Recently, number of Japanese corporations which outsource the development of software to Vietnam 
is increasing.  We will therefore think about the Japanese tax treatment when a Japanese company 
outsources IT/software development to a Vietnamese corporation.

In practice, when software development falls under rendering personal services and 
when software development is being carried out in Vietnam, there is no tax issue arisen in Japan, 
based on the principle of "no taxation without PE (permanent establishment)". 

On the other hand, if software development is regarded as using copyrights or 
transferring of copyrights, Japanese withholding income tax should be taxed.

Therefore, it is important to judge whether the nature of transactions are rendering personal services
or copyrights concerned.


Practically, we will consider this issue in the following steps;

Firstly, to check the contract of software development and contents of the contract, 
e.g., details of software to be developed, attribution (Japan or Vietnam) of the deliverables
(intellectual property right), etc.

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(2) Next, to check the actual transaction and confirm whether the contract 
and the actual transaction is the same. At this time, following points should also be checked;

a) Scope of work between Japan and Vietnam 
(e.g., requirements definition, instructions of development work, etc.)

b) Where the deliverables belong to, etc.

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(3) After that, to consider whether the transaction falls under rendering personal services 
or whether the deliverables (intellectual property) are relevant to the copyright 
stipulated in the Copyright Law.

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In the case where the outsourced software development falls under rendering personal services 
and services are performed in Vietnam, there is no Japanese withholding income tax will be taxed.  
In the case where the software development is relevant to copyright stipulated in the Copyright Law,
it is subject to Japanese withholding income tax.

● If software development falls under copyright and its intellectual property rights 
belong to Vietnam, it means that the Japanese corporation obtained permission to use the copyright and are 
subject to tax withholding tax.

● If software development falls under copyright and its intellectual property rights 
belong to Japan, it will be subject to tax withholding tax as the copyright is regarded as being transferred 
from Vietnam to Japan.

Please note that, under the Japan-Vietnam tax treaty, Japanese withholding tax is reduced to 10% by submitting 
a tax treaty application form.


In our opinion, if the development in Vietnam is performed based on the instructions from Japan and 
is just input work, there is room to claim that it is rendering personal services.
In this case, even if the remuneration for outsourcing is calculated based on time-charge, 
it does not affect the above judgment of personal services or not. (December 11, 2009 Judgment Casebook No.78)

In this way, it is important to know whether the software development falls under the copyrights stipulated 
in the Copyright Law, so it would be useful to obtain the information 
from the engineer in charge of the software development or ask the opinion from the expert who is familiar 
with the Copyright Law.