Vietnam’s 3-Year CIT Exemption for Foreign-Invested SMEs: What Decree 20/2026 Means for Your Business

Vietnam has just confirmed that foreign-invested enterprises (FIEs) qualifying as small or medium-sized businesses can be fully exempt from Corporate Income Tax for their first three years of operation — a major incentive that many newly established FDI companies may not know they are entitled to.

The General Department of Taxation issued Official Letter No. 3896/CT-CS on 11 June 2026, directly responding to questions from tax authorities in Hanoi, Ho Chi Minh City, Bac Ninh, Dong Nai, and Ninh Binh — five of Vietnam’s most active FDI-receiving provinces. The letter clarifies how Decree 20/2026/ND-CP, which implements National Assembly Resolution 198/2025/QH15, applies to foreign-invested companies that meet Vietnam’s SME criteria.

What the 3-Year CIT Exemption Means in Practice

Under Article 7(3) of Decree 20/2026/ND-CP, a newly registered SME is entitled to full exemption from Corporate Income Tax for 3 consecutive years, calculated from the first year its Enterprise Registration Certificate is issued.

Critically, the General Department of Taxation has now confirmed this exemption applies explicitly to foreign-invested enterprises — not just domestically owned companies — provided the company meets the SME thresholds and does not fall within the specific exclusions listed in the decree.

The financial impact is significant. At Vietnam’s standard 20% CIT rate, a newly established FIE with VND 5 billion in annual taxable profit saves VND 1 billion per year — or VND 3 billion (approx. USD 120,000) over the three-year exemption period. For capital-light professional services or trading companies that reach profitability early, this incentive can materially reduce the cost of entering Vietnam.

Who Qualifies: SME Criteria for Foreign-Invested Companies

To be eligible, an FIE must meet Vietnam’s statutory definition of a small or medium-sized enterprise under Law 04/2017/QH14 (SME Support Law) and Decree 80/2021/ND-CP. The qualifying thresholds are:

For a newly established FIE, the revenue criterion does not apply in year one (no preceding year exists), so the headcount and charter capital thresholds are the primary qualifying tests at the time of registration.

SME size is further sub-classified as micro, small, or medium — based on sector (manufacturing/construction, agriculture/forestry/fishery, or trade/services) — but all three sub-categories benefit from the same 3-year exemption under this decree.

Who Is Excluded: Four Situations That Disqualify the Exemption

Decree 20/2026 explicitly excludes certain newly registered companies even if they otherwise meet the SME criteria. FIEs must not fall into any of the following:

The exclusion in scenario b2 deserves particular attention for foreign investor groups with existing Vietnam operations. If a foreign group sets up a new subsidiary in Vietnam and designates the same individual as legal representative across both the new entity and an existing group company, the new subsidiary may not qualify for the exemption. Careful legal structuring before incorporation is recommended — this is a situation where getting advice early pays off.

How the 3-Year Exemption Period Is Calculated

The exemption runs continuously from the first year of the Enterprise Registration Certificate, regardless of whether the company generates taxable income in year one or not. The clock starts at registration — not at first profit.

This means a company that operates at a loss in year one still “uses” one of its three exempt years. Companies that expect to be loss-making for the first 12–18 months should still track their ERC date carefully, as the remaining exemption years are counted from that baseline.

There is also a transitional provision: if an eligible company received its ERC before Resolution 198/2025/QH15 came into force but still has remaining time under the incentive window, it may continue to claim the exemption for the remaining years.

Five Action Steps for Newly Established FIEs

If your company received its Enterprise Registration Certificate in 2025 or 2026 and meets the SME criteria, take these steps now:

1. Confirm your SME classification — check your charter capital and average headcount against the thresholds above. Both must be within limits.
2. Review the exclusion criteria carefully — in particular, check whether any legal representative, general partner, or majority shareholder previously held a similar role in another Vietnam entity within the last 12 months.
3. Note your ERC issue date — the 3-year exemption window starts from the year of that date, not from when you first become profitable.
4. Declare the exemption correctly in your annual CIT finalisation — the 3-year exemption must be actively claimed in your annual corporate income tax return (quyet toan thue TNDN). Failing to claim it in the correct year forfeits the benefit for that year.
5. Maintain documentation of your SME eligibility — retain records of your headcount, charter capital, and the reasons you are not excluded, in case of a tax audit.

If your company was established before 2025 and is still within its first three years of operation, check whether Resolution 198/2025/QH15 was already in force at the time of your ERC issuance — the transitional provision may still give you access to part of the exemption period.

For detailed guidance on Vietnam tax compliance for foreign companies and how to structure your entity for maximum incentive eligibility, our team at TrustlineAX works with FDI clients across all major Vietnam provinces.