Secondment is common for multinational companies. Among other benefits, it helps to leverage global talent and expertise for their Vietnam operations. However, a parent company must ensure that seconding a person from a foreign employer to its Vietnamese entity does not create a Permanent Establishment (“PE”) – a taxable presence – in Vietnam. That is, secondment, if not managed properly, carries tax risks to the parent.
While secondment is not the only way that an unwanted PE arises, it is the one we will deal with in this discussion.
Secondment in Vietnam
Secondment involves an employee (“secondee”) of a foreign company (“seconder“) being assigned to work for a Vietnamese entity (“host“) while she remains an employee of the seconder. In such a case, has the seconder created a taxable presence in Vietnam? The issues arises when the person seconded carries the authority of the seconding entity and is authorized to act on behalf of the seconder when it acts for the Vietnamese entity.
A secondment in Vietnam can be structured in two ways, as either an internal transfer or as a foreign assignment. In both cases, and for reasons that have to do with Vietnam’s Labor Law, the secondee must be a manager, executive director, expert, or technical worker. The two forms of secondment can have key differences, but from the standpoint of a PE, the differences are not relevant.
While neither structure inherently constitutes a PE for the seconding company, both carry the risk of creating one. That is, the creation of a PE depends on the nature of the secondee’s activities, not the secondment itself.
The Specter of a Permanent Establishment (PE)
The danger of a PE
The fundamental risk of creating a PE is unplanned tax liability in Vietnam. A PE is simply a tax trigger: it signals to the Vietnam authority that the foreign company has a fixed, taxable presence here, requiring it to pay Corporate Income Tax (CIT) on profits attributed to the PE’s operations both in Vietnam and offshore.
The financial danger is two-fold. First, the foreign company may face retroactive assessments, steep penalties, and interest because the PE may have been created accidentally years before. Second, establishing a PE introduces a large, expensive local compliance burden–registering the tax entity, filing local returns, and dealing with audits–all of which were unplanned. In short, the risk of a PE is owing years of corporate tax and penalties in a country where it never intended to be a formal taxpayer.
How Secondment Triggers PE Risk
While a PE can be created in multiple ways (ie, by creating a fixed place of business), the risk in a secondment arrangement centers on the activities and authority of the secondee in the host country. A PE risk is particularly high if the secondee: (a) possesses authority to conclude contracts on behalf of the foreign seconder, or (b) regularly delivers goods or provides services, such as consulting, on behalf of the seconder.
For example, if the secondee’s work in Vietnam involves installing or servicing products sold by the foreign seconder, this activity could trigger a PE. The key factor is who bears the responsibility for that work. If, on the other hand, the Vietnamese host company is contractually or otherwise responsible for the installation/maintenance and directs the secondee to perform it, the work of the secondee is considered part of the host’s normal operations and does not create a PE. Conversely, if the Vietnamese host has no responsibility for the installation or maintenance, and the secondee performs the work for the benefit of the seconder, the seconder risks creating a PE in Vietnam.
Of course, the creation of a PE could depend on the frequency of the work. Since the law uses the term “regularly” without providing a precise definition, performing the work more than once would likely introduce a significant risk.
Mitigating the PE Risk
If Vietnam and the country from which the secondee comes have a tax treaty, the treaty will take precedence over Vietnamese law and provides clearer rules on what constitutes a PE, potential exceptions, and consequences. It is good to start with a review of a treaty that applies if there is one.
For example, the Singapore-Vietnam tax treaty narrows the PE criteria. Merely possessing the authority to conclude contracts on behalf of the foreign seconder is not enough to create a PE risk; the secondee must habitually exercise such authority. Furthermore, in this treaty even if a secondee “regularly delivers goods or provides services, such as consulting, on behalf of the seconder”, a PE is not automatically created. PE status only applies if such activities exceed an aggregate duration of 183 days within any twelve-month period.
However, to maintain a secondment arrangement and mitigate the PE risk effectively, the foreign company must take a highly controlled and strategic approach:
- Integrate the Secondee with the Host Entity
The core principle of mitigation is to ensure the secondee’s work is exclusively directed and managed by the Vietnamese host entity and forms an integral part of the host entity’s normal business operations. This means the secondee must report to and be controlled by the Vietnamese host in every aspect of her assignment.
Furthermore, all the secondee’s activities must be solely for the host’s benefit. To maintain a clear separation, a prudent step is to be certain that the secondee has no signature nor other authority that permits him or her to conclude contracts or to perform any work on behalf of the seconder unless a treaty clearly permits it.
- Careful Documentation and Scrutiny of Activities
It is important to draft the secondee’s assignment letter carefully. This letter should explicitly limit a secondee’s authority, ensuring they cannot commit the offshore seconder to any actions in Vietnam, either independently or through collaboration with the Vietnamese host.
The secondee must avoid performing activities that benefit the seconder, such as direct sales from the seconder, providing services to the seconder’s clients, or managing inventory for the seconder. Caution is paramount, as distinguishing the true beneficiary of the secondee’s actions can sometimes be difficult.
- Consider Full Termination of Employment (Where Feasible)
To fully eliminate the risk of creating a PE, the foreign company might consider terminating the employment relationship with the secondee entirely. The secondee would then be directly and solely employed by the Vietnamese host, replacing the secondment with a standard direct local employment contract. By cutting the legal tie between the foreign seconder and the secondee, a large risk in the PE relationship is eliminated. However, this may not be an ideal or feasible solution for temporary assignments.
A Successful Precedent
A recent case involving Samsung Korea and its subsidiary in India, and despite the venue, provides a valuable lesson in structuring secondments. The Delhi High Court ruled that Samsung Korea did not create a PE in India simply by seconding employees to its Indian subsidiary.
While the countries and specific laws are different, the court’s reasoning offers a globally relevant blueprint. The court found that the seconded employees were under the full control and supervision of the Indian subsidiary, not Samsung Korea. Crucially, the work performed by these employees was for the direct benefit of the Indian entity’s business, not in furtherance of Samsung Korea’s interests. This arrangement was formalized through tripartite agreements, which proved the employees were fully integrated into the Indian subsidiary’s operations.
As a result, the court concluded that Samsung Korea was not carrying on its own business in India and was therefore not liable for taxes there. This outcome highlights the importance of a well-documented and executed secondment that clearly severs the operational link between the secondee’s activities and the seconder’s interests in the host country.
Conclusion
Seconding an employee is a key strategy for multinational companies. Effective secondments to Vietnam require careful attention to fundamental compliance rules, such as avoiding creation of a PE, which can lead to taxation of the seconder. Caution and drafting of clear secondment agreements and job descriptions is essential. That is, the secondee should not be authorized to act in any way that commits the seconder, nor should she act in any way that directly benefits the seconder.
