemed under the Labour Code:

• • Social Insurances: Employees are subject to insurance contributions, which are levied on both the employer and employee.

• • Personal Income Tax: Obligations for withholding and remitting taxes differs for an employee versus non-employee

• • Employee protection: Employees have significant protections and rights under labour laws (including paid leave, overtime etc). Most importantly, termination of an employee is difficult and implications for employment terms may result in ongoing commitments.

The result is that although an “agreement” may not have been intended to be an employment relationship, and many of the above matters are not envisaged in the document, the fact is that the relationship may in fact be one of employer and employee and many of the obligations will revert back to legislative defaults (ie, leave/termination requirements) or internal standards of the employer.

The bigger implication if this arises is that the “employee” may have greater claims against the employer, and the employer may be subject to significant penalties and additional payments under labour requirements that would not have arisen.

In fact, we have seen claims in labour courts for illegal terminations (usually found in favour of the individual) as notwithstanding the agreement stating the individual is a contractor, the labour courts confirm that the underlying relationship is one of employment.

Note 1: Individuals are usually employees, regardless of what the agreement states.

So, how do parties word around this deeming? As mentioned earlier, Individuals can register with the authorities as Business Individuals (or business households). This will generally support the treatment of the agreement of not being one of employment, but contracting with a business, provided the agreement is drafted with care (remember, the labour code definitions are broad, and if it walks and quacks like a duck….the authorities will likely still call it a duck!).

What are the tax implications here?

Payments to employees are subject to social insurances (health, unemployment and social insurance), and then subject to Personal Income Tax withholding and remitting. The withholding rates for PIT range from 5%-35%.

Payments to individuals under services contracts who are not employees are subject to a flat rate of 10% withholding (where the payment is from 2m VND).

Therefore, the deeming of an employment relationship can have a significant impact on the net cash paid to an individual, or the quantum of potential liability to a deemed “employer” for treating someone as a contractor when they should have been taxed as an employee.

There are, however, some issues that arise here for how labour and tax laws interact. Although an agreement with an individual may be legally valid as a contractor relationship under general contract laws, and therefore a 10% tax withholding is to be applied to the payment, the individual can still be subject to additional Personal Income Tax (“PIT”) upon their annual personal tax finalisation, totalling up to 35%. If the income is from personal exertion (unless specifically exempted and covered by other laws), this business and salary income is subject to PIT per Circular 111/2013/TT-BTC (“Circular 111”) at standard rates (ie, 5% – 35%). If the individual is registered as a business individual then under Circular 40/2021/TT-BTC, taxation is likely different. Therefore, if taxed under Circular 111, this significant additional tax at the end of year on top of the 10% withheld by the paying organisation is commonly problematic. We have seen issues in the press recently where angry claims are made at employing organisations when this is additional PIT (above the 10% initially withheld) is discovered by individuals.

Note 2: have procedures in place for individuals that seek to be paid as contractors requiring them to show their business registration and provide a business invoice, or expect to treat them as an employee (and deal with the implications of labour law, termination, definite term employment etc) to avoid future shocks/impacts.

Firstly, there is no automatic right for a foreign individual to work or undertake business in Vietnam. The right to work is subject to the Labour Code and the relevant Decree covering foreign employment in detail, as the ability to register as a business individual as a resident foreigner doesn’t easily/practically exist in law (establishing a foreign owned company is far easier to contemplate, but is out of the scope of this article).

Therefore, it is difficult to argue that a foreign individual under a domestic service contract is anything but an employment relationship, unless the individual is engaged offshore and providing the services from outside Vietnam.

For an individual to be an employee (or even if they are deemed an employee) they must first obtain a Work Permit (or a Work Permit Exemption, remembering that Work Permit Exemptions are not always automatic, and must be applied for an issued to be valid in many cases). Without a Work Permit in hand, a foreign individual is not practically permitted to undertake any employment activities in Vietnam, except for the ability for a foreign individual to come to Vietnam to provide services for not longer than 30 days per visit, and for not longer than 90 days in any year..

A further take away here, If an organisation seeks to engage a foreign individual for any services, other than through the formal Work Permit/Work Permit Exemption process, it can only realistically be undertaken via:

• • Offshore contract, paying the individual offshore where they are not resident in Vietnam providing the services, or

• • They are only coming to Vietnam for period of less than 30 days per visit, and less than 90 days per year.

Phuong Vo is Managing Partner at Alitium Vietnam, providing market entry and professional support for foreign investors in Vietnam. Contact Phuong via vietnam@alitium.com for further assistance and advice.


This article is general in nature, and while it aims to present useful insights, it is important to note that the content shared here should not be considered as formal legal, taxation or professional advice. For specific guidance on obligations or legal matters related to your business, we strongly recommend consulting with a qualified professional, such as a tax advisor or legal expert or directly reach out to us.