Key Updates on Foreign Contractor Tax (FCT): Major Changes in Taxable Revenue Determination
Foreign Contractor Tax (FCT) is a withholding tax applied to foreign contractors and suppliers earning income in Vietnam. The tax types included under FCT for organization are corporate income tax (CIT), value-added tax (VAT).
Circular 20/2026/TT-BTC on Corporate Income Tax (“CIT”) was released and became effective from 12 March 2026, which introduced significant changes, particularly in the determination of taxable revenue and the applicable tax calculation methods for foreign contractor tax (FCT).
Formula for Determining Corporate Income Tax (CIT) Payable
The Corporate Income Tax (CIT) payable by a foreign contractor is calculated directly based on the taxable revenue and the prescribed CIT rate applicable to the relevant business activity:
CIT Payable = Taxable Revenue × CIT Rate (%).
Components of Taxable Revenue
The Circular stipulates that taxable revenue is the total revenue received by the foreign contractor, without any deduction for expenses. It also includes any taxes and expenses paid on behalf of the foreign contractor by the Vietnamese party, where applicable.
Revenue Component | Treatment | Notes |
Contract Value | Included at 100% in taxable revenue | No deduction is allowed for operating costs, labour costs, or other expenses. |
CIT Paid on Behalf | Must be grossed up | Applicable where the contract price is quoted on a net basis (exclusive of tax). |
Reimbursed Expenses | Included in taxable revenue | Includes airfare, accommodation, insurance, and other expenses paid on behalf of the contractor by the Vietnamese party. |
Vietnamese Subcontractors | Excluded | Amounts paid to Vietnamese subcontractors or subcontractors that declare and pay tax under the declaration method are excluded from taxable revenue. |
Materials and Services Purchased in Vietnam | Excluded | Costs of goods and services purchased in Vietnam with valid supporting invoices for the performance of the contract are excluded from taxable revenue. |
1. Changes in determining CIT Taxable Revenue
A key revision lies in how taxable revenue for Corporate Income Tax (CIT) is determined:
Previous regulation | New regulation |
Revenue excluding Value Added Tax (VAT) | Revenue before deducting any taxes payable (including VAT) |
Implications of the Change
Potential Increase in Tax Liability: Since CIT taxable revenue now includes VAT, the tax base is broadened. This change increases the overall taxable amount, potentially leading to a higher FCT burden compared to previous regulations
Simplification of Tax Calculation: the alignment of VAT and CIT taxable revenue simplifies the calculation approach by removing the need to maintain separate tax bases. However, this alignment also amplifies the impact under net contracts, where both VAT and CIT are simultaneously grossed up on a unified and higher tax base.
2. FCT Calculation Methods
The standard FCT calculation methods remain applicable, with adjustments to align with the new taxable revenue rules.
Criteria | Gross basis (Contractor bears taxes) | Net basis (Vietnam side bears VAT and CIT) |
Taxable revenue (TR) | Contract value (including taxes) | |
VAT | TR × VAT rate | TR × VAT rate |
CIT | TR × CIT rate | TR × CIT rate |
Example: a foreign contractor providing standard services to a Vietnamese entity, with both VAT and CIT applicable rate at 5%, and a contract value of USD 100,000.
Detailed calculations are presented in the table below for both scenarios where the contract value is quoted on a gross basis and on a net basis.
Criteria | Gross basis (Contractor bears taxes) | Net basis (Vietnam side bears taxes) |
Taxable revenue (TR) | = Contract value = 100,000 | = 100,000 ÷ (1 – 5% – 5%) = 111,111 |
VAT (5%) | 100,000 × 5% = 5,000 | 111,111 × 5% = 5,556 |
CIT (5%) | 100,000 × 5% = 5,000 | 111,111 × 5% = 5,556 |
Total tax | 10,000 | 11,112 |
Net amount to contractor | 100,000 – 10,000 = 90,000 | 100,000 |
3. Key Considerations for Businesses
Businesses should promptly update their tax calculation models to ensure compliance with the new regulations.
Further, it is essential for businesses to assess the financial impact of these changes. This includes evaluating any potential increase in foreign contractor tax (FCT) costs and analyzing how the new requirements may affect pricing strategies and overall profit margins.
For any further questions or assistance, please reach out to us at vietnam@alitium.com
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This article is intended to provide an overview of recent updates and announcements. While it aims to present useful insights, it is important to note that the content shared here should not be considered as formal legal, tax or financial advice. For specific guidance on tax obligations or legal matters related to your business, we strongly recommend consulting with a qualified professional, such as a tax advisor or legal expert or directly reach out to us.
