Internal Transfer in Vietnam: Labor Compliance vs Tax Deductibility

For multinational corporations operating in Vietnam, internal transfer arrangements have long been a preferred method to deploy key personnel, including foreign experts. They offer flexibility and exemptions from certain recruitment procedures.

However, ensuring CIT deductibility of employment costs arising from internal transfers has become increasingly complex. This Thought Catalyst highlights the evolving conflict between labor compliance and tax deductibility, and why it may create uncertainty and audit risk for businesses operating in Vietnam.

What is an internal transfer in Vietnam?

Vietnam regulations distinguish between:

• Internal transfer employees (assignment-based), and
• Local hires working under a standard labor contract.

From a compliance perspective, the supporting documentation and payment structure differ materially.

What is the compliance baseline for foreign experts in Vietnam?

Vietnam guidance distinguishes internal transfer arrangements from local employment under labor contracts, particularly for foreign experts.

In practice:

• Internal transfer: labor contract is not allowed; salary is paid offshore (by the parent company); supported by work permit (or equivalent) plus assignment/appointment letter.
• Local hire (standard): labor contract is required; salary is paid onshore (by the Vietnam entity); supported by work permit plus labor contract.

Importantly, signing a labor contract with an internal transfer employee may create serious compliance risks, including potential work permit and visa status implications.

What is the CIT deductibility issue?

A key issue arises for internal transfers in Vietnam because:

• Labor compliance requirements may limit salary payments from the Vietnam entity to internal transferees, but
• New CIT rules may recognize appointment/assignment letters as supporting documents for CIT deductibility of internal transfer salary costs

At the same time, CIT rules may also deny deductibility for expenses linked to violations of specialized laws. This creates uncertainty: are internal transfer salary costs deductible for CIT purposes, or not?

What are the key risks for companies?

This conflict can result in:

• Material CIT deductibility uncertainty
• Increased audit risk
• Potential challenges in structuring salary payment approaches
• Pressure to shift to alternative arrangements (e.g., local labor contract), which may increase costs (payroll taxes, social insurance, compliance burden)

What should companies do now?

Given the evolving enforcement landscape, companies should closely monitor:

• Regulatory updates
• Enforcement practice by authorities
• Internal transfer structures and supporting documentation

This helps companies reassess their approach and respond quickly as the authorities’ position becomes clearer.

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