Tax Obligations of Sole Proprietorships under Newest Regulations

A sole proprietorship is a form of business organization established and operated by an individual or a group of family members within the same household. Due to this characteristic, the tax regulations for sole proprietorships differ significantly from those for businesses. A clear understanding of the types of taxes to be paid and how to fulfill tax obligations will help business owners comply with the law and avoid administrative violations.

The following article provides a comprehensive overview of the taxes and fees that sole proprietorships need to be aware of, along with detailed guidance on how to declare and pay taxes according to the current regulations of the Ministry of Finance.

Revenue Threshold for Taxation

According to Circular 40/2021/TT-BTC, sole proprietorships with annual revenue from production and business activities of VND 100 million or less will be exempt from value-added tax (VAT) and personal income tax (PIT). However, even if exempt from tax payment, sole proprietorships are still responsible for full, accurate, and timely declarations as required.

For sole proprietorships operated by a group of individuals or families, the VND 100 million/year revenue threshold is calculated for a single representative of the group for the tax year, not for each individual member.

Taxes and Fees Sole Proprietorships Must Pay

Business Registration Fee

This is a one-time fee paid when registering the establishment of a sole proprietorship with the competent authorities. The fee is specified by each locality and is usually not high.

License Fee (Lệ phí môn bài)

The license fee is an annual fee that sole proprietorships must pay, calculated based on the previous year's revenue. According to Circular 65/2020/TT-BTC, the fee varies depending on the revenue scale and is divided into different levels.

Payment Deadline for License Fee:

Sole proprietorships starting operations in the first six months of the year must pay the full year's license fee. If starting operations in the last six months of the year, they only have to pay 50% of the annual fee.

In cases where a sole proprietorship temporarily suspends operations and submits a written notice to the tax authority or business registration agency before January 30th of each year, and has not yet paid the license fee for that year, they will be exempt from the fee for the year of suspension.

How to Determine Revenue for Fee Calculation:

The revenue used as a basis for calculating the license fee is the total revenue subject to personal income tax in the preceding year, excluding income from property leasing. For newly established sole proprietorships or those resuming operations after dissolution, revenue is determined based on the scale of businesses in the same industry and locality.

Cases of Exemption from License Fee:

Sole proprietorships are exempt from the license fee in the following situations: annual revenue of VND 100 million or less; no fixed business location and not operating regularly; engaged in salt production; aquaculture, fishing, or fishery support services; in the first year of establishment or commencement of business operations.

Value Added Tax (VAT)

VAT is applicable to sole proprietorships with revenue of VND 100 million or more per year. The tax rate is calculated as a percentage of revenue, depending on the specific business industry.

VAT Calculation Formula:

VAT Payable = Taxable Revenue × VAT Rate

Taxable revenue includes all income from sales, provision of services, processing, commissions, as well as bonuses, promotions, discounts, support, surcharges, and compensation for contract breaches.

Personal Income Tax (PIT)

Similar to VAT, PIT is also applicable to sole proprietorships with revenue of VND 100 million or more per year. The PIT rates are specified in detail for each industry in Appendix I issued with Circular 40/2021/TT-BTC.

PIT Calculation Formula:

PIT Payable = Taxable Revenue × PIT Rate

For sole proprietorships operating in multiple sectors and industries, taxes must be declared and calculated separately for each sector according to the specified rates. If the revenue for each sector cannot be determined or the declaration is not in line with reality, the tax authority will assess the tax according to tax administration laws.

Other Taxes and Fees

Depending on the nature of the business, sole proprietorships may have to pay additional taxes such as environmental protection tax (for gasoline, oil, and plastic bag businesses), natural resource tax (for exploitation of natural resources), or other fees and charges as prescribed.

Tax Payment Methods

Sole proprietorships can apply one of the following tax payment methods, depending on their scale and operational characteristics:

Declaration Method

Applicable to large-scale sole proprietorships or those not meeting the large-scale criteria but voluntarily choosing this method.

The deadline for monthly tax declarations is the 20th day of the following month. For quarterly declarations, the deadline is the last day of the first month of the subsequent quarter.

The tax payment deadline coincides with the tax declaration deadline. Sole proprietorships are not required to maintain full accounting records but must retain invoices, receipts, and contracts to prove the legality of goods and services.

Lump-sum Tax Method (Khoán)

Applicable to sole proprietorships not subject to taxation under the declaration method or on a per-transaction basis.

The deadline for tax declarations is the 15th day of December of the year preceding the tax year. For newly established sole proprietorships, those changing tax calculation methods, or changing industry or scale, the deadline is the 10th day from the date of the change.

Important Note: Starting from 2026, according to the tax sector's digital transformation roadmap, all sole proprietorships will have to switch from the lump-sum tax method to the declaration method. This requires businesses to prepare their sales management systems, electronic invoices, and transparent tax declarations.

Per-Transaction Declaration Method

Applicable to sole proprietorships that operate irregularly and do not have a fixed business location.

The deadline for tax declarations is the 10th day from the date the tax obligation arises. The tax payment deadline coincides with the tax declaration deadline.

Tax Declaration and Payment by a Third Party

In some special cases, an organization or individual will declare and pay taxes on behalf of the sole proprietorship. For example: organizations leasing property from individuals, organizations cooperating in business with individuals, organizations paying sales bonuses, e-commerce platform owners.

Specific Methods

Applied individually to certain cases such as individuals leasing property, individuals directly signing contracts as lottery agents, insurance agents, or multi-level sales agents. Each case has specific regulations regarding the tax period and deadlines.

Tax Registration Deadline

According to Article 33 of the Law on Tax Administration 2019, sole proprietorships have a period of 10 working days from the date of receiving the business registration certificate to register for tax with the managing tax authority. Timely tax registration is a mandatory requirement to avoid administrative penalties.

Consequences of Late Tax Declaration

Late submission or failure to submit tax registration documents and tax declarations will result in administrative penalties according to Circular 166/2013/TT-BTC, with fines ranging from a warning to VND 5,000,000, depending on the severity of the violation and the delay period.

Specifically, late submission of tax declarations from 1-10 days may result in a VND 700,000 fine, from 10-20 days a VND 1,400,000 fine, from 20-30 days a VND 2,100,000 fine, from 30-40 days a VND 2,800,000 fine, and over 40 days a VND 3,500,000 fine. In addition, sole proprietorships will also incur late payment interest calculated on the outstanding tax amount as stipulated.

Conclusion

A thorough understanding of tax regulations not only helps sole proprietorships comply with the law but also lays a solid foundation for sustainable development in an increasingly professionalized business environment.