Outlining fresh regulations on personal income tax

Tran Thai Binh and Duong Thi Minh Han from law firm LNT & Partners

On June 1, the Ministry of Finance promulgated Circular No.40/2021/TT-BTC providing guidelines on VAT, personal income tax (PIT), and tax management imposed on income of the households and individual businesses, which came into effect on August 1.

Circular 40 will replace part of Circular No.92/2015/TT-BTC from 2015 on the same issue. Among other things, under Circular 40, PIT will be imposed on those who are leasing out their properties, including residential houses, premises, shops, factories, and warehouses (exclusive of accommodation services); transportation vehicles and machinery without operators; and other properties (no associated services included).

Taxable income from leasing in Vietnam

Under applicable regulations on PIT, individual and householdlandlords shall be exempted from PIT if their total income earned from lease contracts in the calendar year is lower than VND100 million ($4,350). If the total income is higher, it shall be subject to the PIT.

Circular 40 provides that in determining whether the income reaches the such taxable threshold, it must be calculated based on the total income earned in one calendar year.

However, the circular is seen as controversial as it is based on nominal income in lieu of actual income in one calendar year. Hence, although the total income has not been generated for a full calendar year, it may still be deemed taxable for reaching the set threshold as it is determined based on nominal revenues which is produced under the assumption that the rental income had arisen for the full 12 calendar months.

If the assumption result of such calculation gives an aggregate of more than VND100 million, the income of the months actually arising is subject to the PIT, though the actual income of owners is still less than that threshold in reality.

For example, if the lease agreement is signed in November, Circular 40 will assume that the income is earned for the full calendar year by multiplying the monthly rental to the full 12 calendar months. If the aggregate rent reaches the set threshold, the income earned of two months of the calendar year since November is deemed taxable.

In other words, landlords would have to pay PIT on the two-month rental income of the calendar year even though the total income earned in those two months are less than VND100 million.

The reforms by Circular 40 have put even more pressure on landlords, than Circular 92 did. Under Circular 92, the arising income was calculated based on the total actual income in the corresponding months.

Circular 92 allowed the threshold to be determined on the actual income earned from a lease, not on an assumption like with Circular 40. Landlords who could have been exempted from PIT under the Circular 92 may now be subject to PIT.

It should be reminded that the income which is taxable in the calendar year shall be the rental income actually earned in the corresponding months, and not the assumed income.

Lump-sum rental payments in new regulations

Circular 40 also affects changes in taxation principles on income from lump-sum rental payments for the entire term of the rent. The income from lump-sum payments is taxable if its assumed aggregate of the 12-month rental reaches the taxable threshold under Circular 40, instead of the aggregate of rent in the corresponding months it actually arose in under Circular 92.

Thus, if a lease contract signed in March provides a one-off payment of the rent for the entire term, the income is taxable if it reaches the threshold based on Circular 40’s nominal assumption.

If there are any changes in the subject matter of the lease agreement resulting in a change of the taxable income, the landlord shall declare amendments or supplements with the tax authority.

The situation in a nutshell for landlords

The new approach to determine the taxable income by using an assumption basis under Circular 40 is deemed controversial.

According to Decree No.65/2013/ND-CP from the government, the income from property leasing activities is the amount of payments received from a lessee paid in each instalment or lump-sum as advance payments. Prima facie, the landlords could legitimately expect the determination of taxable income to be based on the “received” income through the calculation method under Circular 92, and not the “assumed” income.

There has been a call from the Vietnamese public to review and amend Circular 40. Nevertheless, for now landlords should be aware of their tax obligations. Regardless of when a lease contract is signed, the income earned in the months is taxable if its assumed aggregate is higher than the aforementioned cost.