A Vietnamese company signs a USD 100,000 consultancy services contract with a Singaporean counterparty, with the contract price stated as “excluding taxes.” When payment is due, the accountant discovers that foreign contractor tax must be withheld and paid on behalf of the Singaporean side — and the gross-up formula significantly inflates the actual cost. Who bears the difference? The contract says nothing. A dispute arising from one sentence that should have been written clearly from the start.
Tax clauses in contracts are not formalities. They determine three things: which party bears the withholding and tax payment obligation; whether the contract price includes taxes; and who indemnifies when tax authorities assess back taxes, impose taxes, or apply rates different from initial expectations. This article analyzes the legal framework and how to draft tax clauses — from gross-up clauses in cross-border service contracts to tax indemnity clauses in M&A transactions.
This article is written from a practical perspective, does not guarantee any outcome, and does not replace advice for specific contracts.
Quick summary
| Topic | Tax clauses, gross-up, and tax indemnity in contracts |
|---|---|
| Who this is for | FDI enterprises, in-house counsel, and investors signing contracts with foreign counterparties or carrying out M&A transactions. |
| Three clause groups needed | (1) Allocating tax obligations and determining whether prices include taxes; (2) Gross-up when paying foreign parties; (3) Tax indemnity when back-tax assessments and imposed taxes arise. |
| Main legal bases | Circular 103/2014/TT-BTC (foreign contractor tax); DTAs and Circular 95/2026/TT-BTC; CIT Law 2025 (Law 67/2025/QH15). |
Why tax clauses in contracts matter
In purely domestic transactions, each party declares and pays its own taxes, so tax clauses in contracts usually stop at “price includes VAT.” But when a contract involves a foreign counterparty, Vietnamese law places the withholding and tax payment obligation on the Vietnamese party. At that point, the tax clause directly determines the actual cost of the transaction.
Typical scenario: a Vietnamese enterprise hires a foreign contractor to provide services. If the foreign contractor does not meet all conditions for self-declaration under Article 8 of Circular 103/2014/TT-BTC, the Vietnamese party must withhold and pay VAT and CIT on behalf of the foreign contractor under Article 11 of this Circular, computed as a percentage of revenue. If the contract states a “net” price (excluding taxes) without a gross-up clause, the Vietnamese party will have to absorb the extra tax paid on behalf — or argue with the counterparty about who bears it.
Another scenario: tax authorities later re-determine the transfer price, assess back taxes, and charge late-payment interest. If the M&A contract has no tax indemnity clause, the buyer must bear all back-tax assessments arising from periods before it owned the target company. See our article on tax due diligence in M&A transactions.
Legal framework: which party bears tax when working with foreign counterparties
Before drafting clauses, the correct tax obligations under the law must be identified, because contract clauses cannot change the obligation owed to tax authorities — they only allocate costs between the parties.
Foreign contractor tax. Under Circular 103/2014/TT-BTC, a foreign contractor may self-declare and pay taxes only when meeting all three conditions in Article 8: having a permanent establishment in Vietnam (or being a resident of Vietnam), having a business period in Vietnam of 183 days or more, and applying the Vietnamese accounting regime and tax registration. In practice, most foreign contractors providing cross-border services do not meet these conditions. In that case, under Article 11, the Vietnamese party must withhold and pay VAT and CIT on behalf of the foreign contractor, computed as a percentage of revenue under Articles 12 and 13 of the Circular.
Tax-exclusive prices and the gross-up formula. When the contract price paid to the foreign contractor excludes taxes payable, the taxable revenue must be converted (grossed up) under the formula in Articles 12 and 13 of Circular 103/2014/TT-BTC: divide the tax-exclusive price by (1 − the tax percentage rate). In other words, the actual tax paid on behalf is higher than the figure computed directly on the contract price — a point that surprises many businesses when first working with foreign counterparties.
Double taxation agreements (DTAs). If the foreign contractor is a resident of a country that has signed a DTA with Vietnam, they may be exempted or receive tax reductions under the treaty. DTA application is currently guided by Circular 95/2026/TT-BTC (issued 01/07/2026, replacing Circular 205/2013/TT-BTC). The contract clause should require the foreign party to provide a Certificate of Residence and cooperate in treaty exemption/reduction notification procedures — otherwise, the Vietnamese party must still withhold and pay in full and then handle tax refunds later, which is very time-consuming.
Tax on transfer transactions. Income from capital transfers is taxable CIT income under Article 3 of the 2025 Corporate Income Tax Law (Law 67/2025/QH15, effective 01/10/2025). For foreign enterprises transferring capital in Vietnam, tax is computed at 2% of the transfer price under point i, clause 3, Article 12 of Decree 320/2025/ND-CP. This obligation needs to be reflected in the capital transfer contract (SPA) — see our article on tax on capital transfers in Vietnam.
Three groups of tax clauses to draft
Group 1 — Allocating current tax obligations. The clause must answer clearly: whether the contract price includes or excludes taxes; which party is responsible for declaration and tax payment; which party bears the cost when actual tax rates differ from expectations. The principle: the obligation owed to tax authorities is determined by law (e.g., the Vietnamese party withholds and pays foreign contractor tax), while the contract clause determines which party ultimately bears that cost.
Group 2 — Gross-up. A gross-up clause commits the paying party to “gross up” the payment so that the receiving party actually receives the agreed amount after deducting withholdable taxes. This clause is especially important when the foreign counterparty demands to receive the full net amount, and when DTA application fails or the Certificate of Residence is not provided in time.
Group 3 — Tax indemnity. The indemnity clause handles future risks: if tax authorities assess back taxes, impose taxes, or penalize one party due to the other party’s past acts or declarations, the party at fault must indemnify the full back-tax amount plus penalties and late-payment interest. In M&A contracts, this clause protects the buyer from tax obligations arising from pre-transfer periods — see Section 5 below.
Model clauses: gross-up and tax indemnity
Below is a reference clause framework — it must be adjusted by a lawyer for each specific transaction and should not be copied verbatim.
Model gross-up clause (services contract with a foreign contractor): “All payments to Party B under this Contract shall be made after deducting taxes that Party A is obligated to withhold and pay on behalf under Vietnamese law. Where Party B requires receipt of the full agreed amount (net price), Party A shall add (gross up) to the payment an amount corresponding to the taxes to be withheld and paid on behalf, so that the amount Party B actually receives after tax equals exactly the amount agreed by the parties.”
Model tax indemnity clause: “The breaching Party shall indemnify the other Party for the full amount of back-assessed taxes, administrative tax penalties, and late-payment interest arising from the breaching Party’s incorrect, incomplete declarations or breach of tax obligations during the performance of the Contract. This indemnity obligation is independent and survives termination of the Contract for a period of [__] years.”
Notes when using the models: define the indemnity time scope clearly (tied to the statute of limitations for tax violations), exclude back assessments caused by changes in law after contract signing (if the parties so agree), and provide notification procedures — the assessed party must notify promptly so the indemnifying party has the opportunity to participate in explanations to tax authorities.
Tax clauses in M&A contracts
In a share purchase agreement (SPA), tax clauses have their own three-layer structure:
Tax warranties. The seller warrants that the target company has declared and paid all taxes in full up to the transfer date; which tax incentives it is enjoying and still meets the conditions; no pending tax disputes; and transfer pricing documentation has been fully prepared. If a warranty proves false, the buyer may claim compensation. Points to review before including warranties are presented in our article on tax due diligence in M&A transactions.
Tax indemnity. The seller indemnifies the buyer for all tax obligations (plus penalties and late-payment interest) arising from periods before the transaction completion date, even when tax authorities issue back-tax decisions after the transfer date. This is the most important clause because tax risks usually surface only when tax authorities conduct inspections years later.
Limitations and time limits. Negotiation practice includes: the claims period (survival period) usually tied to the statute of limitations for tax violations; minimum indemnity per claim (de minimis) and an indemnity cap; mechanisms to retain part of the purchase price or escrow to secure indemnity capability. The buyer should also consider a clause allowing purchase price adjustment after the final tax settlement results for the transfer year.
Risks of omitting tax clauses
Practice shows four most common recurring risks. First, not specifying whether the price includes or excludes taxes — disputes are almost certain to arise when the Vietnamese party withholds foreign contractor tax. Second, no gross-up clause while the foreign counterparty demands to receive the full net amount — the Vietnamese party absorbs the tax paid on behalf. Third, not requiring the foreign counterparty to provide a Certificate of Residence for DTA application — losing the exemption/reduction opportunities the treaty allows. Fourth, in M&A, no tax indemnity — the buyer absorbs all back-tax risks from periods before it owned the business.
These risks share one trait: the cost of fixing disputes after they arise is always far greater than the cost of drafting careful clauses from the start. For transactions with foreign elements or large values, tax clause review should be a separate item on the contract negotiation checklist, not merged into the payment clause.
For overall advice on FDI enterprise tax risks, see our tax consulting services for FDI enterprises.
How FLAT LAW FIRM assists
FLAT LAW FIRM assists clients in reviewing and drafting tax clauses in commercial contracts, cross-border service contracts, and M&A contracts: identifying foreign contractor tax withholding obligations; designing gross-up and tax indemnity clauses suited to the transaction structure; assessing DTA application; and reviewing tax warranties and indemnity clusters in share purchase agreements. We work in Vietnamese, Chinese, and English — suited to transactions with foreign counterparties.
See also: Tax consulting for FDI enterprises | Foreign contractor tax in contracts with foreign partners | Tax due diligence in M&A transactions | Contact
Talk to FLAT LAW FIRM
If your business is negotiating contracts with foreign elements or preparing an M&A transaction and needs tax clause review, FLAT LAW FIRM can assist with risk assessment and drafting suitable clauses. Please contact us for advice.
FAQ
Can a contract clause shift the tax payment obligation to another party?
No. Declaration and tax payment obligations owed to tax authorities are determined by law — for example, the Vietnamese party must still withhold and pay foreign contractor tax under Circular 103/2014/TT-BTC. Contract clauses only allocate tax costs between the parties (who ultimately pays), without changing who owes the obligation to tax authorities.
How is gross-up computed?
Under Articles 12 and 13 of Circular 103/2014/TT-BTC, when the contract price excludes taxes, the taxable revenue is converted by dividing the tax-exclusive price by (1 − the tax percentage rate). The specific percentage depends on the type of goods or services the foreign contractor provides.
When can a DTA be applied to reduce foreign contractor tax?
When the foreign contractor is a resident of a country that has signed a DTA with Vietnam and meets the treaty’s conditions. A Certificate of Residence must be prepared and treaty exemption/reduction notification procedures completed under Circular 95/2026/TT-BTC. The obligation to provide these documents should be included in the contract from the start.
How long does a tax indemnity clause in M&A usually last?
Practice ties it to the statute of limitations for tax violations and the period during which tax authorities may inspect and examine prior tax periods. The specific period is negotiated by the parties, usually longer than the contract’s general warranty period because tax risks surface only after many years.
Is this article formal legal advice?
No. This article only provides general information; specific clauses need lawyer review for each contract and transaction.
Does FLAT LAW FIRM support Chinese and English?
Yes. We can assist with exchanges, document review, and explaining options in Vietnamese, Chinese, and English.
