Tax Finalization upon Dissolution of an FDI Enterprise: 4 Cost-Disallowance Risks and Solutions for a Safe Tax Code Closure

Authors: Truong Trong Minh – Senior Associate, Vo Thi Anh Nhi – Paralegal.

For a foreign-invested enterprise (“FDI enterprise”), tax finalization upon dissolution amounts to a comprehensive review of the entire financial history of the investment project. At this stage, the tax authority reviews cash flows, invoices, transactions with the parent company, assets, inventory, revenue, profit, and every single cost item that has been recorded.

Before commencing the tax finalization procedure, many investors believe that a company having incurred losses for several consecutive years means that no outstanding financial obligation can remain. The eventual outcome, however, is often entirely different, once significant cost items are disallowed, resulting in a higher amount of tax payable, together with administrative fines and late-payment interest.

This article by CDLAF Law Firm analyzes the four most common categories of cost-disallowance risk typically encountered by FDI enterprises, together with solutions for closing the tax code safely and effectively.

1. Why is tax finalization the bottleneck of every FDI enterprise dissolution dossier?

In the dissolution process, the tax authority plays the decisive role in determining the outcome of the dissolution. The business registration authority will only update the enterprise’s status to “dissolved, bankrupt, ceased to exist” after receiving confirmation that the enterprise has fulfilled its tax obligations and that its tax code has been terminated. For an FDI enterprise, the level of scrutiny is considerably higher than for a domestic enterprise, for three reasons:

• A complex capital-flow structure: contributed capital from the foreign investor, intra-group loans from the parent company, and profits not yet remitted — each of these cash flows must be shown to be lawful and compliant with foreign exchange management regulations.
• Related-party transactions are the focal point of examination: the purchase and sale of goods, technical services, management fees, and royalties with related parties are the category of transaction subject to the closest scrutiny, particularly for an enterprise that has reported losses for several years.
• The tax authority’s last opportunity for examination: once an FDI enterprise has exited the market, the tax authority no longer has the ability to make a retrospective tax collection. Accordingly, the scope of examination at the dissolution stage is typically expanded to the fullest extent permitted within the applicable statute of limitations.

The practical consequence is that many FDI enterprises with substantial accumulated losses still find themselves with an amount of tax payable following finalization, because that accumulated loss is reduced once non-deductible cost items are disallowed.

2. The four most common cost-disallowance risks

This is a critical section that an enterprise needs to review and reassess before carrying out the tax finalization procedure.

Risk No. 1: Management fees, service fees, and royalties paid to the parent company being disallowed

This is the most common risk category for FDI enterprises. Items such as the management fee, technical service fee, royalty, and regional cost allocation are typically recorded on a regular annual basis pursuant to intra-group contracts, but at the time of finalization there is often insufficient documentation to substantiate them.

The tax authority typically requires that three elements be substantiated simultaneously: (i) that the service was, in fact, actually provided; (ii) that the cost incurred corresponds to the economic benefit received; and (iii) that the cost-allocation method is reasonable and the fee level is consistent with the arm’s length principle.

In practice, many enterprises hold only a framework agreement and a debit note issued by the parent company, without any documentation substantiating the actual content of the service. In such cases, this cost item is typically disallowed in full upon finalization; for an enterprise that has been operating for many years and has remitted a regular monthly “management fee” to its overseas parent company, the cumulative amount can be very substantial.

Risk No. 2: Interest expense on intra-group loans being rejected

Borrowing from the parent company is a common financing method for FDI enterprises, but it is also a significant source of tax risk upon finalization. Commonly encountered issues include:

• Medium- and long-term loans not having been registered with the State Bank of Vietnam as required under foreign loan management regulations, rendering the entire loan and the related interest non-compliant as a matter of form.
• Loan drawdown, disbursement, and repayment transactions not having been carried out through the direct investment capital account (DICA) as required under foreign exchange management regulations.
• The deductible interest expense cap applicable to enterprises with related-party transactions, with any amount exceeding the cap being excluded from deductible expenses.
• The intra-group lending interest rate not being consistent with the arm’s length principle, resulting in an adjustment.

For an intra-group loan that remains unpaid at the time of dissolution, a further question arises as to the foreign contractor tax obligation applicable to the interest that has been, or is to be, paid to the offshore party.

Risk No. 3: Liquidation of assets and inventory being subject to a re-determined price

Upon cessation of operations, an enterprise is required to dispose of all of its machinery, equipment, and inventory. Risk typically arises in two respects:

• The liquidation price being considered lower than the market price, particularly where the sale is made to a related party or to the enterprise’s own personnel. The tax authority may re-determine the price and increase revenue, giving rise to value-added tax and corporate income tax on the resulting difference.
• Damaged or obsolete inventory being destroyed without a complete set of supporting records being prepared as required, resulting in the value of the destroyed inventory being excluded from deductible expenses.

In addition, for imported assets that were exempt from import duty under investment incentives, liquidating or transferring such assets before the required holding period may give rise to an obligation to pay back import duty and import VAT — a cost item that is often entirely overlooked in the dissolution budget.

Risk No. 4: Suspense costs, costs lacking supporting documentation, and reduction of accumulated losses

The final risk category comprises prepaid expenses not yet fully amortized, provision expenses, doubtful receivables not provisioned in accordance with applicable regulations, input invoices lacking non-cash payment documentation, and invoices from suppliers that have ceased operating or that fall within categories flagged as high-risk invoices.

For a loss-making FDI enterprise, the consequence is not merely the loss of deductible expenses, but a reduction or elimination of its accumulated losses. Once the loss available for offset is no longer available, the enterprise generates taxable income and a corresponding corporate income tax liability — together with late-payment interest calculated retroactively for each period. This is precisely why many investors are taken by surprise by the finalization outcome, even though the company has never once been profitable.

3. The basic procedures an FDI enterprise must carry out

Unlike a domestic enterprise, an FDI enterprise must sequentially carry out the following basic procedures in order to dissolve:

Procedure for termination of the investment project: carrying out the procedure for terminating the investment project with the investment registration authority.

Tax finalization procedure: notifying the tax authority of the termination of the tax code’s validity; completing all tax returns and financial statements up to the date of dissolution; handling any unused electronic invoices; undergoing the finalization inspection; paying the full amount of tax and late-payment interest due; and receiving the decision terminating the validity of the tax code.

Procedure for closing the bank account (DICA): carrying out the procedure for closing the direct investment capital account (DICA) after the remaining capital and any lawful profits have been remitted abroad.

Corporate dissolution procedure: carrying out the corporate dissolution procedure at the business registration authority where the enterprise’s head office is located.

4. Solutions for a safe tax code closure: a 5-step roadmap

Step 1 — Review and assess compliance before carrying out the tax finalization procedure. This is the most important step, yet also the one most easily overlooked. An enterprise should, either on its own or through an independent advisory firm, carry out a comprehensive review and assessment conducted in exactly the manner the tax authority will apply upon examination, covering every year still within the applicable statute of limitations. The purpose of this review is to estimate the enterprise’s potential financial exposure before proceeding with dissolution.

Step 2 — Gather and reinforce supporting documentation. For cost items at risk of disallowance, supplementary supporting documentation should be gathered while it remains possible to contact the parent company, former personnel, and business partners: contracts, appendices, acceptance minutes, email correspondence, service reports, and payment vouchers.

Step 3 — Review the accounting books. Fully resolve inventory (through a liquidation sale supported by invoices, or destruction with the proper records), liquidate fixed assets with complete valuation documentation, reconcile and confirm outstanding balances with each business partner, and resolve any suspense costs. A transparent balance sheet as at the closing date significantly shortens the time required for tax finalization.

Step 4 — Prepare the explanatory dossier. Anticipate the questions the tax authority is likely to raise on each item at risk, and prepare the corresponding arguments and supporting documents in advance. An enterprise should engage an advisory firm that is thoroughly familiar with its file throughout the entire tax finalization process.

Step 5 — Fulfil all obligations and obtain the decision terminating the validity of the tax code. Pay the full amount of tax, late-payment interest, and fines determined in the examination conclusion; complete the cancellation of any unused electronic invoices; obtain the decision terminating the validity of the tax code; and proceed to the dissolution procedure at the business registration authority.

CDLAF’s Advisory Services for the Dissolution of FDI Enterprises

CDLAF Law Firm accompanies foreign investors throughout the entire process of exiting the Vietnamese market:

• Pre-dissolution tax risk review (pre-closing tax health check): assessing the four categories of cost-disallowance risk, estimating the potential amount of retrospective tax collection, and proposing measures to reinforce the file before the dissolution decision is announced.
• Advising on the selection of the optimal exit approach, one that is effective and legally sound.
• Carrying out the full suite of procedures on a turnkey basis: tax finalization and tax code closure; termination of the investment project; corporate dissolution; and closure of the DICA account.
• Representing the enterprise in dealings and explanations with the tax authority, the investment registration authority, the business registration authority, and the bank throughout the entire process.

📩 BOOK A CONSULTATION WITH CDLAF’S LEGAL TEAM

Do not let procedural errors disrupt your business plans. Contact CDLAF today to receive a preliminary risk assessment from our team of Lawyers:

Hotline/Zalo: [+84 909 668 216]

Email: info@cdlaf.vn

You can refer for more information:

• • Termination of Operations of an FDI Enterprise in Vietnam — Dissolution Procedure and Tax Code Closure
  • Costs of Corporate Dissolution: Economical Yet Effective
  • 5 Steps to Dissolve a Business Quickly and in Full Compliance in 2026
  • Dissolution; Suspension of Operations; “Neglection” of the Company: Which Option Is More Appropriate?
  • Abandoning an Inactive Company Without Dissolving It — Will There Be Penalties?