LEGISLATIVE BASIS
This Alert is grounded in four instruments that together constitute the current governing framework:
Circular 20/2026/TT-BTC, effective 12 March 2026, is the primary operative instrument and the definitive reference for day-to-day FCT compliance. Law on Corporate Income Tax 2025 (Law No. 67/2025/QH15), effective 1 October 2025, introduced the most significant structural reform to Vietnam’s CIT framework in over a decade. Circular 86/2024/TT-BTC, effective 6 February 2025, introduced procedural reforms to FCT administration and is now read alongside Circular 20/2026. Law on Construction 2025 (Law No. 135/2025/QH15), effective 1 July 2026, reaffirms and carries forward the Construction Operation Licence requirement for foreign construction and EPC contractors.
- EXECUTIVE SUMMARY
Vietnam’s foreign contractor tax framework has undergone fundamental reform across 2025 and 2026. Three successive instruments — Circular 86/2024/TT-BTC, Law No. 67/2025/QH15, and Circular 20/2026/TT-BTC — have modernised FCT administration, revised CIT treatment of foreign contractors, and updated the registration and withholding procedures that Vietnamese contracting parties must follow. From 12 March 2026, Circular 20/2026 is the operative instrument and all FCT declarations, registrations, and withholding calculations must be conducted under its framework.
Running parallel to the FCT regime, and equally important, is the question of foreign contractor licensing. The answer is not a blanket yes or no. It turns precisely on the sector and the nature of the engagement. Construction and EPC contractors must obtain a Construction Operation Licence — on a per-contract, per-project basis — before commencing any work on Vietnamese territory. General service providers operating cross-border without a physical project site do not require a licence. The Law on Construction 2025, effective 1 July 2026, maintains and carries forward the licensing requirement in full.
Foreign contractors and their Vietnamese counterparties must act now to assess their position under both frameworks. The compliance window before 1 July 2026 is short.
- WHAT IS FOREIGN CONTRACTOR TAX?
Foreign Contractor Tax is not a separate tax in the Vietnamese tax code. It is a withholding mechanism — a composite levy combining Value Added Tax and Corporate Income Tax — applied to income earned by foreign entities from contracts performed in Vietnam or with Vietnamese counterparties. It applies to foreign organisations and individuals that supply goods or provide services in Vietnam under contracts with Vietnamese parties, where the supply of goods is associated with services performed in Vietnam.
The two components are as follows. The VAT component is levied on the value of goods and services supplied in Vietnam and is withheld by the Vietnamese contracting party. The CIT component is levied on the taxable profit or deemed taxable revenue of the foreign contractor and is likewise withheld by the Vietnamese contracting party. In both cases, the Vietnamese party acts as the withholding agent and bears primary compliance responsibility for declaration and remittance.
There are three FCT payment methods. Under the Deduction Method (phương pháp khấu trừ), the foreign contractor registers with the Vietnamese tax authority, maintains full Vietnamese accounting records, and files VAT and CIT returns directly. This method is available to foreign contractors that have a permanent establishment or are present in Vietnam for 183 days or more in a tax year. Under the Direct Method (phương pháp trực tiếp), the Vietnamese contracting party withholds and remits both VAT and CIT on behalf of the foreign contractor, applying prescribed deemed rates to the gross contract value. This is the most common method for foreign contractors without a local presence and the method most directly affected by the 2025–2026 legislative changes. Under the Hybrid Method, the foreign contractor registers for and pays VAT directly under the deduction method, while the Vietnamese party withholds CIT on a deemed basis. This method is available to foreign contractors present in Vietnam for more than 183 days but who do not meet all conditions for the full deduction method.
- THE NEW REGULATORY FRAMEWORK: KEY CHANGES
Circular 86/2024/TT-BTC — Effective 6 February 2025
Circular 86 introduced important procedural reforms to FCT administration, primarily targeting tax code registration and the direct withholding method. It streamlined tax code registration for foreign contractors operating under the direct method, giving Vietnamese contracting parties updated procedures for registering the foreign contractor’s tax code. It clarified the obligations of Vietnamese withholding agents, including updated timelines for declaration and remittance. It also updated guidance on the interaction between FCT obligations and applicable double taxation agreements (DTAs), including the documentary requirements for foreign contractors seeking treaty relief. Practitioners must note that Circular 86 has been supplemented and in certain respects superseded by Circular 20/2026; both instruments must be read together for the current position.
Law on Corporate Income Tax 2025 — Law No. 67/2025/QH15 — Effective 1 October 2025
The CIT Law 2025 represents the most significant structural reform to Vietnam’s CIT framework in over a decade and has direct implications for the CIT component of FCT. On the rate structure, the Law confirms and in some respects modifies the CIT rates applicable to foreign contractors under the FCT regime; practitioners should verify applicable deemed CIT rates under the direct method against the updated schedule. On the scope of Vietnam-sourced income, the 2025 Law broadens the categories of income considered to arise from Vietnamese sources, potentially bringing additional categories of foreign contractor income — including digital services, intellectual property licensing, and technology transfer — within the FCT net. On the interaction with the Global Minimum Tax, for foreign contractors that are constituent entities of MNE groups subject to GMT rules, the 2025 Law establishes the interface between the CIT framework and Qualified Domestic Minimum Top-up Tax obligations; this is a complex area requiring specialist advice. On CIT incentives, the 2025 Law updates the schedule of available incentives; foreign contractors operating in encouraged sectors or geographical areas should confirm whether preferential treatment is available to reduce their FCT burden under the deduction method.
Circular 20/2026/TT-BTC — Effective 12 March 2026 — The Operative Instrument
Circular 20/2026 is the primary operative instrument governing FCT as of the date of this Alert. It supersedes and consolidates earlier circulars and is the definitive reference for all current compliance work. Its principal changes are as follows.
On deemed FCT rate schedules, Circular 20/2026 publishes the revised schedule of deemed VAT and CIT rates applicable under the direct method, organised by contract type and sector. Both Vietnamese contracting parties and foreign contractors must apply these rates from 12 March 2026.
On tax code registration, Circular 20/2026 replaces the registration procedures introduced by Circular 86/2024 with a revised, digitised process. Foreign contractors subject to the direct method must now be registered through the updated electronic portal. Vietnamese contracting parties acting as withholding agents are responsible for initiating this registration and face penalties for non-compliance.
On the scope of FCT, the Circular provides updated guidance on which contract types and service categories are subject to FCT, addressing areas of prior ambiguity including mixed supply contracts combining goods and services, digital platform services, and offshore services with a Vietnam nexus.
On the penalty framework, Circular 20/2026 updates the penalties for FCT non-compliance, including late registration, under-withholding, and late remittance. Vietnamese contracting parties in particular face enhanced scrutiny as the primary withholding agents.
On DTA relief, the Circular provides updated procedures for applying for double taxation agreement benefits to reduce or eliminate FCT liability. Documentary requirements have been revised and time limits tightened. Foreign contractors from DTA partner countries should review the updated application process promptly.
- DO FOREIGN CONTRACTORS NEED A LICENCE? THE DEFINITIVE ANSWER
The foreign contractor licence question is one of the most frequently misunderstood compliance issues in the Vietnamese market. The answer turns entirely on the sector and the nature of the activities performed. This section sets out the position with precision.
► CONSTRUCTION & EPC CONTRACTORS — LICENCE IS MANDATORY
A foreign contractor engaged in civil engineering, procurement, and construction — whether under an EPC structure, a turnkey contract, or a conventional construction contract — must obtain a Construction Operation Licence. This requirement is mandatory, applies on a per-contract and per-project basis, and is triggered by the award of the contract, not by the commencement of physical work.
When exactly does the licence requirement arise?
A foreign contractor must apply for a Construction Operation Licence when all of the following conditions are met simultaneously: the foreign contractor has been awarded a contract for construction work in Vietnam, including civil works, industrial construction, infrastructure, or mechanical and electrical installation, or procurement within an EPC structure; the contract is to be performed in whole or in part within Vietnamese territory; and the foreign contractor will be directly executing construction activities, rather than merely providing offshore design, advisory, or supply services without an on-site presence.
Exactly when to apply — the timing rule:
The Construction Operation Licence must be applied for and obtained after the foreign contractor has been formally notified of winning the bid, and before commencing any construction activities on Vietnamese territory. It is a pre-commencement licence, not a pre-bid licence. A foreign contractor may participate fully in a bidding process without holding the licence. It cannot, however, commence any on-site work until the licence has been granted. Commencing work without the licence exposes the foreign contractor to administrative sanctions and potentially to contract nullification risk.
Joint venture and local subcontracting obligations:
In addition to obtaining the Construction Operation Licence, a foreign construction or EPC contractor is legally required either to form a joint venture with a Vietnamese contractor, or to engage Vietnamese subcontractors for portions of the work — unless the contracting authority has formally certified that no capable Vietnamese contractor is available for those portions. This local participation requirement is not optional. It must be reflected in the contract structure before the licence application is submitted. A licence application that does not demonstrate compliant local participation arrangements is liable to be refused.
The Law on Construction 2025 — Critical date: 1 July 2026:
Law No. 135/2025/QH15 (Law on Construction 2025) takes effect on 1 July 2026. This Law maintains and carries forward all existing Construction Operation Licence requirements for foreign contractors without relaxation. Foreign contractors with live or pipeline EPC and construction contracts must ensure their licence applications and local participation arrangements are structured in full compliance with the 2025 Law from that date. Contracts entered into before 1 July 2026 but executed after that date will be subject to the new Law’s requirements. The window to review and restructure existing arrangements before the transition date is short. Foreign contractors should act immediately.
► GENERAL SERVICES & TRADING — NO LICENCE REQUIRED
A foreign contractor providing standard cross-border commercial services — including consulting, financial advisory, legal services, software development, software licensing, marketing, advertising, digital services, training, and similar engagements — without a physical project site in Vietnam does not require a foreign contractor licence of any kind. For these contractors, the only regulatory obligation running parallel to their commercial engagement is FCT compliance: ensuring that their Vietnamese counterparty correctly registers their tax code under Circular 20/2026 and withholds and remits FCT under the applicable method.
The critical distinction — physical footprint, not contractual label:
The licence/no-licence boundary turns on the physical nature of the services, not their contractual characterisation. A foreign contractor that labels its engagement as consulting but deploys personnel to manage and supervise construction activity on a Vietnamese project site will be treated as a construction contractor for licensing purposes. The substance of the engagement governs, not the label placed on it in the contract. This distinction is well established in Vietnamese regulatory practice and is strictly applied by the relevant authorities.
PRACTICAL COMPLIANCE CHECKLIST
For foreign contractors:
Determine whether your engagement involves physical construction activity in Vietnam. If yes, a Construction Operation Licence is required before work commences — not before bidding, but before the first day on site. If a licence is required, confirm that your contract structure includes either a joint venture with a Vietnamese contractor or Vietnamese subcontracting arrangements, and engage legal counsel before signing the main contract. Confirm which FCT payment method applies to your engagement — direct, deduction, or hybrid. If subject to the direct method, confirm with your Vietnamese counterparty that your tax code has been or will be registered through the new electronic portal under Circular 20/2026. If your jurisdiction has a DTA with Vietnam, assess whether treaty benefits are available to reduce your FCT burden and prepare the required documentation under Circular 20/2026’s updated procedures. If you are a constituent entity of an MNE group, assess the interaction of the 2025 CIT Law changes with your GMT and QDMTT obligations. For construction and EPC contractors specifically: review all live and pipeline contracts for compliance with the Law on Construction 2025 before 1 July 2026.
For Vietnamese contracting parties acting as withholding agents:
Update all FCT withholding calculations to apply the deemed rate schedule published in Circular 20/2026/TT-BTC from 12 March 2026. Register or re-register the tax code of each foreign contractor in your supply chain through the updated electronic portal. Verify that each foreign construction or EPC contractor holds a valid Construction Operation Licence before contract execution. Review all FCT declaration and remittance timelines against the updated procedures in Circular 20/2026. Ensure that contract documentation with foreign contractors contains adequate FCT clauses addressing withholding obligations, grossing-up provisions, and DTA relief procedures.
HOW DUANE MORRIS VIETNAM CAN HELP
Duane Morris Vietnam LLC has advised foreign contractors and Vietnamese project owners on FCT compliance, construction licensing, and contract structuring for over two decades. Dr. Oliver Massmann, Partner and General Director, is ranked by Chambers Asia-Pacific, Legal 500, and IFLR1000 as a leading practitioner in Vietnam’s energy, infrastructure, and regulatory practice, and is the only foreign lawyer to have presented to Vietnam’s National Assembly in Vietnamese.
Our practice covers FCT structuring and payment method selection; tax code registration and DTA relief applications under Circular 20/2026; Construction Operation Licence applications and management; joint venture and subcontracting agreement structuring for construction engagements; FCT contract clause drafting and review; regulatory compliance audits for foreign contractors and Vietnamese withholding agents; and representation in FCT disputes and enforcement proceedings.
Please do not hesitate to contact Dr. Oliver Massmann under [email protected] if you have any questions or want to know more details on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.