Foreign Contractor Tax (FCT) in FDI Exit: The “Invisible” Tax Most Likely to Be Collected on Your Way Out of Vietnam

Hypothetical scenario: a foreign group decides to sell its entire subsidiary in Vietnam to an investment fund, also a foreign organization. The transfer contract is signed abroad; money moves straight from the buyer’s account to the seller’s account — not a single dong passes through Vietnam. The company’s accountant in Vietnam thinks: this transaction has nothing to do with us.

Months later, when the company completes tax finalization procedures to close its tax code, the tax authority asks: where was the 2% corporate income tax on the capital transfer value withheld and paid on behalf? And the one who must answer — together with the tax, penalties, and late-payment interest — is the company in Vietnam, under current law.

That is foreign contractor tax. And in FDI exit — whether by dissolution, project termination, or transfer — it is the most overlooked tax, even as its entire legal framework changed on 1 July 2026. This article goes deep into foreign contractor tax in the exit context, supplementing the tax finalization upon FDI dissolution/project termination analyzed earlier.

What Is Foreign Contractor Tax — and Why It “Touches” Exit

“Foreign contractor tax” (commonly abbreviated FCT) is the general name for tax obligations applying to foreign organizations and individuals with income arising in Vietnam: comprising value-added tax (VAT) and corporate income tax (CIT), calculated as a percentage of revenue. The special — and troublesome — feature is that the actual taxpayer is often not the foreign organization but the Vietnamese party, in its capacity as withholding and paying on behalf.

When an FDI enterprise is operating normally, foreign contractor tax is already a matter to handle periodically. But in exit, it becomes more dangerous: payments abroad concentrate at one point in time (advisory fees for the project sale, parent company management fees, outstanding royalties), capital transfer transactions are large in value, and the entire history of payments abroad over many years gets “dug up” again in the dissolution finalization period.

When FDI Exit Triggers Foreign Contractor Tax Obligations

There are four typical situations.

1. Payments for Foreign Services during the Wind-Down Phase

The exit phase always comes with outward payments: legal and tax advisory fees for the company sale transaction, parent company management service fees, valuation advisory costs, special audits for the exit. In substance, these are services provided by foreign organizations to the Vietnamese party — and each payment triggers foreign contractor tax withholding obligations: 5% VAT and 5% CIT on taxable revenue (Law on VAT 2024, Article 12(2)(b2); Decree 320/2025/ND-CP, Article 12(3)(a)).

The common mistake is thinking “the company is about to dissolve, let the parent company pay these”. Whoever signs the contract and bears the cost has the withholding obligation — entrusted payment does not eliminate the tax obligation.

2. Capital Transfer to a Foreign Investor

This is the article’s opening scenario, and also the most surprising situation. When a foreign investor transfers contributed capital/shares in a Vietnamese enterprise to a buyer that is also a foreign organization or individual, current law clearly provides: the taxpayer is the enterprise established under Vietnamese law where the foreign organizations invested capital — i.e., the company in Vietnam itself (Decree 320/2025/ND-CP, Article 2(2)). The company is responsible for declaring and paying tax on behalf (from the company’s own funds) for the transferring foreign party, even though the money never passes through it.

The applicable rate: 2% CIT on taxable revenue for capital transfer activities of foreign enterprises (Decree 320/2025/ND-CP, Article 12(3)(i)). Note one notable exception: intra-group ownership restructurings — that do not change the ultimate parent company and do not generate income — are excluded from this rate. Internal restructurings before exit need to be correctly designed to use this exception.

On the timing of the obligation: under Circular 20/2026/TT-BTC, for capital transfers of foreign enterprises, the time for determining taxable revenue is when the initial capital transfer contract takes effect — not when the money reaches the account.

For the full picture of exit options via transfer, see also project transfer and sale of FDI companies.

3. Royalties and Outstanding Amounts Payable to the Parent Company

Many FDI enterprises pay brand royalties and technology transfer fees to their parent companies abroad throughout operations. Upon exit, outstanding royalties — or a lump-sum payment to terminate the license agreement — trigger foreign contractor tax obligations. The CIT rate for royalties is 10% on taxable revenue (Decree 320/2025/ND-CP, Article 12(3)(c)). On VAT: if the royalty is technology transfer under the Law on Technology Transfer or intellectual property assignment under the Law on Intellectual Property, it is not subject to VAT (Law on VAT 2024, Article 5(21)); other royalty forms (e.g., periodic brand usage fees) need their nature examined when preparing the return.

4. Investment Project Transfer — Not the Same as Capital Transfer

Two different things must be distinguished: transferring contributed capital in the company (selling shares/capital contributions) and transferring the investment project (transferring the entire project with its attached rights and obligations). Current tax law classifies “income from investment project transfer and income from investment project participation right transfer” as other CIT-taxable income (Decree 320/2025/ND-CP, Article 3(3)(c)). Determining tax obligations in this case is more complex than a pure capital transfer, so it needs separate review before signing.

The New Legal Framework: Circular 103/2014 Was Abolished on 1 July 2026

This is the biggest change many accountants and investors have not yet updated. Circular 103/2014/TT-BTC — the guidance document for foreign contractor tax for over a decade — expired on 1 July 2026, abolished under Article 99 of Circular 89/2026/TT-BTC (issued 30 June 2026, effective 1 July 2026). All provisions on conditions for contractors’ self-declaration, Vietnamese parties’ withholding on behalf, and revenue-percentage tax rates in Circular 103 no longer apply.

The current legal framework has three tiers: Laws (2025 Law on CIT — No. 67/2025/QH15, effective 1 October 2025; 2024 Law on VAT — No. 48/2024/QH15, effective 1 January 2026); Decrees (Decree 320/2025/ND-CP guiding the Law on CIT, providing on-behalf taxpayers and the CIT percentage rate table; Decree 252/2026/ND-CP guiding the 2025 Law on Tax Administration, providing declaration and payment deadlines); Circulars (Circular 89/2026/TT-BTC providing foreign contractor tax declaration procedures at Article 30; Circular 20/2026/TT-BTC, effective 12 March 2026, detailing taxable revenue determination at Article 7).

The practical meaning: internal forms, procedures, and “experience” of foreign contractor tax accumulated from the Circular 103 era all need review.

The Rate Table: Determining the Correct Rate for Each Income Type

For foreign contractors, tax is calculated as a percentage of taxable revenue, not on profit. Below are the most common rates in the FDI exit context:

Some special rates to remember to avoid misapplication: restaurant, hotel, and casino management services bear 10% CIT (not 5%); where services are supplied together with goods and can be separated, the goods portion is taxed at 1%; if they cannot be separated, 2% applies to the whole.

Taxable Revenue and the NET Contract Trap

A notable new point in the calculation: under Article 7 of Circular 20/2026/TT-BTC, a foreign contractor’s taxable CIT revenue is the entire revenue the contractor receives, before deducting payable taxes — including expenses paid by the Vietnamese party on the contractor’s behalf (if any). In other words, the tax base is the “gross” amount, not the net amount actually received after tax.

The direct consequence is the NET contract trap — a contract stating a price excluding taxes, with the Vietnamese party committing to bear all taxes for the contractor. This case must gross up the NET price into taxable revenue before applying the rates. Illustrative example: a services contract at a NET price of VND 90 million, with the Vietnamese party bearing taxes. For services, the total tax “load” is 10% (5% VAT + 5% CIT); the grossed-up taxable revenue is 90 / (1 − 10%) = VND 100 million; the tax payable on behalf is VND 5 million VAT + VND 5 million CIT. Taking the VND 90 million straight as the base understates from the first step — and this shortfall is easily detected at finalization, because the tax authority only needs to compare the contract with the return.

Important note: the above example only illustrates the method of grossing up a NET price. As of this article’s writing, there is no uniform guidance on gross-up under the new legal framework — Circular 20/2026/TT-BTC provides a separate formula for CIT (taxable CIT revenue = revenue excluding CIT / (1 − CIT % rate), Article 7(4)), while VAT has its own calculation base, and advisory practice still records a two-step gross-up approach (grossing up CIT first, then VAT on revenue already including CIT) — the result may differ slightly from the combined one-step formula in the example above. The specific gross-up method should be confirmed with the tax authority or a tax advisor for each contract before applying — please discuss with FLAT for a free first 30 minutes of consultation on the correct calculation for your contract.

Who Withholds, Declares, and Pays on Behalf — and the Deadlines

Who is the on-behalf taxpayer? Under Decree 320/2025/ND-CP, Article 2(2), an organization established under Vietnamese law is the taxpayer in the case of paying tax on behalf when purchasing services or receiving capital transfers under a contract with a foreign enterprise. In practice, that is the FDI company in Vietnam — the company must withhold the tax at the time of payment to the foreign contractor, then declare and pay on behalf to the budget. The special case noted above: when both the transferor and transferee of capital are foreign organizations or individuals, the Vietnamese enterprise where the investment was made performs this obligation.

How to declare? Under Circular 89/2026/TT-BTC, Article 30, this is declared per each payment arising to the contractor, with a finalization declaration at contract end if the declared/paid tax changes. Multiple payments in a month may be registered for monthly declaration. The return form for the Vietnamese party withholding and paying on behalf is form 01/NTNN, NCCNN; the finalization return at contract end is form 02/NTNN.

Deadlines? Under Decree 252/2026/ND-CP, Article 10: for taxes declared per arising event, the return filing deadline is no later than the 10th day from the day following the day the tax obligation arose (usually the payment date); if registered for monthly declaration, the deadline is the 20th of the following month. In the exit context, take special note: foreign contractor tax obligations arise per each payment, independently of the dissolution schedule — they cannot be “lumped” into the final finalization period without incurring late-payment interest running from each payment date.

5 Common Mistakes That Lead to Additional Assessment on Exit

Mistake 1: Still following “experience” from the Circular 103/2014 era. This circular has been abolished: its CIT provisions for foreign contractors expired on 12 March 2026 (Circular 20/2026/TT-BTC, Article 10(7)), and the entire circular was abolished on 1 July 2026 (Circular 89/2026/TT-BTC, Article 99). Using old forms, applying old conditions, or looking up rates from old articles is a sure way to misdeclare. All internal foreign contractor tax procedures need updating under Circular 89/2026, Decree 320/2025, and Circular 20/2026.

Mistake 2: Signing a NET contract but forgetting to gross up. As analyzed above, a NET-priced contract without grossing up into taxable revenue understates both VAT and CIT from the start. This is a technical error but with very real financial consequences: additional assessment of the difference plus late-payment interest running from each payment date.

Mistake 3: Capital transfer between foreign parties with nobody paying tax on behalf. Many exit M&A deals are structured entirely abroad — the seller in one country, the buyer in another, money routed through foreign banks. Both sides think any tax obligation (if any) belongs to their countries. But under Decree 320/2025/ND-CP, Article 2(2), the company in Vietnam must declare and pay on behalf the 2% CIT on the transfer value. Missing this obligation, the company only “wakes up” at the dissolution finalization period to the tax plus late-payment interest running from the date the transfer contract took effect.

Mistake 4: Payments to the parent company during wind-down not treated as taxable objects. Management fees, technical service fees, royalties paid to the parent company — despite the “intra-group” label — remain income of a foreign organization arising in Vietnam and fully subject to foreign contractor tax. “Our own money moving between us” is not a basis for exemption under Vietnamese tax law.

Mistake 5: Ignoring double tax treaties — or applying them wrongly. Vietnam has double tax treaties with many countries, and some income types may be exempted or reduced in Vietnam. But this benefit is not automatic: the foreign contractor (or the Vietnamese party signing the contract and paying the income) must submit a dossier requesting exemption/reduction together with the return of the first declaration — comprising the request form 01/HTQT (Appendix III, Circular 89/2026/TT-BTC), the original or certified copy of the tax residence certificate issued by the residence country’s tax authority with consular legalization (if the certificate for the requested year is not yet available at filing, the certificate for the immediately preceding year is submitted), a copy of the contract (paper or electronic) certified by the taxpayer, and a certified copy of the authorization letter (if authorizing a lawful representative to complete the procedures). Without the dossier, pay 100% in full; with the wrong conditions for each specific treaty, it is rejected and additionally assessed.

When Do You Need a Lawyer, Not Just an Accountant?

A good accountant handles returns and rate calculations. But some situations go beyond accounting and need a tax lawyer involved early:

• Structuring the capital transfer transaction: selling to a foreign party, selling to a Vietnamese party, or transferring the investment project — each structure has completely different tax consequences. See the comparison matrix at FDI Exit: Bankruptcy, Dissolution, or Transfer?
• Multinational mixed contracts: one contract supplying equipment, installation and training services, and technology transfer, with parties in multiple countries — separating each part to apply the correct rate and the correct tax treaty is a legal problem, not just an arithmetic one.
• Disputes over transfer price determination: when the tax authority deems the capital transfer price inconsistent with market price and re-determines it (this right is recognized in Decree 320/2025/ND-CP), defending the position requires legal reasoning based on written law.
• Reviewing all outstanding foreign contractor tax obligations before signing the dissolution decision: a tax “health check” before exit is always cheaper than a subsequent additional assessment decision.

Don’t Let Foreign Contractor Tax Become the Last and Most Expensive Bill

Foreign contractor tax has a characteristic that makes it dangerous in the exit context: the obligation belongs to the Vietnamese party, arises per each payment, and only fully reveals itself when the enterprise wants to leave. The new legal framework from 1 July 2026 — with Circular 103/2014 abolished, tax rates restated in Decree 320/2025, and taxable revenue determination in Circular 20/2026 — means all “old experience” needs re-verification. Reviewing foreign contracts, amounts payable to the parent company, and the capital transfer transaction structure early is the only way to avoid paying in additional assessments, penalties, and late-payment interest.

FLAT Law Firm supports foreign investors in reviewing outstanding foreign contractor tax obligations, structuring capital transfer transactions, and handling additional assessment and tax determination situations arising during exit from Vietnam.

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This article is general information and does not replace legal advice for each specific case.

Read more in the FDI exit topic cluster: Tax Finalization upon FDI Dissolution/Project Termination · Project Transfer and Sale of FDI Companies · FDI Exit: Bankruptcy, Dissolution, or Transfer?