Should a Household Business with Revenue Over VND 3 Billion Convert to a Company?

1. Household businesses with revenue over VND 3 billion: Should they convert into a company?

This is a question that many high-revenue household businesses—especially those in retail, trading, or online commerce—are deeply concerned about, as tax authorities tighten management and require Group 3 household businesses to maintain accounting records almost equivalent to those of enterprises.

Converting to a corporate model offers Corporate Income Tax (CIT) incentives, but it also entails major changes in VAT calculation methods, operating costs, and accounting obligations.

2. Corporate Income Tax incentives under the CIT Law

According to Article 15 of the Corporate Income Tax Law, enterprises:

“With annual revenue below VND 50 billion, newly established from household businesses, are exempt from Corporate Income Tax for two consecutive years from the time taxable income arises.”

👉 Conclusion: Enterprises converted from household businesses are exempt from CIT for the first two years.

This is an attractive policy, but it should not be the sole deciding factor.

Many household businesses focus only on CIT incentives while overlooking VAT, which is often the tax that has the most direct impact on actual profitability.

3. VAT — a critical tax that many household businesses underestimate

Household businesses pay tax based on a percentage of revenue (1–5%), which is relatively simple and straightforward.

Enterprises, however, calculate VAT using the credit method:

VAT payable = Output VAT – Deductible Input VAT

Key points that many household businesses are not accustomed to:

• The selling price to end consumers already includes VAT.
  
• Household businesses do not separate VAT and do not declare VAT.
  
• Once converted into a company, VAT must be separately stated, and input and output invoices must be fully managed and recorded.

4. Proper understanding of VAT calculation under the enterprise model

Most goods currently are subject to an 8% VAT rate
(although some goods are subject to 5%, 10%, or are non-taxable, these are less common).

Value-added tax is only deductible for:

• Goods and services with valid VAT invoices, or
  
• Imported goods for which VAT has been paid at the import stage.
  

Therefore, goods purchased without invoices, or purchased from household businesses that issue sales invoices (not VAT invoices), are not eligible for VAT deduction.

A critical point for household businesses:
The final selling price to end consumers is a VAT-inclusive price.

Since most household businesses sell directly to individual consumers for personal use, VAT deduction calculations are often not fully understood or properly assessed before conversion.

5. Visual example: Same revenue, but different VAT payable

Sample VAT invoice

The total amount payable by the consumer for a Xiaomi TV is VND 8,490,000.

However, this total amount includes:

• The net value of the goods: VND 7,861,111
  
• Value-Added Tax (VAT) at 8%: VND 628,889

Similarly, for high-revenue household businesses, all goods sold already include VAT.
In most cases, when you inform customers of the total selling price, that price is already VAT-inclusive, and the consumer only pays that final amount.

VAT calculation under the credit method

VAT payable = Output VAT on sales invoices – Input VAT on purchase invoices

Let’s look at three different examples of VAT payable for the same scenario.

Scenario overview

PICO Supermarket sells a Xiaomi TV to the final consumer at the same retail price of VND 8,490,000, but the procurement method differs in each case.

Case 1

• PICO purchases the TV from an authorized Xiaomi distributor (a company) at a price of VND 5,400,000, including 8% VAT.
  
• PICO hires a part-time salesperson, paying a commission of VND 2,000,000 per TV to an individual (no VAT invoice).

Case 2

• PICO purchases the TV from an authorized Xiaomi distributor (a company) at VND 5,400,000, including 8% VAT.
  
• In addition, PICO sells via the Shopee e-commerce platform and receives a VAT invoice for platform service fees of VND 2,000,000, including VAT.

Case 3

• PICO purchases the TV from a household business that can only issue a sales invoice with a tax authority code, valued at VND 5,400,000
  (Note: a sales invoice is not a VAT invoice and therefore not eligible for VAT deduction).
  
• In addition, PICO sells via the Shopee e-commerce platform and receives a VAT invoice for platform service fees of VND 2,000,000, including VAT.

Comparison of VAT Calculation Across Different Cases

Item		Formula (when VAT invoices are available)	Case 1	Case 2	Case 3
Output sales value	(1)		8.490.000	8.490.000	8.490.000
Output Value-Added Tax (VAT)	(2)	=(1) / 1,08	628.889	628.889	628.889
Net purchase value (excluding VAT)	(3)		7.861.111	7.861.111	7.861.111
Total purchase value (VAT-inclusive)	(4)		5.400.000	5.400.000	5.400.000
Input VAT on purchases	(5)	=(4) / 1,08	400.000	400.000	0
Net purchase value (excluding VAT)	(6)		5.000.000	5.000.000	0
Total selling expenses (VAT-inclusive)	(7)		2.000.000	2.000.000	2.000.000
Input VAT on selling expenses	(8)	=(7) / 1,08		148.148	148.148
Net selling expenses (excluding VAT)	(9)			1.851.852	1.851.852
VAT payable	(10)	=(2) – (4) – (8)	228.889	80.741	480.741
VAT payable / Revenue ratio	(11)	= (10) / (1)	2,70%	0,95%	5,66%
Item			In this case, only the purchase of goods is supported by VAT invoices.Selling expenses paid to sales staff do not have VAT invoices, therefore input VAT on selling expenses is not deductible.	In this case, there are VAT invoices for both the purchase of goods and the selling expenses incurred on the e-commerce platform.As a result, input VAT from both sources can be fully deducted.	In this case, there is no VAT invoice for the purchase of goods(only a sales invoice issued by a household business and approved by the tax authority).Only the VAT invoice for selling expenses on the e-commerce platform is deductible.

Clearly, although the total purchase value is the same, the VAT payable as a percentage of revenue differs significantly across the cases.

Only Case 2 is more advantageous compared to the 1.5% revenue-based tax that a household business is currently required to pay.

In the remaining cases, VAT alone after converting to the enterprise model already exceeds the entire tax liability that a household business engaged in trading would otherwise pay.

Therefore, from a VAT perspective alone, converting to an enterprise model is more beneficial than the revenue-based tax regime applied to household businesses only when:

• the enterprise has substantial input costs that are supported by VAT invoices, or
• operates in export-related activities, or
• sells goods and services that are not subject to VAT.

6. When is converting to an enterprise beneficial?

An enterprise model is more advantageous when:

• You have substantial input costs supported by VAT invoices
  
• You are engaged in export activities (0% VAT rate)
  
• You sell goods or services that are not subject to VAT
  
• Your business model is expanding and requires large contracts
  
• The tax authority requires you to be classified as a Group 3 household business
  (with accounting and compliance obligations similar to an enterprise)

7. Hidden costs when converting to an enterprise

In practice, converting to an enterprise involves several hidden costs that must be carefully assessed.

1) Significant increase in input costs

Enterprises are required to purchase goods and services from suppliers that can issue VAT invoices, which typically results in higher purchase prices.

2) Accounting, software, and e-invoicing costs

For example:
100 invoices/day × VND 500 per invoice = VND 50,000 per day for e-invoicing alone.

3) Compliance costs

Including:

• Tax filings
  
• Financial statements
  
• Accounting records and books
  
• Reconciliation, review, and document retention
  

4) Higher legal and regulatory risks

Enterprises are subject to more frequent inspections and audits than household businesses.

8. When should you convert — and when should you stop?

You SHOULD CONVERT when:

• The tax authority requires you to move into Group 3 household business classification
  → At this point, accounting requirements are already similar to an enterprise,
  → Immediate conversion allows you to benefit from the 2-year CIT exemption.
  
• You have a clear supply chain with sufficient VAT invoices.
  
• You plan to scale up operations, hire staff, or cooperate with large enterprises.

You SHOULD NOT CONVERT when:

• Your supply mainly comes from household businesses.
  
• Profit margins are low and easily eroded by non-deductible VAT.
  
• You lack sufficient resources to operate a full enterprise-level accounting system.
  
• You only need to maintain a small and stable business model.

Alternative options

If the current model is no longer efficient, you may consider:

• Downsizing operations
  
• Temporarily suspending business activities
  
• Seeking professional tax advice before making a decision

9. Conclusion

Converting from a household business to an enterprise is not simply about enjoying a 2-year Corporate Income Tax exemption.

The most critical factor to evaluate is:
➡️ Your input cost structure and the ability to deduct VAT.

If your business has a transparent supply chain, complete VAT invoices, operates at scale, and is oriented toward long-term growth, conversion can be highly beneficial.

Conversely, if your supplies are mainly sourced from household businesses and VAT cannot be deducted, your overall tax burden may be higher than under the current household business regime.

👉 Always prepare a tax projection before making a decision.
👉 Consult a licensed tax agent to simulate VAT and CIT under different scenarios.

How Will the 2026 Tax Law Impact Household Businesses on E-commerce Platforms?

ROADMAP FOR IMPLEMENTING E-INVOICES FOR HOUSEHOLD BUSINESSES IN 2026

Household Business Tax Declaration: Key Regulations You Must Understand

Luật thuế 2026 tác động thế nào đến hộ kinh doanh trên sàn thương mại điện tử?