1. Overview of Evolving Tax Regulations in Vietnam and the Legislative Context

The tax legal system in Vietnam has undergone a fundamental transformation following the National Assembly’s promulgation of the new CIT Law No. 67/2025/QH15 (effective October 1, 2025) and the Government’s Decree 320/2025/ND-CP (effective December 15, 2025, applicable from the 2025 tax year). These legislative instruments establish a stringent regulatory basis aligned with international standards, enhancing the state’s administrative capacity over domestic and cross-border economic activities.

1.1. Scope of Regulation and Digitalization in Tax Administration

Decree 320/2025/ND-CP details the principles for determining taxable income, tax bases, tax rates, and tax incentive conditions. A pivotal shift in current tax administration is the comprehensive integration of CIT regulations with the national electronic invoicing (e-invoice) database. The tax authorities now utilize automated cross-matching algorithms to monitor cash flows and the movement of goods in real-time. This mechanism compels corporate entities to maintain absolute consistency between internal accounting records and the electronic data reported to state agencies.

1.2. The Shift Toward Source-Based Taxation

Current tax legislation has significantly broadened the scope of taxpayers. Accordingly, foreign enterprises engaged in e-commerce or digital platform operations in Vietnam incur tax liabilities on income generated within Vietnam, regardless of whether they have established a Permanent Establishment (PE) in the country. This provision enforces the principle of taxation at the source, applying to any foreign organization deriving income from the provision of goods or services to consumers or partners within Vietnamese territory.

2. Revenue Recognition in Business Operations and Cross-Border Transactions

Accurately determining the timing and basis for revenue recognition is a decisive factor in the legality of tax declarations and is frequently a focal point for tax reassessments during inspections.

2.1. Discrepancies Between Accounting Standards and Tax Law in Revenue Recognition

Practical application reveals a distinct divergence between Vietnamese Accounting Standards (VAS) and tax regulations regarding the timing of taxable revenue recognition. CIT law stipulates that revenue from the sale of goods is recognized at the moment the right of ownership or right of use is transferred, irrespective of whether the enterprise has received payment. For the provision of services, the timing is determined by the completion of the service provision or the issuance of the invoice. Issuing invoices at an incorrect time will result in the tax authority recalculating the taxable revenue for that period, accompanied by administrative penalties for invoicing violations and late payment interest.

2.2. Permanent Establishment and Tax Obligations for Cross-Border E-Commerce

The new CIT Law No. 67/2025/QH15 provides specific provisions ensuring that foreign suppliers without a physical presence in Vietnam fulfill their tax obligations via the electronic portal for foreign providers. Taxable revenue is determined based on the location of the service consumer (identified via IP addresses, bank payment information, or telephone area codes). This self-declaration and revenue allocation process requires the IT systems of foreign organizations to accurately extract transaction data originating from the Vietnamese market.

3. Deductible Expenses and the “Substance over Form” Principle

To determine taxable income, enterprises are permitted to deduct incurred expenses provided they satisfy all statutory conditions. However, Decree 320/2025/ND-CP has established considerably stricter control standards for these criteria.

3.1. New Regulations on the VND 5 Million Non-Cash Payment Threshold

Pursuant to Point c, Clause 1, Article 9 of Decree 320/2025/ND-CP, a prerequisite for an expense to be deductible is that for any expenditure valued at VND 5 million or more (inclusive of Value-Added Tax), the enterprise must possess non-cash payment vouchers. The reduction of this threshold from VND 20 million to VND 5 million applies universally to all transactions for goods and services, as well as other disbursements such as wages and salaries to employees. Any expenditure of VND 5 million or more executed in cash will be entirely excluded from reasonable expenses during CIT finalization.

3.2. The Obligation to Prove the Economic Substance of Transactions

Tax authorities strictly enforce the principle that the substance of a transaction supersedes its declared form (“Substance over Form”). The existence of an e-invoice and a bank transfer receipt are mandatory but insufficient conditions for automatic recognition. Enterprises bear the burden of proof to provide documentation demonstrating that the expenditure directly served business operations generating taxable revenue. For specialized service expenses such as consulting, marketing, or intra-group management fees, companies must maintain documentation of actual service deliverables (analytical reports, handover documents, confirmation emails) to justify the expense to the regulatory body.

3.3. Risk Management for Statutorily Capped Expenses

Decree 320/2025/ND-CP stipulates specific limitation ratios for certain categories of expenses, requiring precise calculation during the preparation of financial statements:

• Interest expenses for enterprises with related-party transactions: The total net deductible interest expense must not exceed 30% of the total net profit from business activities plus interest expense and depreciation during the period (EBITDA).
• Direct welfare expenses for employees: The total expenditure of a welfare nature must not exceed one month’s actual average salary realized in the tax year. Enterprises must explicitly define these items in internal documents such as the Collective Labor Agreement or the Internal Financial Regulations.

4. Control of Related-Party Transactions and Transfer Pricing Regulations

Foreign Direct Investment (FDI) enterprises and domestic economic groups must strictly adhere to the Arm’s Length Principle when engaging in transactions with related parties.

4.1. Obligations to Prepare and Maintain Transfer Pricing Documentation

The law mandates that enterprises declare related-party transaction information and prepare pricing documentation, including the Local File, Master File, and Country-by-Country Report (CbCR), unless they meet statutory exemption criteria. Preparing this documentation system requires enterprises to conduct functional and risk analyses and select appropriate pricing methods based on highly reliable comparable data in the independent market.

4.2. Risks of Profit Margin Imposition by Tax Authorities

During tax audits and inspections, if the tax authority determines that the comparable database utilized by the enterprise lacks comparability, or the pricing method does not reflect the true nature of the transaction, the authority has the jurisdiction to reject the enterprise’s documentation. Relying on databases managed by the tax sector, the state agency will impose a reassessed profit margin, resulting in the legal consequence of upward revenue adjustments or downward expense adjustments, thereby generating substantial CIT arrears and corresponding late payment interest.

5. Practical Application of Corporate Income Tax Incentives

Tax incentive policies are implemented to attract investment into areas with difficult socio-economic conditions and prioritized sectors such as high technology and supporting industries.

5.1. New Tax Rate Structure and Independent Accounting Principles

Pursuant to Article 11 of Decree 320/2025/ND-CP, alongside the standard tax rate of 20%, the law applies preferential tax rates based on revenue scale to support small and medium-sized enterprises:

• A 15% tax rate applies to enterprises with total annual revenue not exceeding VND 3 billion.
• A 17% tax rate applies to enterprises with total annual revenue from over VND 3 billion up to VND 50 billion.

To benefit from preferential tax rates and tax holiday periods, enterprises must mandatorily implement separate accounting for income derived from incentivized activities versus non-incentivized activities. If the accounting system cannot accurately segregate shared expenses, the enterprise must allocate expenses based on the revenue ratio, which directly impacts the total amount of tax exempted or reduced.

5.2. Incentive Conditions for Expansion and Technological Upgrade Projects

When an enterprise makes additional investments in fixed assets to expand its scale or increase capacity, the incremental income from this expansion project is only eligible for CIT incentives if the project meets strict quantitative criteria regarding the minimum additional investment capital (e.g., minimum VND 20 billion for projects in incentivized geographical areas or VND 40 billion for incentivized sectors), or meets standards for the percentage increase in the original cost of fixed assets. The enterprise is responsible for providing documentation proving the independence of the newly invested items from the currently operating project.

6. Income Offset Mechanisms and Loss Carryforward Regulations

Managing the value of deferred tax assets from losses is a critical requirement in financial administration for enterprises, particularly those in their formative stages or heavily impacted by economic cycles.

6.1. Principles of Income Offsetting and Loss Carryforward Periods

Enterprises experiencing a business loss after tax finalization are permitted to carry forward the entire loss to offset against taxable income in subsequent financial years. The loss carryforward period is calculated continuously but must not exceed 5 years, commencing from the year following the year the loss occurred. Under the new regulations, enterprises have the right to voluntarily offset losses incurred from real estate transfers or investment project transfers against the income of standard business operations. Notably, enterprises are not permitted to execute this offset against income from projects currently enjoying CIT incentives.

6.2. Financial Treatment of Losses in Corporate Restructuring

Tax law stipulates specific limitations on the transfer of accumulated loss usage rights in transactions involving mergers, consolidations, divisions, separations, or enterprise conversions. The inheritance of losses from a merged or consolidated enterprise is not executed automatically but must comply with detailed regulations regarding the continued maintenance of capital contribution ratios and the continuity of the business lines, designed to prevent the structuring of entity acquisitions for the purpose of tax avoidance (tax loss trafficking).

7. Impact of the New CIT Law on Capital Transfer and M&A Activities

The provisions in Decree 320/2025/ND-CP have structurally altered the tax calculation method applied to divestment transactions by foreign investors in Vietnam.

7.1. Transition of the Tax Calculation Method for Foreign Organizations

The most significant change concerning Mergers and Acquisitions (M&A) is the application of a new tax calculation method for capital transfer activities. According to Clause 3, Article 12 of Decree 320/2025/ND-CP, when a foreign organization transfers capital, the CIT rate is fixed at 2% calculated directly on the total transfer price. This provision replaces the previous method of calculating a 20% tax on taxable income (transfer price minus cost price and transfer expenses). Consequently, the foreign organization is obligated to pay a 2% tax on the total value of the capital transfer transaction, regardless of whether the transaction yields a profit or records a loss.

7.2. Declaration and Withholding Obligations of the Target Entity in Vietnam

For indirect capital transfer transaction structures occurring outside the territory of Vietnam but resulting in a change of control over an enterprise established in Vietnam, the Vietnamese enterprise bears the responsibility to notify and declare tax for that transaction. In the event the transferor fails to voluntarily fulfill the tax declaration and payment obligations, the target enterprise in Vietnam is legally bound to declare and withhold the tax amount on behalf of the state agency.

8. Practical Compliance Recommendations and Strategic Tax Risk Management

Based on our firm’s practical advisory experience serving a diverse clientele, particularly foreign investors, proactively establishing compliance control mechanisms is the most effective strategy to mitigate administrative sanctions from tax authorities. We outline the following key recommendations:

8.1. Establish Internal Control and Payment Procedures Under New Regulations

• Update financial regulations and internal procurement procedures: Mandatorily enforce payments via bank accounts for all transactions, invoices, or salary disbursements valued at VND 5 million or more, strictly adhering to Article 9 of Decree 320/2025/ND-CP.
• Develop comprehensive Defense Files: Maintain complete documentation for all major transactions, including economic contracts, work handover minutes, technical documents, and evidence proving the transaction actually occurred and yielded commercial benefits for the enterprise.

8.2. Review Legal Structures in M&A Transactions

• Conduct rigorous Due Diligence: Execute comprehensive legal and tax due diligence on the target entity to identify all contingent tax liabilities, administrative penalty arrears, and the status of compliance with tax incentive conditions.
• Draft robust SPAs: During the drafting and negotiation of the Share Purchase Agreement (SPA), the parties must establish clauses allocating responsibility for the 2% tax calculated on the capital transfer revenue. Furthermore, we strongly advise incorporating comprehensive warranties and tax indemnities into the contract to protect the purchaser’s interests.

8.3. Proactively Seek Expert Consultation and Maintain Legal Dialogue

Prior to executing new investment projects, corporate restructuring, or implementing digital platform business models, we recommend that enterprises undergo strategic consultation to evaluate the impact of tax regulations. For provisions lacking detailed implementation guidance from the General Department of Taxation, enterprises should prepare dossiers and submit official ruling requests to the local tax authority. A formal written response from a state agency establishes an official legal basis, safeguarding the enterprise’s rights during subsequent tax inspections and finalizations.

9. Conclusion

The transition toward a more rigorous, digitally integrated tax management framework under Law No. 67/2025/QH15 and Decree 320/2025/ND-CP signals a definitive paradigm shift for corporate compliance in Vietnam. The lowering of non-cash payment thresholds, the stringent enforcement of the “Substance over Form” principle, and the overhaul of capital transfer taxation demand that both domestic enterprises and foreign investors elevate their internal governance. Companies can no longer rely on superficial documentation or outdated administrative practices. Proactive adaptation, rigorous internal auditing, and strategic tax planning are now absolute imperatives. We continuously monitor these legislative developments to ensure our clients’ commercial transactions remain legally sound and financially optimized. Businesses are strongly encouraged to conduct comprehensive tax health checks to navigate this increasingly complex legal environment effectively.

HARLEY MILLER LAW FIRM

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