Foreign contractor tax in Vietnam: the most common mistakes in cross-border contracts

The short answer

Foreign contractor tax (FCT) comprises VAT and CIT (or PIT for individuals) on income that foreign organisations and individuals earn from contracts with Vietnamese parties. Usually, the Vietnamese party withholds and pays it on payment.

Between 2025 and 2026, the legal framework changed significantly:

• the CIT element of FCT is now governed by Circular No. 20/2026/TT-BTC (replacing the corresponding part of Circular No. 103/2014/TT-BTC);

• the VAT element is governed by Circular No. 69/2025/TT-BTC;

• services supplied by foreign providers without a permanent establishment via e-commerce and digital platforms are subject to 10% VAT from 1 July 2025 under the 2024 VAT Law.

The most common mistakes are not about rates, but about four steps:

• determining whether a transaction is subject to FCT;

• classifying the income correctly;

• grossing up correctly where the contract states a net price;

• the procedure for applying tax treaties.

Why is FCT a long-term hot spot?

Cross-border transactions are increasingly diverse: digital services, software, remote consulting, capital transfers, and supply chains combining goods and services. Each type of transaction has its own FCT treatment.

FCT is also easy for the tax authority to collect in an audit. The obligation sits with the Vietnamese party, and outbound payments can all be traced through banks.

Seven common mistakes

1. Assuming services "performed abroad" are not taxable. The principle is that services supplied and consumed in Vietnam are subject to FCT, even if the contractor's staff never come to Vietnam. Only certain services performed and consumed outside Vietnam fall outside the scope, according to the prescribed list.

2. Misclassifying income. "Software" may be a service, a royalty or goods. Each has a different CIT rate and VAT treatment. In mixed contracts where the components cannot be separated, the business risks having the highest rate applied to the whole contract.

3. Grossing up incorrectly for net contracts. Where the Vietnamese party bears the tax, taxable revenue must be grossed up from the amount actually paid. According to analyses of Circular No. 20/2026/TT-BTC, the gross-up method has changed from Circular No. 103/2014/TT-BTC, now applying a single gross-up on the combined tax rate. Using the old formula may lead to underpaid tax.

4. Overlooking 10% VAT on digital services. From 1 July 2025, services supplied by foreign providers without a permanent establishment via e-commerce and digital platforms are subject to 10% VAT, no longer the 5% rate for ordinary services.

5. Applying a tax treaty without following the procedure. Many businesses simply do not withhold CIT because "the treaty exempts it", without a treaty application or a valid certificate of residence. Circular No. 95/2026/TT-BTC also makes clear that applications are refused where the request is made more than 3 years after the tax liability arose.

6. Contracts that do not specify who bears the tax. Without a clear tax clause, disputes arise over the amount payable. If the Vietnamese party has paid in full without withholding, it still has the obligation to pay on the contractor's behalf.

7. Filing at the wrong time or on the wrong form. FCT withheld by the Vietnamese party is declared for each payment. Late filing or payment triggers late-payment interest and penalties.

Reference table of common rates (deduction method)

Transaction	VAT	CIT
Ordinary services (consulting, management, technical)	5%	5%
Digital services supplied via digital platforms by foreign providers without a permanent establishment	10% (under the 2024 VAT Law)	5%
Royalties	Not subject to VAT (where conditions for transfer of rights are met)	10%
Interest	Not subject to VAT	5%
Goods delivered in Vietnam with services under the contract	As prescribed for each component	As prescribed for each component

For reference only. Businesses should check Circular No. 20/2026/TT-BTC, Circular No. 69/2025/TT-BTC and the applicable tax treaty for each transaction.

Illustrative case

Company FF signed a USD 1 million contract with a Singaporean company to implement an ERP system, on a "net price, Vietnamese party bears all taxes" basis. The contract had three components: a software licence, implementation and training services, and an annual cloud subscription. However, it did not separate the value of each component.

In an audit, the tax authority found three issues:

• Company FF had treated the whole contract as a royalty (no VAT, 10% CIT);

• no VAT had been charged on the services and cloud subscription;

• the net amount had been grossed up using the old formula.

As a result, Company FF faced VAT collection, late-payment interest and a recalculation of CIT.

The correct approach:

• separate the value of each component in the contract;

• classify each component by substance;

• gross up according to current guidance;

• assess the conditions for applying the Vietnam–Singapore tax treaty to each type of income.

Checklist before signing with a foreign counterparty

1. Determine whether the transaction is subject to FCT.

2. Classify each component: goods, services, royalties, interest or digital services.

3. Separate the value of each component in the contract.

4. Specify whether the price is gross or net and who bears the tax. Add a gross-up clause if needed.

5. Assess treaty eligibility. Ask the counterparty to provide its certificate of residence in good time.

6. Set up a filing and payment schedule for each payment.

FAQs

Which regulations currently govern FCT?

The CIT element is governed by Circular No. 20/2026/TT-BTC and the VAT element by Circular No. 69/2025/TT-BTC, under the 2025 CIT Law, the 2024 VAT Law and their implementing decrees.

Are services provided remotely by foreign experts subject to FCT?

Yes, if the services are supplied and consumed in Vietnam, except where excluded by the rules or exempt under a tax treaty.

How is revenue grossed up for a net contract?

Taxable revenue is grossed up from the amount actually paid using the formula in current guidance. Businesses should recheck their formula, as it has changed from Circular No. 103/2014/TT-BTC.

Can CIT withholding be avoided under a tax treaty?

It can, if the income is exempt or reduced under the treaty and the business follows the treaty application procedure under Circulars No. 89/2026/TT-BTC and 95/2026/TT-BTC.

Legal basis

• CIT Law No. 67/2025/QH15, Decree No. 320/2025/ND-CP and Circular No. 20/2026/TT-BTC.

• VAT Law No. 48/2024/QH15, Decree No. 181/2025/ND-CP and Circular No. 69/2025/TT-BTC.

• Law on Tax Administration No. 108/2025/QH15; Circulars No. 89/2026/TT-BTC and 95/2026/TT-BTC.

• Vietnam's double tax treaties.

How W&A can help

FCT should be dealt with at the contract negotiation stage, not at payment. W&A supports businesses with:

• Pre-signing review of cross-border contracts: component classification, tax clauses and gross-up provisions.

• Determining FCT obligations and grossing up revenue under the new guidance.

• Treaty application procedures for foreign contractors.

• Ongoing FCT filings and payments on behalf of businesses.

• Review and amendment of prior periods, and support with explanations in tax audits.