Ho Chi Minh City, 25 August 2026
Effective from 1 July 2026, the regulations on foreign contractor tax have undergone significant changes following the entry into force of Circular No. 89/2026/TT-BTC (“Circular 89”), which repeals Circular No. 103/2014/TT-BTC (“Circular 103”) – a separate legal instrument that specifically guided the performance of tax obligations by foreign organizations and individuals deriving income in Vietnam (the “Foreign Contractor”).
Accordingly, enterprises established and operating under the laws of Vietnam (the “Vietnamese Party”) that transact with, and incur costs payable to, a Foreign Contractor should note the following risks.
1. Risk in applying the “Transitional provisions” of Circular 89
Unlike Circular 103, Circular 89 does not separately regulate the tax obligations of the Foreign Contractor; rather, it is a general instrument guiding the implementation of the Law on Tax Administration, under which the obligation of a Foreign Contractor to declare value-added tax (“VAT”) and corporate income tax (“CIT”) is set out in a single article (Article 30), which refers to the guidance on tax periods and tax declaration procedures in Article 19 for VAT and Article 21 for CIT.
However, the “Transitional provisions” under Circular 89 apply generally to multiple types of tax and taxpayers and expressly state that “tax declaration dossiers with a tax period before 1 July 2026 shall still use the old forms”. This may be interpreted to mean that tax declaration dossiers in general with a tax period from 1 July 2026 onward must use the new forms. Accordingly, for contracts that a Vietnamese Party signed with Foreign Contractors before 1 July 2026 and that provide for payments in multiple installments which may extend beyond 1 July 2026, the taxpayer (the Vietnamese Party) may risk being penalized by the tax authority with very significant penalties for using the wrong forms and the wrong tax period.
2. Risk in classifying transactions to determine the responsible party and tax payment mechanism
Under Circular 89, from 1 July 2026, when entering into a transaction with a Foreign Contractor, a Vietnamese Party must clearly determine which of the following groups the transaction falls into: (i) transactions arising on e-commerce platforms, which are subject to the withholding and tax payment-on-behalf mechanism under Article 43 of Decree No. 252/2026/ND-CP (“Decree 252”); or (ii) transactions not conducted through e-commerce platforms, which are governed by the tax declaration and payment mechanism under Article 30 of Circular 89. This is a fundamental difference from Circular 103, which applied a single withholding and tax payment-on-behalf principle to all forms of transactions with Foreign Contractors. Misclassifying a transaction not only leads to the application of an incorrect legal basis but also a risk of omitting administrative obligations arising specifically in respect of each transaction group. For example, for a transaction conducted through an e-commerce platform, the buyer, being an enterprise in Vietnam, is obliged to withhold and pay contractor tax (comprising VAT and CIT) on behalf of the Foreign Contractor and must also notify the e-commerce platform operator that the Vietnamese Party has carried out such withholding and tax payment on behalf of the Foreign Contractor.
In addition to classifying transactions by transaction channel as analyzed above, a Vietnamese Party purchasing goods/services from a Foreign Contractor must still correctly determine the nature of the transaction (services, royalties, construction, asset leasing, etc.) in order to apply the correct VAT and CIT rates on revenue under the applicable laws on VAT and CIT.
3. Risk in determining the foreign contractor tax payment method for transactions not conducted through an e-commerce platform
Under Circular 103, enterprises generally used a set of three conditions to determine whether a Foreign Contractor was eligible to apply the declaration method, namely: (i) having a permanent establishment in Vietnam or being a resident in Vietnam; (ii) conducting business in Vietnam under a contractor or subcontractor contract for a minimum term of 183 days; and (iii) applying the Vietnamese accounting regime and holding a Vietnamese tax code. Accordingly, if a Foreign Contractor did not satisfy any one of these three conditions, the Vietnamese Party was responsible for withholding and paying tax on its behalf under the direct method.
Under Circular 89, the tax calculation method is no longer determined based on a single set of conditions applied concurrently to all taxes, but must instead be assessed separately for each specific tax. To apply the direct method (calculating tax as a percentage of revenue), for VAT, reference must be made to the conditions set out in Circular No. 69/2025/TT-BTC (“Circular 69”); for CIT, reference must be made to the conditions set out in Circular No. 20/2026/TT-BTC (“Circular 20”).
Accordingly, applying the three conditions under Circular 103 to determine the tax payment method is no longer appropriate and carries the risk of incorrectly determining the withholding obligation. For each transaction with a Foreign Contractor arising outside an e-commerce platform, the Vietnamese Party must independently assess: (i) the VAT calculation method applicable to the Foreign Contractor; (ii) the CIT calculation method applicable to the Foreign Contractor; and (iii) each party’s corresponding declaration responsibility arising from the results of the two assessments above, before determining the specific scope and rate of withholding.
4. Risk that a Vietnamese Party which is late in filing tax returns or paying tax (on behalf of a Foreign Contractor) may be subject to enforcement measures and exit suspension
In substance, the obligation to declare and pay contractor tax belongs to the Foreign Contractor, while the Vietnamese Party merely performs such obligation on its behalf. However, under Circular 89, all risks relating to the performance of the Foreign Contractor’s tax obligations are shifted to the Vietnamese Party. Specifically, if a Vietnamese Party is late in filing tax declaration dossiers, is late in or fails to withhold tax, or is late in paying tax on behalf of the Foreign Contractor, the Vietnamese Party may be liable for administrative penalties and/or late-payment amounts calculated based on the tax amount and the period of delay. If the tax debt persists, the Vietnamese Party may become subject to enforcement measures for the implementation of administrative decisions on tax administration, such as suspension of invoice use, distraint of assets, or revocation of its business registration certificate or enterprise registration certificate. More seriously, the Vietnamese Party’s legal representative may be temporarily suspended from leaving Vietnam if the outstanding tax debt is VND 500 million or more and has been overdue for 120 days or more.
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See the previous part here: Part 1
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If your business is reviewing its foreign contractor arrangements or assessing potential tax risks, contact our team:
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