The current situation and solutions for foreign companies suing partners for failure to perform tax obligations under contracts

At present, disputes in which foreign companies initiate legal action against their partners for failure to perform tax obligations under contracts are increasingly common, leading to significant legal risks and economic losses. A clear understanding of the concepts, causes, applicable legal provisions, and dispute-resolution mechanisms is essential to safeguard lawful rights and minimize disputes.

I. Current situation of foreign companies suing partners for failure to perform tax obligations under contracts

Currently, the number of cases in which foreign companies sue their partners for failure to perform tax obligations under contracts is significantly increasing, particularly in cross-border cooperation projects and foreign direct investment. Many disputes arise from partners’ late payment of taxes, incorrect tax declarations, or incomplete performance of tax obligations, resulting in financial losses and prolonged legal disputes.

Such situations not only undermine corporate reputation and long-term cooperative relationships but also increase business risks, compelling the parties to thoroughly understand applicable legal regulations and adopt timely solutions to protect their lawful rights and interests.

II. What does it mean for a foreign company to sue its partner for failure to perform tax obligations under a contract?

It refers to a legal situation in which a foreign company brings a claim against its contractual partner for failure to perform, delayed performance, or improper performance of tax obligations agreed under the contract, thereby causing financial or legal damage to the claimant. Such legal action aims to protect lawful rights and interests, claim damages, and/or compel the partner to duly perform the agreed tax obligations.

1. Concept of a foreign company suing its partner for failure to perform tax obligations under a contract

A foreign company suing its partner for failure to perform tax obligations under a contract constitutes a legal act whereby the foreign company initiates proceedings when the contractual counterparty fails to perform, delays performance, or fails to fully perform the agreed tax obligations.

Such a situation arises where tax obligations form an essential commitment under the contract; any breach may cause financial losses, reputational harm, and adverse impacts on the cooperation process.

The purpose of initiating legal proceedings is to protect lawful rights and interests, compel the partner to properly perform its tax obligations, and, where necessary, claim compensation for losses incurred.

2. Circumstances leading to a foreign company suing its partner for failure to perform tax obligations under a contract

There are various circumstances in which a foreign company may bring a claim against its partner for breach of tax obligations under a contract, most commonly including:

• Late payment or non-payment of taxes: The partner fails to fulfill tax payment obligations in accordance with the agreed schedule, leading to outstanding tax liabilities and legal risks.
• Incorrect declaration or inaccurate reporting: The partner makes false declarations, provides inaccurate or incomplete tax reports as required by law, thereby causing losses to the foreign company.
• Unilateral termination of the contract without fulfillment of tax obligations: Where the partner unilaterally terminates the contract without completing outstanding tax obligations, the foreign company may bring a claim to compel performance and seek compensation for damages.
• Disputes arising from contractual ambiguities: Where the contract contains unclear provisions on tax obligations or is subject to differing interpretations, leading one party to fail to properly perform its commitments, the foreign company may initiate legal proceedings to clarify responsibilities.

These situations commonly arise in business cooperation agreements and international investment contracts, particularly where the foreign party must ensure full compliance with tax obligations to avoid legal and financial risks.

3. Dispute-resolution methods in cases where a foreign company sues its partner for failure to perform tax obligations under a contract

Where disputes arise between a foreign company and its partner regarding failure to perform contractual tax obligations, dispute resolution may be conducted in accordance with commercial dispute-resolution mechanisms as provided under Article 317 of the Law on Commerce 2005, including negotiation, mediation, arbitration, or court proceedings.

Accordingly, the parties may first prioritize negotiation or mediation to clarify the tax obligations stipulated in the contract, identify the causes of breach, and agree on remedial measures in order to limit legal risks and dispute-resolution costs.

If no agreement can be reached and the contract contains an arbitration clause, the foreign company may initiate proceedings before commercial arbitration in accordance with the parties’ agreement. Arbitration is often preferred in transactions involving foreign elements due to its flexibility and confidentiality.

Where there is no valid arbitration agreement, the foreign company is entitled to initiate legal proceedings before the competent court, which will examine the contractual tax obligations, the acts of breach, and issue a judgment compelling performance, awarding damages, or imposing corresponding legal consequences.

III. Legal provisions governing foreign companies suing partners for failure to perform tax obligations under contracts

Relevant legal provisions define the rights and obligations of the parties in disputes over contractual tax obligations and provide the legal basis for foreign companies to initiate legal action and request remedies for breaches.

1. Applicable legal provisions in resolving disputes where foreign companies sue partners for failure to perform tax obligations under contracts

In resolving disputes where a foreign company sues its partner for failure to perform contractual tax obligations, the primary legal basis includes Article 317 of the Law on Commerce 2005 on dispute-resolution methods (negotiation, mediation, arbitration, or court proceedings).

Pursuant to Clause 1, Article 5 of the Law on Tax Administration 2019, “tax” refers to an amount payable to the state budget in accordance with law, and taxpayers are obliged to declare and fully pay taxes as prescribed. Failure to fulfill tax payment obligations or making incorrect or incomplete declarations constitutes a violation of tax law, leading to the right to lodge complaints, denunciations, and even initiate legal action against the breaching party or request competent authorities to take enforcement measures.

Furthermore, pursuant to Article 360 of the Civil Code 2015, a party in breach of contractual obligations must take civil liability, including compensation for damages and contractual sanctions (if agreed under Article 418). It provides a legal basis for foreign companies to require their partners to remedy breaches or to initiate legal proceedings to protect their lawful rights and interests.

2. Competent authorities to resolve disputes where foreign companies sue partners for failure to perform tax obligations under contracts

Where a foreign company sues its partner for failure to perform contractual tax obligations and there is no arbitration agreement, the People’s Courts have jurisdiction to resolve the dispute. Specifically, pursuant to Article 30 of the Civil Procedure Code 2015, disputes arising from contracts in business and commercial activities fall within the jurisdiction of the People’s Courts.

With respect to jurisdiction by level, pursuant to Clause 1, Article 35 and Article 37 of the Civil Procedure Code 2015:

• The People’s Court at the district level has first-instance jurisdiction over domestic business and commercial disputes without foreign elements.
• Where the dispute involves foreign elements, is complex in nature, or falls within cases agreed by the parties in accordance with law, the provincial-level People’s Court has first-instance jurisdiction.

Accordingly, where a partner breaches contractual tax obligations, a foreign company is entitled to bring a claim before the competent court to compel performance, claim damages, and seek resolution of related legal consequences in accordance with law.

3. Consequences where disputes over contractual tax obligations cannot be effectively resolved

Where a foreign company sues its partner for failure to perform contractual tax obligations but the dispute cannot be effectively resolved, the following legal consequences may arise:

• First, prolonged disputes and aggravated losses. Failure to resolve the dispute may cause continued suspension of contract performance, adversely affecting business progress, cash flow, and the reputation of both parties, particularly the foreign company operating in Vietnam.
• Second, risks of additional financial liabilities and tax obligations. In certain cases, tax authorities may consider joint and several liability, resulting in the foreign company being required to temporarily fulfill tax obligations to avoid administrative sanctions under Article 17 of the Decree 125/2020/NĐ-CP for tax evasion or the application of tax enforcement measures in accordance with tax law. In serious cases, criminal liability for the offence of tax evasion under Article 200 of the Penal Code 2015 may arise.
• Third, termination or cancellation of the contract. Where failure to perform tax obligations constitutes a fundamental breach that frustrates the purpose of the contract, the non-breaching party may unilaterally terminate or cancel the contract in accordance with the Civil Code and claim damages.

In summary, failure to effectively resolve disputes over contractual tax obligations not only increases legal risks but also directly affects the economic interests and prospects of continued cooperation between the parties. Therefore, appropriate dispute-resolution mechanisms should be selected promptly to mitigate adverse consequences.

IV. Questions regarding foreign companies suing partners for failure to perform tax obligations under contracts

This section clarifies common issues encountered by foreign enterprises and domestic partners when disputes over contractual tax obligations arise, including the right to initiate legal action, limitation periods, remedies, liability for damages, and specific legal scenarios.

1. If the foreign company prevails, what sanctions may be imposed on the partner for failure to perform tax obligations?

If the foreign company prevails in the dispute due to the partner’s failure to perform contractual tax obligations, the breaching partner may concurrently take multiple legal consequences, including civil liability, administrative sanctions, and, in serious cases, criminal liability.

First, with respect to tax obligations and administrative sanctions, the breaching partner will be compelled to fully perform outstanding tax obligations, including unpaid taxes, late-payment interest, and administrative fines in accordance with tax law. Depending on the specific conduct, such as late payment, incorrect declaration, failure to declare, or tax evasion, competent authorities may impose corresponding monetary penalties under Article 17 of the Decree 125/2020/NĐ-CP and recover the full amount of unpaid taxes.

Second, with respect to civil liability under the contract, where tax obligations are clearly stipulated in the contract, the breaching partner must compensate the foreign company for damages in accordance with Article 360 of the Civil Code 2015, including actual losses and loss of expected benefits. Where contractual penalties are agreed, the breaching party must also pay contractual sanctions under Article 418 of the Civil Code.

Third, with respect to criminal liability, where failure to perform tax obligations involves fraudulent or intentional acts aimed at misappropriation or tax evasion of a substantial amount, the breaching party may be subject to criminal prosecution for the offence of tax evasion under Article 200 of the Penal Code 2015. In such cases, individuals or commercial legal entities may be subject to substantial fines, suspension of operations, or imprisonment in accordance with law.

In short, if the foreign company prevails, the partner may be required not only to fully perform tax obligations, but also to compensate for damages, pay contractual fines, face administrative tax sanctions, and even incur criminal liability in serious cases.

2. What is the limitation period for a foreign company to sue its partner over contractual tax obligations?

Pursuant to Article 429 of the Civil Code 2015, the statute of limitations for initiating legal action to request court resolution of contractual disputes, including disputes arising from failure to perform contractual tax obligations, is three years from the date on which the claimant knew or should have known that its lawful rights and interests were infringed (for example, when it becomes aware that the partner failed to pay taxes or made incorrect tax declarations).

This limitation period applies to claims seeking specific performance of contractual obligations, compensation for damages, or general contractual dispute resolution. Upon expiry of the three-year period, the claimant loses the right to initiate legal proceedings in accordance with law.

Note: The limitation period is calculated from the time the claimant knew or should have known of the infringement of its rights and interests, rather than from the date of contract execution.

3. What should a foreign company do if the partner unilaterally terminates the contract without performing tax obligations?

Where a partner unilaterally terminates the contract without performing tax obligations, the foreign company should review applicable legal provisions to safeguard its lawful rights and interests. Pursuant to Article 428 of the Civil Code 2015, where unilateral termination is not based on lawful grounds or clear contractual agreement, such conduct constitutes a contractual breach, and the terminating party must take civil liability for breach of contract.

As a first step, the foreign company should demand that the partner compensate for damages and fully perform outstanding tax obligations in accordance with the contract and applicable law, and prepare a dossier evidencing actual losses and lost benefits caused by the breach.

If the parties are unable to resolve the matter amicably, the foreign company may initiate proceedings before the competent court or arbitral tribunal (where an arbitration clause exists) to compel performance of tax obligations, claim damages, and address related legal consequences.

In this process, the foreign company should preserve its rights to claim payments for obligations already performed prior to contract termination and safeguard other contractual and statutory rights.

4. What types of disputes may arise where both parties fail to perform contractual tax obligations?

Where both parties fail to perform contractual tax obligations, three principal categories of disputes typically arise:

• First, disputes over the identification of the party bearing tax obligations, where each party contends that tax payment responsibility rests with the other under the contract or tax law.
• Second, disputes over liability for damages and allocation of losses arising from tax arrears, sanctions, and late-payment interest imposed by tax authorities.
• Third, disputes over the validity and treatment of the contract, including the right to unilaterally terminate, cancel the contract, or apply contractual fines for breach of fundamental obligations.

5. In what situations might a foreign company be unable to sue its partner for contractual tax obligations?

There are several circumstances in which a foreign company may be unable to initiate legal proceedings against its partner for failure to perform contractual tax obligations, including:

Expiry of the limitation period: Where the statutory limitation period for contractual disputes (three years from the date the claimant knew or should have known of the infringement under Article 429 of the Civil Code) has expired, the foreign company loses the right to initiate proceedings.

• Prior settlement or adjudication: Where the parties have already resolved the dispute through negotiation, mediation, or a final and binding arbitral award or court judgment has been rendered on the same dispute, the foreign company may not bring the claim again.
• Illegality of contractual provisions or unenforceable claims: Where the contractual tax obligations contravene mandatory legal prohibitions or involve commitments not recognized by law, the claim will not be upheld.
• Lack of sufficient evidence: Where the foreign company fails to produce reliable evidence proving the partner’s breach of tax obligations, the court or arbitral tribunal may refuse to adjudicate in favor of the claim.

These situations underscore the importance of strict legal compliance, comprehensive record-keeping, and clearly defining tax obligations in contracts to preserve the right to initiate legal proceedings when necessary.

V. Looking for a reputable lawyer to handle disputes involving foreign companies suing partners for failure to perform tax obligations under contracts

If you are facing a dispute over contractual tax obligations with a foreign partner and require specialized legal assistance, NPLaw is a reliable choice, with a team of experienced lawyers in international contracts, taxation, and commercial dispute resolution.

NPLaw provides comprehensive advice on rights and obligations, reviews contracts to identify breaches of tax obligations, develops effective litigation strategies, prepares claim dossiers, and represents clients before courts or arbitral tribunals where necessary. Working with NPLaw helps ensure lawful dispute resolution, minimize risks, and maximize protection of both financial interests and corporate reputation.

The above information is for reference only. For case-specific advice, clients are encouraged to contact Ngoc Phu Law Company Limited for prompt consultation.