Home » Research » Vietnam‘s Foreign Contractors Tax – A Complete Guide

Vietnam‘s Foreign Contractors Tax – A Complete Guide

Along with the development of technology, there are more and more forms of cross-border service provision. Therefore, countries have begun to issue regulations on tax collection for organizations or individuals without legal status in their country. Foreign contractor tax is one of the solutions. Apluslaw will delve into the definition, scope, and implications of this tax in Vietnam, as well as examine the relevant legal and regulatory frameworks.

What is Foreign Contractors Tax (FCT)?

FCT is a tax that targets foreign entities (organizations and individuals) who are not operating under Vietnamese law. The tax is levied on income generated by providing services or services attached to goods within Vietnam. 

In essence, contractor tax is not a new tax, but can be considered as a method to collect value-added tax and corporate/personal income tax for subjects of these taxes, but do not operate under Vietnamese law (do not have a tax code in Vietnam).

Currently, contractor tax is regulated by Circular No.103/2014 of the Ministry of Finance.

When does the Foreign Contractors Tax (FCT) arise?

According to Circular No.103/2014/TT-BTC, The Foreign Contractors Tax is applied to the entities below (except for the cases in Article 2 Chapter I):

1. Foreign business organizations having permanent establishments in Vietnam or not; foreign business individuals that are residents of Vietnam or not (hereinafter called foreign contractors and foreign sub-contractors) who do business in Vietnam or earn income in Vietnam under contracts, agreements, or commitments between the foreign contractor and a Vietnamese entity or between a foreign sub-contractor and a foreign sub-contractor to perform part of the main contract.

2. Foreign entities providing goods in Vietnam in the form of domestic export and earn income in Vietnam under contracts between them and Vietnamese companies (except for cases in which goods are processed and then returned to foreign entities) or distribute goods in Vietnam or provide goods under Incoterms rules that require the sellers to be responsible for goods that have been taken into Vietnam’s territory.

Example 1:

Case 1: Company X who is located overseas signs a contract to buy cloth from Vietnamese company A and requests company A to deliver the goods to Vietnamese company B (in the form of domestic export defined by law). Company X earns an income in Vietnam under a contract between company X and company B (company X sells cloth to company B).

In this case, company X is regulated by this Circular and thus, company B shall declare and pay tax on behalf of company X in accordance with this Circular.

Case 2: Company Y who is located overseas signs a contract to process cloth with Vietnamese company C and requests company C to deliver the goods to Vietnamese company D for further processing (in the form of domestic export defined by law). Company Y earns an income in Vietnam under a contract between company Y and company D (company Y sells goods to company D).

In this case, company Y is regulated by this Circular and company D shall declare and pay tax on behalf of company Y in accordance with this Circular.

Case 3: Company Z who is located overseas signs a contract to process or buy cloth with Vietnamese company E (company Z provides raw materials for company E) and requests company E to deliver the goods to Vietnamese company G for further processing (in the form of domestic export defined by law). After processing, company G returns the goods to company Z and company Z must pay company G for the processing under the contract.

In this case, company Z is not regulated by this Circular.

3. Any foreign entity that performs the whole or part of goods distribution or service provision in Vietnam, who is still the owner of goods that are delivered to Vietnamese organizations or take responsibility for the cost of distribution, advertising, marketing, quality of goods/services delivered to Vietnamese organizations, or impose prices (including the cases in which the foreign entity authorities or hires some Vietnamese organization to perform part of the distribution or service provision pertaining to goods sale in Vietnam).

Example 2:

Company A who is located overseas delivers goods to a Vietnamese company B or authorizes company B to perform some services (delivery, distribution, marketing, advertising) while company A is still the owner of goods delivered to company B or still take responsibility for the cost, quality of goods/services delivered to company B, or the one who impose prices for goods/services. In this case, company A is regulated by this Circular.

4. Any foreign entity that negotiates or concludes contracts via a Vietnamese entity.

5. Any foreign entity that exercises its right to export, import, distribute goods in Vietnam, buy goods to export, or sell goods to Vietnamese traders in accordance with trading laws.

How much does Foreign Contractors Tax (FCT) rate?

As mentioned, contractor tax includes value added tax and personal/corporate income tax. Specific tax rates are specified in Circular No.103/2014/TT-BTC as follows:

VAT rate

No.	Trade	VAT rate
1	Services, rental of machinery and equipment, insurance; construction, installation exclusive of raw materials, machinery and equipment.	5
2	Production, transportation, services attached to goods; construction, installation inclusive of raw materials, machinery and equipment.	3
3	Other trades	2

CIT rate

No.	Trade	CIT rate
1	Trading: distribution, supply of goods, raw materials, supplies machinery and equipment; distribution of goods, raw materials, supplies, machinery and equipment attached to services in Vietnam (including those provided in the form of domestic exports, except for goods processed under processing contracts with foreign entities); supply of goods under Incoterms	1
2	Lease of machinery and equipment, insurance, lease of oilrig.	5
	– Restaurant, hotel, casino management services	10
	– Derivative financial services	2
3	Lease of aircraft, aircraft engines, parts of aircrafts and ships	2
4	Construction, installation, whether or not inclusive of raw materials, machinery and equipment	2
5	Other business activities, transport (including sea transport and air transport)	2
6	Transfer of securities, certificates of deposit, ceding reinsurance abroad, reinsurance commission	0.1
7	Loan interest	5
8	Income from copyright	10

PIT rate

According to Clause 2, Article 5 Circular No.103/2014/TT-BTC, “Foreign contractors and foreign sub-contractors are foreign business people that pay VAT as prescribed in this Circular or pay personal income tax as prescribed by regulations of law on personal income tax”.

According to the personal income tax law, depending on the individual’s residence status, type of income, etc., the tax rate will be different.

Following Article 25 of Law on Personal Income Tax, Tax rates on incomes from business for non-residents are specified for different production sectors or business lines as follows:

No.	Trade	CIT rate
1	goods trading	1%
2	service provision	5%
3	production, construction, transportation and other business activities	2%

Is Foreign Contractors Tax (FCT) deducted?

Normally, foreign contractor tax will be declared and paid by the Vietnamese partner, so the declaration of VAT and corporate income tax deduction will also be done by the Vietnamese partner.

According to Clause 10, Article 1, Circular No. 26/2015/TT-BTC stipulates the conditions for input VAT deduction as follows:

“Legitimate VAT invoices for purchases or receipts for payment of VAT on imported goods, or receipts for payment of VAT on behalf of foreign organizations that do not have Vietnamese legal status and the organizations and individuals, and the foreigners that do business or earn income in Vietnam.”

Thus, if a unit incurs VAT paid on behalf of a foreign contractor, it will be able to deduct input VAT if the goods and services are related to the unit’s production and business process.

Why Foreign Contractors Tax (FCT) is important?

The Foreign Contractors Tax (FCT) is important in Vietnam for a couple of reasons:

For the Vietnamese Government:

• Revenue Collection: FCT acts as a source of tax revenue for the Vietnamese government. Since many foreign businesses operate in Vietnam without a permanent presence, FCT ensures they contribute to the tax system for services rendered in the country.
• Regulation and Control: FCT helps regulate foreign businesses operating in Vietnam. By withholding tax at the source, the government can monitor foreign business activity and ensure compliance with tax regulations.

For Foreign Businesses:

• Clarity and Certainty: FCT provides a clear and predictable tax obligation for foreign businesses offering services in Vietnam. Knowing the FCT rate upfront allows them to factor it into their pricing and budgeting.
• Efficiency: The direct method of FCT can be a simpler and more efficient way for foreign businesses with short-term projects to fulfill their tax obligations, avoiding the need to set up a separate legal entity in Vietnam.

Overall, FCT plays a role in ensuring a fair and balanced tax system in Vietnam, benefiting both the government and foreign businesses operating within the legal framework.

Do all transactions need to be reviewed to check which transactions are subject to contractor tax?

Pursuant to Article 2 of Circular No.103/2014/TT-BTC, in some specific cases, contractor tax (understood as the tax prescribed in this Decree) will not be applied to the following subjects:

1. Any foreign entity doing business in Vietnam under the Law on Investment, the Law on Petroleum, and the Law on credit institutions.

2. Any foreign entity that provides goods for Vietnamese entities without ancillary services in Vietnam in the form of:

• Delivery at the foreign border checkpoint: the seller incurs all responsibility, costs, and risk to the transport and delivery of goods at the foreign checkpoint; the buyer incurs all the responsibility, cost and risk to the receipt and transport of goods from the foreign checkpoint to Vietnam (even if goods are delivered at a foreign border checkpoint under a contract which prescribes that the seller is responsible for warranty).
• Delivery at a Vietnam’s border checkpoint: the seller incurs all responsibility, costs, and risk until goods reaches the Vietnam’s checkpoint; the buyer incurs all the responsibility, cost and risk to the receipt and transport of goods from the Vietnam’s checkpoint (even if goods are delivered at a Vietnam’s border checkpoint under a contract which prescribes that the seller is responsible for warranty).

Example 3:

Company C who is located in Vietnam signs a contract to import excavators and bulldozers with company D who is located overseas. Goods are delivered at a Vietnam’s border checkpoint. Company D incurs all responsibility and costs related to the goods until they arrive at the Vietnam’s border checkpoint; company C is incurs responsibility and costs related to the receipt and transport of goods from the Vietnam’s checkpoint. The contracts prescribes that the goods come with a one-year warranty by company D. Other than that, company D does not provide any services related to such goods in Vietnam. In this case, company D’s provision of goods are not regulated by this Circular.

3. Any foreign entity that earns income from services provided and used outside Vietnam.

Example 4:

Company H of Hong Kong provides material handling services at a port in Hong Kong for company A in Vietnam. Company A pays company H for material handling services at the Hong Kong port.

In this case, material handling services at Hong Kong port are provided in Hong Kong, thus they are not taxable in Vietnam.

Example 5:

Professional services, bond management and issuance services, legal counseling, depository services, roadshow services provided by a foreign organization for company A in Vietnam at the countries where company A issues its GDRs (Global Depository Receipt) and international bonds are not regulated by this Circular.

4. Any foreign entity that provides any of the services below for Vietnamese entities, provided the services are provided overseas:

• Repair of means of transport (aircraft, aircraft engine, aircraft and ship parts), machinery and equipment (including undersea cables and transmission devices), with or without spare parts;
• Advertising and marketing (except for online advertising and online marketing);

Example 6:

A Vietnamese company signs a contract with a organization in Singapore to run advertisements for products in Singapore. This advertising service is not regulated by this Circular. A Vietnamese company signs a contract with an organization in Singapore to run advertisements on the Singapore’s market. This advertising service is not regulated by this Circular.

• Trade promotion and investment encouragement;
• Brokering goods sale and services provision overseas;

Example 7:

A Vietnamese company signs a contract to hire a company in Thailand to broker the sale of its goods in Thailand or on the international market. This brokerage service is not regulated by this Circular. In case the Vietnamese company hires a company in Thailand to broker a transfer of the Vietnamese company’s real estate in Vietnam, then this brokerage service is regulated by this Circular.

• Training (except for online training);

Example 8:

Company A in Vietnam signs a contract with University B of Singapore for provision of training for Vietnamese employees at University B. The training services provided by University B are not regulated by this Circular. In case Company A in Vietnam signs a contract with University B which requires University B to provide training for Vietnamese employees in Vietnam in the form of online training, the online training services provided by University B are regulated by this Circular.

• Division of charges for international telecommunications services between Vietnam and foreign contractors, which are provided outside Vietnam, lease of transmission lines and satellite frequency bands overseas as prescribed by the Law on telecommunications; division of charge for international postal services between Vietnam and other countries as prescribed by the Law on Postal services and international agreements on postal services to which Vietnam is a signatory, provided such services are provided outside Vietnam.

5. Any foreign entity using a bonded warehouse or inland clearance depot (ICD) as a warehouse serving international transport, transit of goods, or storage of goods to be processed by other companies.

Until now we have not filed the FCT, is there any retrospective tax payment during tax inspection?

According to Vietnamese law, failure to declare foreign contractor tax, when inspected and discovered, will result in payment of the outstanding amount and administrative or criminal penalties for tax evasion, depending on the amount of undeclared tax.

Law On Tax Administration 2019

“Article 143. Acts of tax evasion   

1. Failing to submit a tax registration dossier; failing to submit a tax declaration dossier; submitting a tax declaration dossier past 90 days after the expiration of the time limit or extended time limit for submission of tax declaration dossiers prescribed in this Law.”

Decree No. 125/2020/ND-CP on sanctioning of administrative violations related to taxes and invoices

“Article 17. Sanctioning of the acts of tax evasion

1. A fine equal to the evaded tax amount shall be imposed on the taxpayer that has one or more extenuating circumstance(s) when committing any of the following acts of violation:

a) Failing to submit the tax registration dossier; failing to submit the tax declaration dossier or submit the tax declaration dossier past 90 days, after the expiration of the time limit or extended time limit for submission of tax declaration dossiers, except for the cases specified at Points b and c, Clause 4 and Clause 5, Article 13 of this Decree.”

Criminal Code 2015

“Article 200. Tax evasion

1. Any person who commits any of the following acts of tax evasion with an amount of tax evaded from VND 100,000,000 to under VND 300,000,000, or with an amount of tax evaded under VND 100,000,000 despite the fact that he/she previously incurred a civil penalty for the tax evasion or has a previous conviction for any of the offences specified in Article 188, 189, 190, 191, 192, 193, 194, 195, 196, 202, 248, 249, 250, 251, 252, 253, 254, 304, 305, 306, 309 and 311 hereof which has not been expunged, shall be liable to a fine of from VND 100,000,000 to VND 500,000,000 or face a penalty of 03 – 24 months’ imprisonment;

a) Failure to submit the application for tax registration; failure to submit tax declaration; failure to submit tax declarations on schedule as prescribed by law.”

Will tax amount change based on the ways on writing the contract?

Theoretically, the tax rate can vary depending on how the contract is written. However, it should be noted that the basis for determining tax is not only based on the contract, but also on other related records and documents. In other words, the tax authority will determine the tax rate based on the nature of the transaction. Therefore, if you intentionally write a contract that does not match the nature of the transaction, you can still be subject to tax assessment, tax collection, and tax penalties by the tax authority.

How is the FCT different from the Japanese withholding  tax?

The difference between FCT (Vietnam) and Japanese withholding tax:

	FCT (Vietnam)	Japanese withholding tax
Nature of the Tax	A composite tax combining Value Added Tax (VAT) and either Corporate Income Tax (CIT) or Personal Income Tax (PIT).	A single tax withheld at source on specific income types like royalties, dividends, and interest payments.
Applicability	Applies to payments made by Vietnamese companies to foreign contractors who don’t have a permanent establishment (PE) in Vietnam, regardless of where the services are performed.	Applies to specific income types earned by non-residents in Japan, even if they have a PE in Japan.
Tax Rates	Varies depending on the type of service and any applicable tax treaties. The VAT portion typically ranges from 0% to 10%, and the CIT/PIT portion ranges from 0% to 20%.	Varies depending on the income type and any applicable tax treaties. Rates typically range from 10% to 20.5%.
Declaration Methods	Offers two methods: Direct Method (withholding at a fixed rate) and Declaration Method (allows for VAT deductions)	Generally a single withholding at source, with limited options for reducing the tax burden.
Purpose	Primarily for revenue collection and regulating foreign business activity.	Primarily to collect tax on income earned by non-residents in Japan.

If already taxed in Japan, is it possible to avoid being taxed according to the regulation of the agreement to avoid double taxation? Is it possible to deduct taxes paid abroad?

It is generally possible to avoid double taxation if you have already paid taxes in Japan and are subject to taxation in Vietnam (in the case we are discussing, it is the taxes stipulated in Circular No.103/2014/TT-BTC), because Vietnam and Japan have signed an agreement against double taxation. This Agreement (DTA) are designed specifically to prevent individuals and businesses from paying taxes twice on the same income. The exact mechanisms for avoiding double taxation vary depending on the specific cases in the DTA.

According to Article 22 of Double Tax Avoidance Agreement between Vietnam and Japan, it is possible to deduct taxes paid abroad, specifically as follows:

“1. In Vietnam, double taxation shall be eliminated as follows:
Where a resident of Vietnam derives income, profits or gains which under the laws of Japan and in accordance with this Agreement may be taxed in Japan, Vietnam shall allow as a credit against the Vietnamese tax imposed on that income, profits or gains an amount equal to the tax paid in Japan. The amount of credit, however, shall not exceed the amount of the Vietnamese tax on that income, profits or gains computed in accordance with the taxation laws and regulations of Vietnam.”

Subject to the laws of Japan regarding the allowance as a credit against Japanese tax of tax payable in any country other than Japan:

• Where a resident of Japan derives income from Vietnam which may be taxed in Vietnam in accordance with the provisions of this Agreement, the amount of Vietnamese tax payable in respect of that income shall be allowed as a credit against the Japanese tax imposed on that resident. The amount of credit, however, shall not exceed that part of the Japanese tax which is appropriate to that income.
• Where the income derived from Vietnam is a dividend paid by a company which is a resident of Vietnam to a company which is a resident of Japan and which owns not less than 25 per cent either of the voting shares issued by the company paying the dividend, or of the total shares issued by that company, the credit shall take into account the Vietnamese tax payable by the company paying the dividend in respect of its income

Is it true that when sending people to work under a technical support contract, we need to pay both FCT and PIT?

As mentioned, FCT is not a new tax and includes the value-added tax, corporate income tax and personal income tax for subjects of these taxes but do not operate under Vietnamese law. Therefore, there will be no case of having to pay personal income tax twice according to Circular No.103/2014/TT-BTC and the Law on Personal Income Tax.

FCT is a tax applied on services, so is it taxable when importing equipment items?

FCT (Foreign Contractor Tax) is not applicable to the import of equipment items. FCT is a tax imposed on foreign legal entities providing services to Vietnamese entities. It’s based on the value of the services rendered, not on the value of goods.

Is FCT applicable in international trade terms?

FCT (Foreign Contractor Tax) is not directly related to international trade terms. Different countries will have different rules in determining what will be subject to withholding tax. It may depend on the country where the income is, the organization where the income is, the nature of the income, etc. In addition, each country will have different rules in determining the subject of contractor tax, tax rates, tax calculation methods, etc.

Tax consulting services for foreigners

We hope that the above article has provided you with some basic information about foreign contractor tax applied in Vietnam, some aspects related to the double taxation agreement, as well as answered questions related to this special tax.

A+ lawyers provide tax legal advice

With a team of experienced, talented, enthusiastic and dedicated lawyers, A+ Law is proud to be the leading unit in consulting and resolving tax issues for foreign investors including the following services:

• Consulting on determining tax obligations: tax amount payable, tax exemption, tax reduction, tax deduction, tax calculation price, tax rate.
• Consulting on procedures: registration, declaration, tax payment, tax settlement, inspection and handling of violations, tax complaints.
• Consulting on accounting regimes: accounting standards, invoices, documents.
• Consulting on cooperation and business plans: forecasting arising tax obligations
• Authorized representative to carry out tax procedures.

Reasons for choosing Law A+:

Good expertise, lots of experience

A+ Law’s team of lawyers are all excellent lawyers, familiar with legal regulations, and understand how litigation agencies and Party supervision agencies operate. In addition, A+ lawyers have fought and are experienced in criminal cases.

Understanding

A+ Lawyers understands the fear and confusion of clients when faced with a situation where they may have to go to jail, may be unjustly wronged, and wishes to receive full support 24/7 from expertise to safety. psychological mind. Therefore, we will do our best to bring peace of mind and fairness to our customers and clients.

Committed to the end

The journey to achieving justice for customers may not be smooth and straightforward. That journey may take many years and many levels of trial. A+ Lawyer commits to accompany and protect clients until justice and fairness are achieved.

Foreign contractor tax is a tax imposed on foreign organizations and individuals providing services or goods in Vietnam. The role of this tax is to ensure revenue for the state budget, create fairness between domestic and foreign contractors, and monitor compliance with tax laws by foreign contractors when doing business in Vietnam. If you still have any questions related to this issue, please contact lawyer A+ via email: contact@apluslaw.vn or via phone number: 0899511010 for support and advice.