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At year-end, many FDI companies receive a sizeable debit note for management fees paid to the parent company or for royalties. The charge makes sense from the group's point of view, but at tax finalization the Vietnamese company must prove that the service was real and delivered a benefit. This article provides an evidence checklist and the warning signs that make the expense likely to be disallowed, drawing on the accounting experience of ACCA Consulting Vietnam.
1. Why are management fees paid to the parent so often scrutinized?
Management fees, technical support fees and brand royalties are related party transactions that usually involve no tangible goods and are calculated using the group's allocation formula. The tax authority will ask three questions: was the service real, did the Vietnamese company benefit, and is the price consistent with the arm's length principle? If evidence is missing for any of these, the expense may be disallowed when calculating taxable income.
| Question | Evidence to have | Concrete example |
|---|---|---|
| Was the service real? | Contract, service reports, email correspondence, meeting minutes | An internal audit report produced by the group at the Vietnamese factory |
| Was there a benefit? | Measurable results, implementation decisions, before/after comparison | A new process that reduced the defect rate; an ERP system put into use |
| Is the price reasonable? | Allocation basis, underlying cost, mark-up, market comparison | Allocation by revenue or number of users, supported by the group's spreadsheet |
2. Evidence checklist for deductibility
- Service agreement or licence agreement signed before the charges arise, clearly describing the scope of services
- Debit note/invoice showing the service period, calculation basis and amount
- Group allocation spreadsheet: total underlying cost, allocation key, the Vietnamese company's share
- Periodic service reports, meeting minutes, training materials, deliverables
- Evidence of benefit: processes, systems or customer contracts obtained thanks to the service
- Bank payment records and foreign contractor tax (FCT) returns (where applicable)
- For royalties and technology transfer: check registration procedures under sector-specific regulations (if any)
3. Warning signs that an expense is likely to be disallowed
- Shareholder activities: costs incurred by the parent to manage its own investment (group board meetings, preparing consolidated financial statements) are allocated down to the subsidiary.
- Duplicated services: the Vietnamese company already has its own HR and accounting departments but still pays for similar services.
- No output: there is only a contract and a debit note, with no report or service deliverable.
- Unclear allocation: rounded amounts, or large year-on-year changes that cannot be explained.
- Persistent losses: the company keeps paying high fees to the parent, increasing its losses.
- Brand royalties on contract manufacturing: the company only manufactures for the group yet still pays a fee to use the brand.
4. Example: the cost when VND 1 billion of management fees is disallowed
Assume an FDI company pays a management fee of VND 1 billion per year (approximately USD 39,000 at a reference rate of VND 25,500/USD), which is fully disallowed for lack of evidence in a tax audit one year (365 days) later. The CIT rate is 20% and late-payment interest is 0.03% per day on the tax underpaid, excluding any penalties.
Illustrative example. Late-payment interest = 200,000,000 × 0.03% × 365 days. Excludes administrative penalties for tax violations (if any).
View as table
| Disallowed management fee | 1,000,000,000 VND |
| Additional CIT payable | 200,000,000 VND |
| Late-payment interest for 365 days | 21,900,000 VND |
| Total tax and late-payment interest | 221,900,000 VND |
Illustrative example assuming the entire fee is disallowed.
View as table
| Full evidence | Insufficient evidence | |
|---|---|---|
| Deductible expense | 1,000,000,000 VND | 0 VND |
| Additional CIT | 0 VND | 200,000,000 VND |
| Late-payment interest | 0 VND | 21,900,000 VND |
5. Managing fees paid to the parent throughout the year
- 1Review contracts at the start of the year
Check that the scope of services and fee basis still reflect reality.
- 2Collect evidence quarterly
Save reports, emails and meeting minutes in a shared folder.
- 3Reconcile the allocation schedule
Ask the group to send the allocation schedule together with the debit note.
- 4Declare foreign contractor tax
File and pay on time when paying the parent company (where applicable).
- 5Year-end summary
Include the fees in the related party transaction schedule and the CIT finalization appendix.
Evidence should be collected while the service is being delivered; trying to find it three years later, when the tax auditors arrive, is almost impossible. These fees must also be reflected correctly in the related party transaction appendix and the transfer pricing documentation.
FAQ
Are a contract and an invoice enough for the management fee to be deductible?
No. For related party transactions, the company also needs evidence that the service was real, delivered a benefit and was priced in line with the arm's length principle.
Is foreign contractor tax payable on fees paid to the parent company?
In many cases, yes, depending on the type of service and the double tax agreement between the two countries. Check the current regulations before paying.
Should we stop paying management fees while the company is making losses?
That is a business decision for the group. However, paying high fees while making persistent losses is a sign likely to attract scrutiny, so the evidence of benefit needs to be all the stronger.
Protect fees paid to the parent before a tax audit
ACCA Consulting Vietnam reviews contracts, evidence and filings relating to management fees and royalties for FDI companies. Get advice on our accounting services.
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