While it is also available under the MIT license, MS reserves the right to re-license it however they see fit. If you want to contribute, you'll have to sign their CLA to give Microsoft that right.
One problem is that you are required to sign away your rights in order to contribute, so that in the future you might not have the rights to use your own work.
Then there are proprietary extensions, like the "remote" extension (1) that competes with Theia's open source solution.
I've well aware of the OSS/FOSS definitions - it was exactly those that made me question your argument thst VS Code isn't open source. It plainly is, and indeed is Free As In Beer.
I don't see the problem with proprietary extensions - any open plugin mechanism will have at least some proprietary extensions (by the primary maintainer, or by third parties), including Theia's if it gains enough traction.