EPE VAT Regime in Vietnam: Regulatory Criteria and Compliance Risks

Export Processing Enterprises (EPEs) represent a central pillar of foreign direct investment in Vietnam’s manufacturing sector. The tax regime governing an EPE is defined by two primary legislative frameworks:

• Non-tariff zone status: Established under Decree No. 35/2022/ND-CP and specialized customs supervision regulations in Decree No. 18/2021/ND-CP (requiring solid perimeter fencing and 24/7 customs-connected surveillance cameras).
• Value-added tax treatment: Governed by the Law on VAT 2008 and transitioning to the new Law on Value-Added Tax No. 48/2024/QH15 (effective July 1, 2025). Article 9 maintains a 0% VAT rate for qualifying goods and services supplied into non-tariff zones directly serving export production. For broader guidance, review our overview on VAT for enterprises in Vietnam.

Tax authorities audit consumption locations and service objectives rigorously. Procuring personal consumption services such as worker commuting or factory catering under an erroneous 0% rate exposes both suppliers and EPEs to retroactive tax clawbacks and administrative penalties.

1. Legal Status of Export Processing Enterprises in Vietnam VAT and Customs Framework

An EPE is not an independent corporate form under the Law on Enterprises. It is a regulatory status tied to a specific geographical footprint and dedicated to export manufacturing. Investors must differentiate between non-tariff customs classification and VAT obligations.

Non-Tariff Zone Conditions and Customs Oversight under Decree 35/2022/ND-CP

Article 26 of Decree No. 35/2022/ND-CP and Decree No. 18/2021/ND-CP establish three mandatory operating conditions for an EPE:

• Export manufacturing objective: Specialized in producing goods for export located within an industrial park or economic zone.
• Solid physical perimeter fencing: Factory premises and storage warehouses must be enclosed by solid walls or fences, with controlled entry and exit gates separating the site completely from domestic territory.
• Customs surveillance camera network: Operating 24/7 security cameras at entry gates, exit checkpoints, and warehouse storage locations, maintaining an uninterrupted live data feed directly to supervising customs authorities.

Supervising customs authorities conduct physical inspections and issue a formal confirmation document before manufacturing operations commence.

Risk of losing non-tariff status: If an EPE dismantles physical perimeter fences, establishes uncontrolled secondary access doors, or suffers prolonged surveillance camera outages, customs authorities can suspend non-tariff zone privileges. All inventory, machinery, and raw materials become immediately subject to standard import duties and import VAT identical to a domestic enterprise.

Non-Taxable VAT Classification and Customs Tax Administration

Because an EPE operates inside a recognized non-tariff zone, its core manufacturing operations fall into specialized VAT categories:

• Imported goods from overseas: Raw materials, production machinery, and manufacturing components imported into an EPE warehouse belong to the non-taxable VAT category at customs clearance.
• Finished goods exported overseas: Finished products exported directly to foreign markets do not trigger domestic VAT in Vietnam.
• Transactions between EPEs: Sales, raw material transfers, and technical services rendered between two EPEs located within non-tariff zones remain outside the scope of Vietnamese VAT.

Holding EPE status does not grant a blanket VAT exemption for every service or commodity procured from domestic suppliers.

2. Conditions for Applying 0% VAT to Domestic Goods and Services Supplied to an EPE

Transactions between domestic Vietnamese vendors and an EPE represent the primary focus of tax audits:

• Goods sold into an EPE: Treated as on-spot exports. Domestic suppliers issue a 0% electronic VAT invoice provided they retain an executed commercial contract, compliant electronic invoice, non-cash bank payment records, and a cleared export customs declaration.
• Services provided to an EPE: Must be performed and consumed entirely inside the non-tariff perimeter, directly serving the EPE’s manufacturing activities, accompanied by factory acceptance minutes. For international transactions, review our analysis on export services VAT.

Statutory Exclusions from 0% VAT Subject to Mandatory 10% Tax

Law No. 48/2024/QH15 explicitly excludes domestic services associated with personal consumption or delivered outside the non-tariff perimeter:

Issuing a 0% invoice for an excluded service category triggers retroactive 10% VAT assessments, a 20% penalty for under-declaration under Article 16 of Decree No. 125/2020/ND-CP, and late payment interest of 0.03% per day. EPE accounting teams must ensure domestic contractors issue 10% VAT invoices for personal consumption services to prevent commercial invoice disputes.

3. VAT Administration in Toll Manufacturing and Domestic Trading Between EPEs and Local Entities

Two-way commerce between an EPE and domestic companies requires strict adherence to customs declarations and tax accounting.

On-Spot Import-Export Customs Procedures and VAT Filings

When an EPE purchases production materials from a domestic supplier, both entities execute on-spot customs procedures under Article 86 of Circular No. 38/2015/TT-BTC (amended by Circular No. 39/2018/TT-BTC):

• Domestic vendor: Opens an on-spot export declaration, issues a 0% VAT invoice, and receives settlement through international or domestic commercial banking channels.
• Purchasing EPE: Opens a corresponding on-spot import customs declaration. Goods remain exempt from import VAT at customs clearance.

If an EPE purchases incidental office supplies or daily consumables, the EPE may opt out of customs declarations. In such cases, the domestic vendor must issue an invoice at the standard domestic VAT rate (8% or 10%).

Domestic Subcontracting Toll Manufacturing and VAT Treatment

An EPE may subcontract manufacturing stages to domestic enterprises:

• Material delivery: Raw materials dispatched into domestic territory for processing are exempt from VAT and import tariffs. The EPE issues internal stock transfer notes accompanied by domestic transport orders and files a processing facility notification with customs.
• Processing fee: Toll manufacturing fees charged by the domestic contractor to the EPE qualify for 0% VAT if finished components return to the EPE for export production.
• Reverse toll manufacturing: When an EPE undertakes processing for a domestic client, the processing fee is exempt from VAT. Upon re-importing the finished goods, the domestic customer pays import duty and import VAT on the added processing value.

When an EPE liquidates surplus machinery or sells production scrap into the domestic market, it must register a change of purpose with customs. The domestic buyer opens an on-spot import declaration and remits import duties and import VAT. For credit mechanisms, review our guide on VAT refund procedures for FDI.

4. Ring-Fencing VAT Obligations When an EPE Exercises Trading and Import-Export Rights

Decree No. 35/2022/ND-CP permits an EPE to conduct commercial trading and distribution. This non-manufacturing activity requires strict operational segregation.

Under Clause 6 of Article 26 of Decree No. 35/2022/ND-CP, an EPE must amend its Investment Registration Certificate (IRC) to include commercial distribution. Commercial inventory must be stored in a dedicated sub-warehouse physically demarcated from export manufacturing inventory. The enterprise must maintain separate accounting ledgers for trading revenues and expenditures. If a partitioned warehouse cannot be maintained inside the plant, the EPE must establish an independent branch outside the non-tariff perimeter.

Commercial wholesale and retail activities do not benefit from non-tariff privileges:

• Customs import stage: When importing goods for domestic resale, the EPE registers a commercial import declaration and pays customs import duties along with import VAT upon customs clearance.
• Domestic sales stage: When distributing goods domestically, the EPE issues electronic VAT invoices at the standard 10% rate (or temporary 8% rate).
• Periodic VAT returns: Filed using Form 01/GTGT with the supervising local tax department. Input VAT incurred on commercial merchandise is creditable against output VAT liabilities.
• Non-cash payment compliance: Applies non-cash bank transfer verification for transactions of VND 5 million or higher under Article 14 of Law 48/2024/QH15. See our analysis on non-cash payment rules from 5 million VND.

Enterprises must never commingle commercial goods with export-processing inventory. Diverting duty-free materials into domestic distribution channels constitutes customs fraud and tax evasion.

5. Common VAT Audit Exposures and Penalty Matrix under Decree 125/2020/ND-CP

During post-clearance audits and tax inspections, EPEs encounter recurring exposures across customs and tax interfaces:

6. Compliance Governance Recommendations for FDI Manufacturing Plants

The VAT regime applicable to an EPE delivers substantial cash flow advantages but requires strict adherence to Decree No. 35/2022/ND-CP and Law on VAT No. 48/2024/QH15.

To mitigate tax audit exposure, EPE management should establish three internal controls:

1. Conduct quarterly audits of physical fences and customs camera links, verifying zero signal outages that could compromise non-tariff status.
2. Direct domestic contractors to issue 0% invoices for manufacturing support and standard 10% invoices for employee welfare and personal consumption services.
3. Maintain physical warehouse separation and independent accounting ledgers between export manufacturing materials and commercial trading merchandise.

For assistance with customs compliance and tax health checks, explore our corporate tax compliance services or audit support services delivered by Indochina Link Vietnam’s team of certified professionals.