In the context of global economic integration, many foreign enterprises are providing services or performing contracts in Vietnam. To ensure fair and transparent tax obligations, Vietnamese law clearly regulates the Foreign Contractor Tax – a tax applied to foreign organizations and individuals deriving income in Vietnam. However, not everyone fully understands the taxable subjects and the precise tax calculation methods, leading to challenges in tax declaration and compliance.

This article will clarify who is subject to Foreign Contractor Tax, cases eligible for exemptions or reductions, and the detailed tax calculation methods under current regulations. By understanding these aspects, enterprises and individuals can fulfill their tax obligations correctly and avoid legal and financial risks.

1. Definition of Foreign Contractor Tax

Currently, Vietnamese law does not provide an official definition of Foreign Contractor Tax (FCT) within its legal documents. However, in practice, FCT refers to a tax regime applied to foreign organizations and individuals deriving income in Vietnam through the provision of services or the supplying goods.

FCT is not a distinct tax but rather a combination of three fundamental taxes :

• Value-Added Tax (VAT): Applied to the added value of goods and services supplied by foreign contractors in Vietnam.
• Corporate Income Tax (CIT): Imposed on the taxable profits earned by foreign entities from business activities in Vietnam.
• Personal Income Tax (PIT): Applicable to income received by foreign individuals working in Vietnam under contractor agreements.

The implementation of FCT ensures tax equity between domestic enterprises and foreign contractors while enabling the government to effectively manage tax revenue. Depending on the contractual structure and payment methods, the calculation of FCT varies, requiring businesses and individuals to understand the relevant regulations to comply correctly and mitigate legal risks.

2. Entities Subject to Foreign Contractor Tax

Under current Vietnamese regulations, Foreign Contractor Tax (FCT) applies to foreign organizations and individuals conducting business in Vietnam or deriving income from Vietnam. The entities subject to FCT include the following:

Foreign Organizations and Individuals Providing Services or Conducting Business in Vietnam :

• Foreign organizations with or without permanent establishments in Vietnam.
• Foreign individuals engaged in business activities, regardless of their residency status in Vietnam.
• These entities (collectively referred to as Foreign Contractors or Foreign Subcontractors) derive income from business activities in Vietnam under a contract, agreement, or other legally binding commitment with Vietnamese organizations or individuals. They may also subcontract with other foreign contractors to fulfill part of a primary contract.

Foreign Organizations and Individuals Supplying Goods in Vietnam and Deriving Income

FCT applies in the following cases:

• Foreign enterprises supplying goods under an on-the-spot import-export arrangement, deriving income from a contract with a Vietnamese enterprise.
• Foreign organizations or individuals distributing goods in Vietnam or supplying goods under international commercial terms (Incoterms), where the seller assumes risks related to the goods upon their arrival in Vietnamese territory.
• Note: A foreign enterprise that merely processes goods and returns them to a foreign counterparty is not subject to FCT.

Foreign Organizations and Individuals Engaged in Goods Distribution or Service Provision in Vietnam

FCT applies where foreign organizations or individuals conduct business in Vietnam while retaining significant control over their commercial operations. This includes situations where the foreign entity:

• Retains ownership of goods even after their delivery to a Vietnamese entity.
• Bears costs related to distribution, advertising, marketing, or ensuring product or service quality in Vietnam.
• Exercises control over pricing for goods or services sold in Vietnam.
• Appoints or contracts with a Vietnamese organization to provide distribution or sales-related services while maintaining substantial oversight of such activities.

Foreign enterprises in this category remain liable for FCT, even if they do not have a physical presence in Vietnam, provided they exert significant economic influence over the Vietnamese market.

Foreign Organizations and Individuals Contracting Through a Vietnamese Intermediary

FCT applies to foreign entities that do not directly enter into contracts but authorize a Vietnamese organizations or individuals to conduct the following activities on their behalf:

• Negotiating and executing contracts, where the contract remains under the foreign entity’s name.
• Engaging in joint business activities with Vietnamese organizations or individuals, resulting in income sourced from Vietnam.

The use of an intermediary does not exempt a foreign contractor from FCT obligations, and they remain liable under Vietnamese tax law.

Foreign Organizations and Individuals Engaged in Import, Export, and Distribution in Vietnam

FCT is also levied on foreign entities engaged in trade activities in Vietnam, including:

• Exercising the rights to import, export, and distribute goods within Vietnam.
• Purchasing goods in Vietnam for export or selling goods to Vietnamese traders in accordance with Vietnamese commercial law.

Foreign organizations participating in supply chain activities—regardless of their operational structure—may be liable for FCT if their income is sourced from Vietnam.

3. Entities Exempt from Foreign Contractor Tax

Although Foreign Contractor Tax (FCT) is broadly applicable to foreign organizations and individuals deriving income from Vietnam, certain exceptions exist under Article 2 of Circular 103/2014/TT-BTC. These exemptions apply in the following cases:

Foreign Organizations and Individuals Operating Under Specialized Laws

Foreign organizations and individuals conducting business in Vietnam under specific regulatory frameworks, such as the Law on Investment, the Law on Petroleum, and the Law on Credit Institutions, are exempt from FCT. These sectors have distinct tax obligations regulated by their respective legal frameworks.

Foreign Entities Supplying Goods Without Associated Services in Vietnam

Foreign entities that supply goods to Vietnamese entities but do not directly provide associated services in Vietnam are not subject to FCT. Specific cases include:

• Delivery at an overseas border checkpoint:
  • The seller assumes all responsibilities, costs, and risks related to exporting the goods and delivering them at the foreign border checkpoint.
  • The Vietnamese buyer assumes responsibility for transporting the goods into Vietnam, even if the contract includes warranty provisions provided by the seller.
• Delivery at a Vietnamese border checkpoint:
  • The seller assumes all responsibilities, costs, and risks related to the goods until delivery at the Vietnamese border checkpoint.
  • The Vietnamese buyer assumes responsibility for handling and transporting the goods within Vietnam, even if the contract includes warranty provisions provided by the seller.

If a foreign entity merely sells goods without providing related services in Vietnam, it is not subject to FCT.

Foreign Entities Providing Services Performed and Consumed Entirely Outside Vietnam

Services rendered and consumed entirely outside Vietnam are exempt from FCT. This exemption applies to:

• Repairs of transport vehicles, machinery, and equipment: Includes aircraft, aircraft engines, aircraft components, ships, transmission equipment, and undersea cables, with or without the supply of spare parts.
• International advertising and marketing services: Except for online advertising, marketing activities conducted entirely outside Vietnam are not subject to FCT.
• Investment and trade promotion activities conducted overseas.
• Brokerage services: Foreign entities brokering the sale of goods or provision of services outside Vietnam are not subject to FCT.
• Training services: Training programs conducted outside Vietnam are exempt. However, online training (e-learning) may be subject to FCT if consumed by individuals in Vietnam.
• Revenue sharing from telecommunications and postal services:
  • International telecommunications charges between Vietnam and foreign countries.
  • Fees for leasing foreign transmission lines and satellite bandwidth under Vietnam’s Telecommunications Law.
  • International postal service charges between Vietnam and foreign countries under the Postal Law and applicable international agreements.

Foreign Entities Using Bonded Warehouses or Inland Container Depots (ICDs) for Trade Facilitation

Foreign enterprises that only use bonded warehouses or inland container depots (ICDs) for storage, international transportation, transit, transshipment, or processing are not subject to FCT. This ensures that FCT applies only to business activities with direct economic impact on Vietnam’s domestic market, while transit and transshipment activities remain tax-exempt.

To conclude, Foreign Contractor Tax does not apply to entities operating under specialized laws, selling goods without providing services in Vietnam, offering services performed entirely outside Vietnam, or using bonded warehouses and ICDs solely for trade facilitation. Accurately determining tax-exempt entities allows foreign enterprises to optimize tax obligations while ensuring Vietnamese businesses comply with withholding and reporting requirements when engaging with foreign partners.

Time of writing: 19/02/2025

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer  at  info@cdlaf.vn

You can refer for more information:

• Conditions for establishing a company operating in the logistics field
• Conditions for conducting Organization of Conventions and Trade Shows: A legal perspective and advice for Foreign Investors
• Legal requirements for organizing various types of events in Vietnam: A comprehensive guide for investors