There are three ways foreign contractor tax (FCT) can be paid in Vietnam. Under the withholding method, the Vietnamese customer deducts the VAT and CIT components from each payment and pays them on the contractor's behalf. Under the declaration method, the foreign contractor registers for tax, keeps Vietnamese books and declares VAT and CIT much like a local company. The hybrid method sits between them: the contractor registers and declares VAT under the credit method, while CIT is paid as a percentage of revenue.
For a one-off service or a royalty paid by a foreign-invested enterprise, withholding is almost always the answer and there is no real choice to make. The question becomes real for long projects — a plant built by a foreign EPC contractor, a multi-year installation or engineering contract, a foreign firm running a project office in Vietnam. There, the method changes who files, how input VAT is handled, what the contract price must cover and how much administration the contractor carries. This guide explains the three options and the decisions around them.
The rules that set the choice
The CIT component follows Law 67/2025/QH15, applied from the 2025 tax year, and the VAT component follows Law 48/2024/QH15, in force from 1 July 2025. Registration, declaration and payment follow the Law on Tax Administration (Law 38/2019/QH14), now with its 2026 implementing documents: Decree 252/2026/NĐ-CP, Circular 89/2026/TT-BTC, and Circular 90/2026/TT-BTC on tax registration. The conditions for each method and the deemed percentages are set in the Ministry of Finance guidance on foreign contractors, read together with these laws.
We describe the conditions in principle below. Before a contractor elects a method, the adviser should confirm in writing which conditions apply under the current text, because the method affects the whole life of the contract and changing it later is not simple.
Method one: the Vietnamese party withholds
This is the default. The Vietnamese customer registers to pay tax on behalf of foreign contractors, computes the VAT and CIT components on each payment, declares them and pays them to the state. The contractor does not register in Vietnam and does not keep Vietnamese books.
- Base: revenue received by the contractor, grossed up where the Vietnamese party bears the tax.
- VAT: a percentage of revenue set for each activity. The contractor cannot deduct its own input VAT; the Vietnamese customer may claim the FCT VAT it paid as input VAT if conditions are met.
- CIT: a deemed rate on revenue by activity. Actual costs and profit margin do not matter.
- Best for: services, royalties, interest, short contracts, and any contractor without a real presence in Vietnam.
The weakness shows on large projects with heavy local costs. A contractor that buys a great deal of material and subcontracted work in Vietnam pays VAT on those purchases but cannot offset it against the deemed VAT, so the VAT cost sits inside its price.
Method two: the contractor declares on its own books
Under the declaration method the foreign contractor registers for tax in Vietnam, applies Vietnamese accounting rules, issues Vietnamese invoices, declares VAT by the credit method and CIT on actual taxable income. The Vietnamese customer does not withhold. In effect, the contractor behaves like a local taxpayer for the duration of the contract.
The conditions have historically combined three ideas: a permanent establishment or tax residence in Vietnam, a contract of substantial duration, and the ability to keep accounts under Vietnamese accounting standards and the invoice rules. The exact thresholds are in the guidance; check them for your contract rather than assuming.
What the contractor gains: VAT on local purchases becomes creditable, CIT follows actual profit rather than a deemed margin, and the customer's payment process is simpler. What it takes on: a Vietnamese chart of accounts, e-invoicing (under Decree 254/2026/NĐ-CP on e-invoices and documents from 1 July 2026, with Circular 91/2026/TT-BTC), monthly or quarterly returns, an annual CIT finalisation, and exposure to a full tax audit.
Method three: the hybrid
The hybrid method lets a contractor that can keep Vietnamese books for VAT, but not for CIT, split the two. The contractor registers, declares VAT under the credit method — so input VAT on local purchases is creditable — and pays CIT as a percentage of revenue, as under withholding. It suits a contractor with large local purchases and a clear revenue trail but no appetite, or no capacity, to prepare a full Vietnamese CIT computation.
The hybrid is a formal regime, not an informal split that the parties agree between themselves. The contractor has to register and notify the tax authority of the method it applies, and the Vietnamese customer has to know which method is in place so that it does not withhold VAT that the contractor is already declaring.
Comparing the three side by side
| Question | Withholding | Declaration | Hybrid |
|---|---|---|---|
| Who files | Vietnamese customer | Foreign contractor | Contractor (VAT and CIT at a percentage) |
| Contractor registers in Vietnam | No | Yes | Yes |
| VAT basis | Deemed on revenue | Credit method | Credit method |
| Local input VAT creditable to contractor | No | Yes | Yes |
| CIT basis | Deemed rate on revenue | Actual taxable income | Deemed rate on revenue |
| Vietnamese books and invoices | Not required | Required | Required for VAT |
| Typical use | Services, royalties, interest, short contracts | Long projects with local presence and full accounting | Long projects with heavy local purchasing |
Hypothetical example. Suppose a foreign engineering firm wins a two-year contract to build and commission a production line for a Vietnamese manufacturer, and expects to buy much of the steel, cabling and local labour in Vietnam. Under withholding, the VAT it pays on those purchases stays a cost, and the price it quotes rises accordingly. Under the hybrid or the declaration method, that input VAT can be credited, which may lower the price — at the cost of registering, keeping Vietnamese books and filing regularly. The right answer depends on the numbers and on the firm's ability to run Vietnamese accounting for two years, not on a general preference.
Cash flow, timing and audit exposure
The methods also differ in when money leaves and how long questions stay open. Under withholding, tax is paid around each payment, so the contractor receives less cash on every invoice but carries no Vietnamese filing afterwards; the Vietnamese customer carries the audit exposure for the amounts withheld. Under declaration, VAT is settled period by period with input credits, CIT is paid provisionally during the year and finalised after year end, and the contractor itself is audited on its Vietnamese books — often after the project has closed and the site team has left.
That last point is easy to underestimate. A contractor that elects declaration should plan who will answer the tax office two or three years later, where the Vietnamese accounting records will be kept, and how the tax code will be closed properly when the project ends. Leaving a registration open with no one responsible is a common source of later problems for both the contractor and its Vietnamese customer.
What the Vietnamese customer should settle in the contract
Whatever the method, the Vietnamese party carries the consequence if it withholds when it should not, or does not withhold when it should. Five clauses prevent most disputes:
- The method. State which method the contractor applies and require written evidence of registration if it is declaration or hybrid.
- Price basis. Say whether the price includes or excludes Vietnamese VAT and the CIT component, and who bears any gross-up.
- Invoices. Under declaration or hybrid, require Vietnamese e-invoices for each payment; without them the customer's input VAT claim is weak.
- Subcontractors. If the contractor subcontracts to other foreign parties, specify who handles their FCT. Revenue passed to a subcontractor is treated under specific rules and has to be traceable.
- Change of method. Agree what happens to price and payments if the tax authority does not accept the elected method or the contractor fails to keep its registration current.
Where to check before paying
If a contractor says it declares its own tax, check it before the first payment. The taxpayer information lookup run by the tax authority shows whether the contractor has a Vietnamese tax code, its registration status and the managing tax office. A Vietnamese e-invoice from the contractor can be checked on the e-invoice portal of the tax authority. If either check fails, withhold until the position is documented — a paid invoice is much harder to correct than a held one.
For your own withholding returns, the company's e-tax account shows which FCT returns were filed and paid. Reconcile it against overseas payments at least every quarter. Since 1 July 2025 Vietnam has 34 provinces and centrally run cities and a three-tier tax administration — the Tax Department, provincial and city tax offices, and grassroots tax offices — so confirm which office manages the payer before filing.
Frequently asked questions
Can a foreign contractor choose any method it likes?
No. Withholding is the default; declaration and hybrid depend on conditions about presence, contract duration and accounting capacity set in the guidance. Check the current conditions for your contract before electing.
Does the declaration method mean the contractor has a permanent establishment?
Not automatically, but the two questions are closely related. A long project with a site office is often a permanent establishment under domestic law or a tax treaty, and that affects how profit is taxed.
If the contractor declares VAT itself, should we still withhold VAT?
No, provided the contractor is registered under that method and issues Vietnamese e-invoices. Withholding on top would double the VAT. Keep evidence of the contractor's registration in the payment file.
Can we credit the FCT VAT we withhold?
Generally yes, if the conditions for input VAT credit are met and you hold the tax payment documents. Under declaration or hybrid, you credit the VAT on the contractor's Vietnamese e-invoice instead.
Can the method change halfway through a project?
It is possible in some cases but disruptive, because registration, invoices and past returns have to be reconciled. Decide at tender stage and write the consequences into the contract.
Who handles foreign subcontractors of our main contractor?
That depends on the method the main contractor uses and the subcontract terms. Specify it in the main contract and ask for evidence that the subcontractors' tax is handled.
