Government Decree 20/2017/ND-CP on tax management for enterprises with related-party transactions requires enterprises with related-party transactions to declare information on these transactions to the tax authorities. Violations of this regulation allow the tax authorities to determine the price, profit margin, and profit allocation ratio used for tax declaration and calculation, and to determine taxable income or the amount of corporate income tax payable.
1. What are related party transactions?
"Related transactions" are transactions that occur between related parties In the production and business process, this includes: Buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning machinery, equipment, goods, and providing services; borrowing, lending, financial services, financial guarantees, and other financial instruments; buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning tangible and intangible assets, and agreements on the shared use of resources such as joint ventures, cooperative exploitation of human resources; and sharing costs among affiliated parties.
2. What are related parties?
Related parties (hereinafter referred to as "related parties") are parties that have a relationship falling under one of the following categories:
- One party is directly or indirectly involved in the management, control, capital contribution, or investment in the other party;
- The parties are directly or indirectly subject to the management, control, capital contribution, or investment of another party.
The affiliated parties referred to in Clause 1 of this Article are specifically defined as follows:
- One business directly or indirectly holds at least 25% of the owner's equity of the other business;
- Both businesses have at least 25% of their owner's equity held directly or indirectly by a third party.
- One business is the largest shareholder in terms of owner's equity of another business, holding directly or indirectly at least 10% of the total shares of that business;
- A business that guarantees or lends capital to another business in any form (including third-party loans secured by related-party financing and similar financial transactions) provided that the loan amount is at least 25% of the owner's equity of the borrowing business and accounts for more than 50% of the total value of the borrowing business's medium and long-term debts;
- An enterprise may appoint members to the executive board or control of another enterprise provided that the number of members appointed by the first enterprise exceeds 50% of the total number of members on the executive board or control of the second enterprise; or that a member appointed by the first enterprise has the authority to decide on the financial or operational policies of the second enterprise;
- Two businesses that both have more than 50% of their board members or both have a board member with the authority to decide on financial or business policies designated by a third party;
- Two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals who are related to one of the following: spouse, biological father, adoptive father, biological mother, adoptive mother, biological child, adopted child, biological brother, biological sister, biological sibling, brother-in-law, sister-in-law, daughter-in-law, grandparent, grandchild, maternal grandfather, maternal grandmother, grandchild, aunt, uncle, cousin, and niece/nephew.
- The two business establishments have a relationship where the head office and the permanent establishment are, or both are permanent establishments of, a foreign organization or individual;
- One or more businesses are controlled by an individual through that individual's capital contribution to the business or direct participation in its management;
- Other cases involve businesses being effectively managed and controlled by other businesses in terms of their production and business operations.
