Opportunity or Challenge for the Innovative Startup Ecosystem in the Nation’s Development Era?

Innovative startups in Vietnam are presented with significant opportunities to benefit from the State’s preferential policies. In practice, however, many enterprises continue to forgo substantial benefits due to limitations in information access and legal capacity. In circumstances where most businesses encounter serious difficulties during their early stages, the effective implementation of tailored support policies not only enhances the survival and growth prospects of startups, but also contributes to the advancement of the private sector, the promotion of innovation, and the pursuit of sustainable development.

Against this backdrop, Resolution No. 198/2025/QH15 dated 17 May 2025 of the National Assembly has laid the foundation for specific mechanisms and policies aimed at promoting the private economic sector. As of May 2025, this sector comprised more than 940,000 enterprises and over 5 million household businesses, contributing approximately 50–51% of GDP, more than 30% of state budget revenue, and employing around 82% of the workforce—thereby affirming its pivotal role in economic growth. Vietnam has set a target of approximately 2 million enterprises by 2030, contributing 55–58% of GDP, and at least 3 million enterprises by 2045, contributing over 60% of GDP.

In order to implement Resolution 198, on 15 January 2026, the Government promulgated Decree No. 20/2026/NĐ-CP, providing guidance for its implementation. The Decree is expected to remove long-standing obstacles relating to land, taxation, finance, science and technology, and human resources, thereby establishing a clearer and more stable legal corridor for private enterprises. It is anticipated that this instrument will address in a comprehensive manner persistent bottlenecks concerning land use, tax administration, financial access, science and technology development, and workforce capacity, thereby creating a more transparent and predictable legal framework for private sector entities.

Notably, Decree 20/2026/NĐ-CP introduces a number of tax incentive policies of a directly supportive nature, applicable from the 2025 tax period onward. These measures are intended to alleviate cost burdens for enterprises during their initial stages of operation, while simultaneously encouraging investment, innovation, and the expansion of production and business activities. Clause 1, Article 7 of Decree 20/2026/NĐ-CP clearly identifies the categories of beneficiaries entitled to tax incentives, focusing on core actors within the innovative startup ecosystem, including: management companies of innovative startup investment funds; innovative startup enterprises; and intermediary organizations supporting innovative startups that derive income from innovative startup and innovation activities.

First and foremost, innovative startup enterprises constitute the central beneficiaries of the policy. Pursuant to Clause 1, Article 3 of Resolution 198/2025/QH15, such enterprises are established on the basis of exploiting intellectual property, technology, or new business models, and possess the potential for rapid growth. The inclusion of this group within the scope of tax incentives reflects the State’s recognition of the high-risk nature and leading role of startups in driving innovation.

In addition, management companies of innovative startup investment funds—defined under Clause 4, Article 2 of Decree 38/2018/NĐ-CP—are also entitled to benefit, given their intermediary role in connecting investment capital with startup enterprises. Tax incentives granted to these entities contribute to reducing fund operating costs and fostering the development of the domestic venture capital market.

Furthermore, intermediary organizations supporting innovative startups, such as incubators and provincial or national innovation support centers established under the Law on Science, Technology and Innovation 2025, are included within the regulatory scope. The expansion of beneficiaries across the ecosystem chain demonstrates a comprehensive policy approach; however, it also necessitates sufficiently stringent eligibility criteria and incentive mechanisms to ensure that support is properly targeted and substantively effective.

The application of tax incentives under Decree 20/2026/NĐ-CP must be considered in conjunction with the existing legal framework. Regulations concerning innovative startup enterprises and supporting entities are concurrently governed by the Law on Support for Small and Medium-Sized Enterprises, the Law on Corporate Income Tax, the Law on Investment, and their guiding decrees (notably Decree 38/2018/NĐ-CP and Decree 210/2025/NĐ-CP on innovative startup investment funds), as well as the Law on Science, Technology and Innovation. Collectively, these instruments aim to support and encourage the formation of an innovative startup ecosystem. Accordingly, in order to lawfully and sustainably benefit from the incentives, enterprises must not only satisfy the conditions set forth in Decree 20/2026/NĐ-CP, but also ensure compliance with other relevant regulations, particularly those relating to business lines, revenue-generating activities, and accounting methods.

Beyond identifying eligible beneficiaries, Decree 20/2026/NĐ-CP provides detailed provisions regarding the scope of income eligible for tax exemption or reduction, thereby enabling enterprises to apply preferential policies more proactively and manage tax risks effectively.

For innovative startup enterprises, fund management companies, and intermediary support organizations:

i) Income derived from innovative startup and innovation activities shall be exempt from corporate income tax for two (2) years and subject to a 50% reduction of payable tax for the subsequent four (4) years.

ii) The tax exemption and reduction period shall be calculated consecutively from the first year in which taxable income arises from innovation-related activities. Where an enterprise generates revenue but no taxable income during its first three (3) years, the exemption/reduction period shall commence from the fourth year.

iii) In order to qualify, enterprises must separately account for income derived from innovative startup and innovation activities. Where separate accounting is not feasible, the income eligible for tax incentives shall be determined by multiplying total taxable income by the percentage (%) of revenue or deductible expenses attributable to incentive-eligible production and business activities relative to total revenue or total deductible expenses of the enterprise during the tax period.

iv) In cases where certain revenue or deductible expenses cannot be separately accounted for, such revenue or expenses shall be allocated based on the ratio between revenue or deductible expenses of incentive-eligible activities and the enterprise’s total revenue or total deductible expenses.

For institutional investors investing in innovative startup enterprises, income derived from the transfer of shares, capital contributions, or capital contribution rights shall be exempt from 100% corporate income tax. (Note: this exemption does not apply to the transfer of listed shares. Where 100% of a single-member limited liability company is transferred together with real estate assets, real estate transfer tax shall apply.)

For newly established small and medium-sized enterprises (SMEs), from the date of issuance of the first Enterprise Registration Certificate, such SMEs shall be entitled to a 100% exemption of corporate income tax for three (3) consecutive years. The exemption period shall be calculated consecutively from the year of initial licensing. However, this incentive shall not apply to SMEs established through merger, division, consolidation, or transformation of legal form; nor to newly established SMEs whose legal representative (or largest shareholder) previously held a similar position in a dissolved enterprise within twelve (12) months prior to the establishment date; and it shall not apply to income already subject to incentives under Clause 3, Article 18 of the Law on Corporate Income Tax No. 67/2025/QH15.

It is evident that the tax incentive policies under Decree 20/2026/NĐ-CP create substantial opportunities for innovative startup enterprises, particularly in the context of the State’s ongoing efforts to refine the institutional framework and position the private sector as a key driver of the economy. Corporate income tax exemptions and reductions during the early years of operation not only alleviate financial pressure, but also create room for the reallocation of resources toward core activities such as research and development (R&D), product refinement, talent acquisition, and market expansion.

Moreover, tax incentives exert a positive spillover effect on startups’ access to capital. In practice, eligibility for lawful tax exemptions and reductions enhances an enterprise’s credibility in the eyes of investors, venture capital funds, and financial institutions. This not only improves short-term cash flow, but also establishes a favorable legal foundation for medium- and long-term growth strategies. Accordingly, the tax incentive policies under Decree 20/2026/NĐ-CP are expected to serve as a significant lever for the private sector, encouraging enterprises to invest boldly in innovation-intensive sectors and to gradually scale their operations in a sustainable manner.

Nevertheless, alongside these opportunities, enterprises face considerable challenges in the course of implementation. In practice, determining which activities qualify as “innovation” remains complex, particularly for enterprises operating hybrid or multi-sector business models. Eligibility for incentives depends not solely on statutory provisions, but largely on how enterprises structure their operations, establish legal documentation, and implement accounting systems from the outset.

Practical experience indicates that numerous enterprises, despite being eligible in principle, have encountered risks of disqualification or tax reassessment due to incorrect characterization of innovative activities, failure to segregate incentive-eligible income, or insufficient preparation of legal documentation when dealing with tax authorities. Such risks often materialize only years later, once enterprises have expanded and become subject to in-depth inspections or audits.

Recognizing the legal barriers faced by innovative startups from their earliest stages, Paxlaw Limited Liability Law Company positions itself not merely as a legal advisor, but as a long-term legal partner throughout the enterprise lifecycle. With a team of experienced lawyers in investment, corporate law, and innovative startups, Paxlaw assists enterprises in effectively accessing and utilizing incentives under Decree 20/2026/NĐ-CP through the design of appropriate legal structures, optimized investment and ownership arrangements, robust internal governance mechanisms, and transparent, consistent documentation evidencing innovation activities.

On that foundation, PaxFlow – an outsourced legal department service – is structured as an integrated legal function accompanying startups from their inception, when financial and human resources are limited but legal issues arise continuously, diversely, and across multiple disciplines. Instead of investing in the costly and often unsustainable establishment of an in-house legal department, startups may engage Paxlaw’s experienced legal team for ongoing support in structuring and standardizing corporate frameworks, building internal governance foundations, reviewing, drafting and negotiating contracts, protecting intellectual property assets, and ensuring compliance with tax, labor, data protection, and other legal obligations.

Through a comprehensive, proactive, and operationally grounded approach, Paxlaw not only assists startups in making legally compliant decisions at each specific juncture, but also mitigates long-term risks, enhances transparency, and prepares enterprises for critical milestones such as scaling, fundraising, or strategic partnerships – thereby enabling startups to move faster, stronger, and more sustainably along their growth journey.

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