Foreign Contractor Tax in Contracts with Foreign Partners

What is foreign contractor tax and when does it arise?

Foreign contractor tax (commonly abbreviated FCT) is the tax obligation applying to foreign organizations and individuals doing business in Vietnam or earning income arising in Vietnam under contracts or agreements with Vietnamese parties. The directly governing document is Circular 89/2026/TT-BTC of the Ministry of Finance (effective from 01/7/2026, replacing Circular 103/2014/TT-BTC) guiding the implementation of tax obligations for foreign organizations and individuals doing business in Vietnam or earning income in Vietnam.

The key point businesses must grasp: foreign contractor tax comprises two taxes — value-added tax (VAT) and corporate income tax (CIT) — calculated on the revenue the foreign contractor receives. And under the most common method, it is the Vietnamese party that withholds and pays on behalf, not the foreign contractor paying itself.

A typical example: a Vietnamese company hires a Singaporean company for management consulting at a fee of VND 200 million. Upon payment, the Vietnamese company must withhold foreign contractor tax (10% rate for services: 5% VAT + 5% CIT), i.e., VND 20 million paid to the tax authorities, and only transfers VND 180 million to the partner — unless the contract agreed a “net” price, in which case the Vietnamese party must pay this tax amount in addition to the contract price.

Which cases are not subject to foreign contractor tax?

Not every transaction with foreign parties triggers foreign contractor tax. Common cases not subject to the tax include: foreign contractors that have established companies or branches in Vietnam and fulfill tax obligations like domestic businesses; imported goods delivered at the border gate where the foreign party performs no services within Vietnamese territory; services performed and consumed entirely outside Vietnamese territory; and certain cases governed by double taxation agreements (DTAs) toward exemption or reduction.

The “yes/no” boundary for foreign contractor tax usually lies in the question: does the foreign party perform any activity in Vietnam, or does the income arise from Vietnam. This is also the most common point of dispute between businesses and tax authorities, because interpretations of “services attached to goods” or “consumed in Vietnam” may differ in each specific dossier.

Three FCT calculation and payment methods

Article 30 of Circular 89/2026/TT-BTC provides three cases, which the business and contractor need to determine from contract negotiation:

Method 1 — Deduction (contractor self-declares; Clause 1, Article 30 of Circular 89/2026/TT-BTC)

The foreign contractor registers for tax itself, declares, and pays VAT and CIT like a Vietnamese business. Conditions: having a permanent establishment in Vietnam or being a tax resident of Vietnam; business duration in Vietnam under the contract of 183 days or more; applying the Vietnamese accounting regime; registering for tax and being granted a tax code. The Vietnamese party must notify the tax authorities in writing that the contractor pays tax under this method within 20 working days from the contract signing date. Advantage: the contractor is taxed on profit (20% rate) after deducting expenses, instead of on revenue.

Method 2 — Deemed ratio / direct (Vietnamese party withholds on behalf; Clause 2, Article 30 of Circular 89/2026/TT-BTC)

This is the most common method in practice. The Vietnamese party withholds the entire foreign contractor tax upon payment to the foreign contractor, at deemed ratios on taxable revenue. The foreign contractor need not register or declare anything in Vietnam. Formula: when the contract states a net price (excluding tax), foreign contractor tax = net price × ratio ÷ (1 − ratio); when the contract states a gross price (including tax), foreign contractor tax = gross price × ratio.

Method 3 — Hybrid (Clause 3, Article 30 of Circular 89/2026/TT-BTC)

The contractor registers and applies the Vietnamese accounting regime to self-declare CIT under the deduction method (calculated on revenue minus expenses), but the VAT portion is still withheld and paid on behalf by the Vietnamese party at the ratio. This method is uncommon, usually only considered when the contractor has large expenses incurred in Vietnam and wants to reduce CIT payable.

FCT rate table under the deemed-ratio method

Under Article 7 of Circular 20/2026/TT-BTC (detailing Clause 3, Article 12 of Decree 320/2025/ND-CP), the CIT rates on taxable revenue by industry are: trading (distribution, supply of goods, machinery and equipment): 1%; services, leasing of machinery and equipment, insurance, drilling-rig rental: 5%; restaurant, hotel, and casino management services: 10%; derivative financial services: 2%; leasing of aircraft, aircraft engines, and sea vessels: 2%; construction and installation (with or without supply of raw materials): 2%; other production and business activities and transportation (sea, air): 2%; securities transfer: 0.1%; loan interest: 5%; royalty income: 10%.

VAT rates on revenue (Clause 2, Article 12 of the Law on Value-Added Tax 2024): services and construction without supply of raw materials: 5%; manufacturing, transportation, services attached to goods, and construction with supply of raw materials: 3%; other business activities: 2%.

Thus, for an ordinary consulting services contract, total foreign contractor tax is 10% of the payment value (5% VAT + 5% CIT); for a software copyright transfer contract, the total is 10% CIT (no VAT); for a foreign loan contract, foreign contractor tax is 5% on interest. Businesses need to correctly identify the “nature” of each component in a composite contract — because one EPC contract may include equipment supply (1%), construction and installation (2% CIT + 3% VAT), and services (5% + 5%), each part subject to a different ratio.

Four points to lock in contracts with foreign partners

• Net or gross price: the contract must state clearly whether the price includes foreign contractor tax and which party bears it. If unstated, a dispute over who bears the tax is almost certain when the tax authorities back-collect.
• Tax gross-up clause: when the Vietnamese party commits that the partner receives the full net amount, the contract needs a gross-up clause to back-calculate the additional tax payable — and the financial impact of this clause must be computed in advance.
• Separating contract components: for composite contracts (both goods supply and services), the value of each component should be separated to apply the correct ratio, rather than letting the tax authorities apply the highest ratio to the entire value.
• Double Taxation Agreement (DTA): if the contractor is from a country that has signed a DTA with Vietnam, consider the possibility of treaty exemption or reduction — but DTA application has its own procedures and conditions; it is not automatic.

Common risks and prevention

The most common error is the business paying 100% of the contract value to the foreign partner without withholding foreign contractor tax — when discovered, the business must pay the entire multi-year tax amount plus late-payment interest and penalties. The second error is applying the wrong ratio due to misidentifying the nature of the transaction (e.g., treating services attached to goods supply as pure trading). The third is failing to notify the tax authorities when the contractor applies the deduction method, leading to declarations not being accepted.

The most effective prevention is building a “foreign contractor tax checklist” into the approval process for every contract with foreign partners: determine whether it is subject to the tax, choose the calculation method, determine the ratios, lock tax clauses in the contract, and assign responsibility for withholding — declaration — payment for each payment.

How does FLAT LAW FIRM assist with foreign contractor tax?

We review businesses’ existing contracts with foreign partners to identify outstanding foreign contractor tax obligations and quantify back-collection risks; advise on choosing the optimal calculation method for each contract; draft and negotiate tax clauses in contracts (net/gross price, gross-up, tax allocation); and represent businesses in working with tax authorities in disputes over FCT application or treaty benefits under double taxation agreements.

See also our tax consulting services for FDI enterprises.

Frequently asked questions

Useful links

You should talk to a lawyer if:

• Your business regularly signs contracts with foreign partners but has no foreign contractor tax withholding process.
• Composite contracts (EPC, equipment supply with services) have not been component-separated to apply correct tax ratios.
• You want to assess the possibility of treaty benefits under double taxation agreements for the foreign contractor.
• You have paid foreign partners without withholding tax and need a remediation plan.
• The foreign contractor wants to apply the self-declaration (deduction) method and needs procedures prepared.