New FCT Rules: Is Your Business Still Applying the Right Treatment?
Introduction
A change in Foreign Contractor Tax (FCT) rules does not necessarily mean that a business is making a new type of payment. The more important question is whether an existing payment continues to be treated correctly under the applicable rules.
In 2026, changes under separate legal instruments introduced the current CIT framework relevant to foreign contractors and updated the related tax-administration procedures. These changes are particularly relevant to businesses making recurring payments for software, consulting, advertising and other cross-border services.
Businesses should therefore review whether the actual transaction, contractual terms, tax responsibility and taxable revenue continue to be assessed on the appropriate basis, particularly where the same treatment is applied across multiple reporting periods.
Article Outline
I. Key FCT Changes in 2026
II. How the New FCT Rules Affect Your Business?
III. FCT Risks from Incorrect Accounting Treatment
PCA Note
I. Key FCT Changes in 2026
The tax framework applicable to foreign contractors now spans separate CIT, VAT and tax-administration rules. Businesses should therefore avoid treating “FCT” as a single tax calculation. In particular, CIT and VAT must be assessed under their respective legal frameworks, while declaration, withholding and payment procedures should be determined under the applicable tax-administration rules.
The transition to the new legal framework takes place at different times for different taxes and procedures. Point a, Clause 7, Article 10 of Circular No. 20/2026/TT-BTC repeals the CIT provisions under specified articles of Circular No. 103/2014/TT-BTC, subject to the scope and exceptions set out therein.
Circular No. 89/2026/TT-BTC subsequently repealed Circular No. 103/2014/TT-BTC with effect from 1 July 2026. Businesses should therefore identify the rules currently applicable to each tax and the relevant tax-administration procedures, including any applicable transitional provisions.
|CIT Taxable Revenue Under Circular 20/2026/TT-BTC
Circular No. 20/2026/TT-BTC, effective from 12 March 2026 and applicable from the 2025 tax period, provides the current CIT rules applicable to foreign enterprises and foreign contractors doing business or deriving taxable income in Vietnam.
Under Article 7, CIT taxable revenue is generally determined based on the total revenue received by the foreign contractor or foreign subcontractor before deduction of taxes payable. It also includes costs paid by the Vietnamese party on behalf of the foreign contractor or foreign subcontractor, where applicable.
The inclusion of costs paid on behalf of a foreign contractor is not entirely new. Similar treatment existed under Circular 103/2014/TT-BTC. However, the wording of the current CIT revenue rule should be reviewed carefully together with the new CIT framework and the contractual tax arrangements applicable to each transaction.
Accordingly, the amount transferred directly to the foreign contractor may not always represent the full CIT taxable revenue.
Example: If a Vietnamese company pays USD 10,000 to a foreign contractor and separately bears USD 500 of costs on behalf of that contractor, and those costs fall within the applicable taxable-revenue rule, the CIT taxable revenue may include both amounts.
|Digital Services, Software and Other Cross-Border Transactions
Businesses making payments for software, SaaS, digital services, consulting, advertising or other cross-border services should assess the actual nature and structure of each transaction rather than relying solely on its accounting description.
VAT and CIT should be considered separately. Where a transaction involves an e-commerce or digital platform, businesses should also identify the applicable withholding, declaration and payment mechanism.
|E-Commerce and Digital Platform Transactions
From 1 July 2026, Circular No. 89/2026/TT-BTC provides updated tax-administration procedures for foreign contractors, foreign suppliers and certain transactions conducted through e-commerce and digital platforms.
Depending on the transaction structure, the status of the foreign supplier and the functionality of the relevant platform, the obligation to withhold, declare and pay tax may rest with the foreign supplier, the Vietnamese business purchaser or the platform operator. Businesses should identify the applicable mechanism before determining the responsible party.
|Existing Contracts and Transitional Rules
Businesses should not assume that one effective date applies to all FCT-related matters. Circular No. 20/2026/TT-BTC took effect on 12 March 2026, while Circular No. 89/2026/TT-BTC took effect on 1 July 2026.
Circular No. 20/2026/TT-BTC also contains a specific transitional rule for certain contractor and subcontractor contracts signed before it took effect and applying the mixed method under Circular No. 103/2014/TT-BTC. The applicable treatment should therefore be determined by reference to the relevant legal rule, transaction structure, contractual terms and any applicable transitional provision.
Key Takeaway: Businesses should identify the substantive tax rules, tax-administration procedures and transitional provisions applicable to each foreign-contractor arrangement, together with the party responsible for withholding, declaring and paying tax.
II. How the New FCT Rules Affect Your Business?
For FDI businesses, FCT commonly arises from routine payments to foreign contractors, including payments for services, software, advertising and consulting. Similar-looking payments may nevertheless receive different FCT treatment depending on:
- what the foreign contractor actually provides;
- how the service is performed and the arrangement is structured;
- the contractual and payment terms; and
- the party responsible for the relevant tax obligations.
The assessment should therefore be based on the substance of the transaction rather than the expense name alone.
What Should Businesses Check in the Contract?
The contract is an important source for determining the tax position. Businesses should review:
- the applicable tax rules and, where relevant, their effective dates;
- the scope of work;
- the payment terms;
- the tax clauses; and
- any costs borne by the Vietnamese party on behalf of the foreign contractor.
Why Does Taxable Revenue Matter?
The contract and supporting payment records should identify any costs borne by the Vietnamese party on behalf of the foreign contractor, as those amounts may form part of CIT taxable revenue under the applicable rules.
What About Existing Contracts?
For an existing arrangement, businesses should identify separately the substantive tax rules, tax-administration procedures and transitional provisions applicable to the transaction. Neither the contract date nor the payment date should be used in isolation to determine the applicable treatment.
III. FCT Risks from Incorrect Accounting Treatment
An FCT risk may extend beyond a single incorrect tax calculation. Where an incorrect treatment becomes the standard approach for recurring payments, the same error may be reproduced across multiple transactions, accounting periods and tax filings, increasing potential exposure and making remediation more time-consuming.
For management, an FCT error may therefore be either:
- a transaction-level issue: an isolated error that may be corrected individually; or
- a process-level issue: an underlying accounting treatment that must be corrected to prevent recurrence.
Where an issue is identified, management should determine the transactions, reporting periods and previous tax filings affected and establish whether the error is isolated or embedded in the accounting process.
Key Takeaway: Management should assess both the immediate error and whether the underlying treatment has been applied more broadly.
PCA Note
PCA supports businesses in reviewing foreign-contractor arrangements against the updated CIT, VAT and tax-administration framework, including transaction classification, taxable revenue, contractual tax allocation and withholding responsibility.
Should you wish to review your current FCT treatment or a specific foreign-contractor arrangement, the PCA Team can assist based on the relevant facts and supporting documentation. Clients may also request PCA’s practical recommendations on this topic.
Email: info@pca-cs.com
Hotline: +84 (0) 909 090 415 | +84 (0) 909 091 141
Author: Chief Financial Officer, Mr. Nguyen Quoc Tu
Tags: #ForeignContractorTax, #FCTVietnam, #VietnamTax, #VietnamTaxCompliance, #FDIVietnam, #CrossBorderTax, #CorporateIncomeTax, #TaxRegulations, #TaxAdvisory, #DoingBusinessInVietnam