Related-party transactions, also known as transfer pricing, refer to the practice where related companies "intentionally manipulate" the prices of goods and services bought and sold between related companies.
This handbook provides comprehensive guidance on related-party transactions for businesses in Vietnam, including:
- Understanding related party transactions correctly.
- How to determine if a related-party transaction exists or not.
- Risks that need to be addressed for businesses with related-party transactions.
- FAQ – A collection of frequently asked questions about identifying related-party transactions.
The issue of related-party transactions (often referred to as transfer pricing) is receiving increasing attention from tax authorities, who conduct annual reviews and thorough audits during tax settlements. Previously, this issue was typically only encountered in foreign-invested enterprises.
However, currently, with the existing regulations on tax management for related-party transactions, ordinary business transactions that seem unrelated to transfer pricing are actually subject to the legal regulations on related-party transactions.
For example:
Businesses that borrow from commercial banks for business purposes, or that engage in lending transactions with family members or individuals who are also the legal representatives of the business, are subject to the declaration of related-party transactions.
The tax authorities have the right to determine the price, profit margin, taxable income, or corporate income tax payable for taxpayers who do not comply with regulations on declaring and determining related-party transactions. If the tax authorities determine this, it may lead to the company being subject to tax arrears, a reduction in losses, or an increase in taxable income. Simultaneously, the company may also face other related penalties.
1. Understanding related party transactions correctly
1.1. What are related party transactions?
Related-party transactions (Transfer pricing) refer to the practice of related businesses "intentionally adjusting prices" for goods and services bought and sold between related businesses.
This definition of related-party transactions is closest to the nature of such transactions.
In official terminology and legal regulations, the term "related party transaction" is used. The term "transfer pricing" is not clearly defined in relevant regulations; however, based on its nature, it is frequently used, especially in relation to foreign-owned enterprises (Transfer Pricing).
1.2. What are related-party transactions?
Related-party transactions are transactions that are "not based on the normal market price," where related parties have applied measures or changed pricing policies to goods and services in order to alter the intrinsic value of goods or services and assets transferred between members of a group or affiliated entity (related parties) with the aim of minimizing the amount of tax payable to the state.
Related party transactions are almost a all possible types of transactions between related parties. Related-party transactions are subject to the law. buy and sell transactions, exchange, rent, lease, borrowlending, transferring, assigning goods, providing services; lending, lending, financial services, financial guarantees and other financial instruments; buying, selling, exchanging, leasing, renting, borrowing, lending, transferring, assigning tangible and intangible assets and agreements for buying and selling, sharing resources such as assetscapital, labor, cost sharing between related parties, except for business transactions involving goods and services subject to state price regulation, which are carried out in accordance with the law on pricing.
1.3. Examples of related party transactions
a. Price shifts through input factors
Excessively high input costs compared to market prices, through foreign investment in assets, machinery, equipment, and technology transfer, when businesses set high prices themselves or when input materials are too expensive, result in the cost of goods sold exceeding the selling price, leading to negative profits or very low profits. Examples include: purchasing raw materials from the same group, importing components for automobiles, computers, and electronic components for domestic production and sale…
b. Transfer pricing through output factors
Setting a selling price for products, goods, and services to the parent company that is lower than the market price. Examples include: processing fees, products in the garment, footwear, software, and electronics industries, etc.
c. Transfer pricing through the provision of services
Transfer pricing occurs through the provision of services such as marketing, advertising, management consulting, and support, even though no services are actually performed.
d. Expenses allocated by the parent company to the subsidiary.
The costs that parent companies allocate to subsidiaries, such as payments made on their behalf within the group, are often opaque and lack proof of the services provided.
e. Payment of trademark and copyright fees
Payments for trademarks, royalties, and training costs cannot be justified.
f. Paying interest on loans to related parties.
Paying interest to related parties at a rate higher than commercial bank interest rates, or providing interest-free loans to transfer profits to loss-making related parties, or receiving tax incentives (tax exemptions, reductions, low corporate income tax rates).
g. Transactions with companies that have preferential tax rates.
Deal with companies that have preferential tax rates compared to others (for example, tax-exempt software sales).
2. How to determine whether or not there are related-party transactions
2.1. General principles for determining whether a related-party transaction exists.
Related-party transactions are identified based on whether transactions occur with parties that have the following relationships:
- 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.
2.2. The related parties in sections (a) and (b) above are specifically defined as follows:
This list identifies whether a business has related-party transactions (applicable from 2020 onwards). The following are the items to be checked:
- 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 and directly or indirectly holds at least 10% of the total shares of the other 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 parents, adoptive parents, stepfather, stepmother, parents-in-law; biological children, adopted children, stepchildren of the spouse, daughter-in-law, son-in-law; siblings with the same parents, half-siblings, half-siblings; brother-in-law, sister-in-law, daughter-in-law, son-in-law of a person with the same parents or half-siblings; paternal grandparents; grandchildren; aunts, uncles, and nieces/nephews.
- 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;
- 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, controlled, and having decisions made by other businesses regarding their production and business operations;
- Businesses that have transactions involving the transfer or acquisition of at least 25% of the owner's capital contribution during the tax period; or borrowing or lending at least 10% of the owner's capital contribution at the time of the transaction during the tax period with individuals managing or controlling the business or with individuals in a relationship as stipulated in point g of this clause.
This is a checklist based on Decree 132/2020/ND-CP that determines whether a business is exempt from, or partially exempt from, preparing a Report on Related Party Transactions.
3. Common risks for businesses with related-party transactions
3.1. Risks encountered if a business fails to file a declaration for related-party transactions.
The tax authorities have the right to determine the price; profit margin; profit allocation ratio; taxable income or the amount of corporate income tax payable for taxpayers who do not comply with regulations on declaring and determining related-party transactions; or who do not provide or provide incomplete information and data for declaring and determining the price of related-party transactions.
In addition, the tax authorities also impose administrative penalties on businesses for late filing of tax returns, as well as any accrued interest charges.
3.2. Reduction in deductible expenses for corporate income tax purposes for enterprises with related-party transactions.
The costs of related-party transactions that are inconsistent with the nature of independent transactions or do not contribute to generating revenue or income for the taxpayer's production and business activities are not deductible expenses when determining taxable income for corporate income tax purposes in the period, including:
a) Payments to related parties that do not engage in any production or business activities related to the taxpayer's industry or business operations; and do not have any rights or responsibilities related to the assets, goods, or services provided to the taxpayer;
b) The cost paid to an affiliated party that engages in production and business activities but whose asset size, number of employees, and production and business functions are not commensurate with the value of the transaction received by the affiliated party from the taxpayer;
c) Payments to related parties that are residents of a country or territory not subject to corporate income tax do not contribute to the revenue or added value of the taxpayer's production and business activities.
Service fees between affiliated parties:
a) Except for expenses specified in point b of this clause, taxpayers may deduct service fees from their taxable expenses for the period if the following conditions are met: The service provided has commercial, financial, and economic value and directly serves the taxpayer's production and business activities; the service from related parties is determined to have been provided under similar circumstances as independent parties would pay for these services; the service fee is paid on the basis of the arm's length principle and the method of calculating transfer pricing or allocating service fees among related parties must be applied uniformly throughout the group for similar types of services; and the taxpayer must provide contracts, documents, invoices, and information on the calculation method, allocation factors, and pricing policy of the group for the service provided.
In cases involving centers performing specialized functions and synergistically creating added value for the group, taxpayers must determine the total value generated from these functions, and determine the appropriate profit allocation based on the value contributed by the affiliated parties after deducting (-) the corresponding service fees for the affiliated party performing the coordination and service provision functions of independent transactions of a similar nature.
b) Service fees that are not deductible when determining taxable income include: expenses arising from services provided solely for the benefit or value creation of other related parties; services serving the interests of the related party's shareholders; duplicate fees charged by multiple related parties for the same type of service, where the added value for the taxpayer cannot be determined; services that are essentially benefits received by the taxpayer as a member of a group; and additional costs that the related party adds for services provided by a third party through the related party's intermediary, which do not contribute additional value to the service.
Total interest expense deductible when determining taxable income for corporate income tax purposes for businesses with related-party transactions:
a) The total interest expense, after deducting interest on deposits and loans incurred during the period, is deductible when determining taxable corporate income. not exceeding 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer ( not exceeding 30% of EBITDA).
b) The portion of interest expense not deductible under point (a) of this clause shall be carried forward to the next tax period when determining the total deductible interest expense, provided that the total deductible interest expense incurred in the next tax period is lower than the amount stipulated in point (a) of this clause. The carry-forward period for interest expense shall not exceed 05 years from the year following the year in which the non-deductible interest expense was incurred.
4. FAQ - Frequently Asked Questions about Identifying Related Party Transactions
Question:
The company is 100% domestically owned, and all transactions are also domestic. In 2020, the company invested in major office renovations and borrowed 2 billion VND from the chairman without interest. During the year, 1,5 billion VND was repaid. Does this amount constitute a related-party transaction? When filing the tax return, is it necessary to submit an appendix to the corporate income tax return?
Reply:
According to Decree No. 132/2020/ND-CP, if the Chairman of a company manages and controls the enterprise, and the enterprise borrows at least 10% of the owner's capital contribution from the Chairman, then the loan transaction between the company and the Chairman is considered an related-party transaction. When settling corporate income tax, information on related-party transactions must be declared in accordance with the provisions of Decree No. 132/2020/ND-CP.
March 11, 2021 | Response from the General Department of Taxation
Question:
In 2020, our company borrowed capital from a commercial bank to finance its business operations, exceeding 25% of its equity. Does this constitute a related-party transaction? Is the 25% limit, as stipulated in Decree No. 132/2020/ND-CP, calculated based on the outstanding loan balance or on each individual loan?
Reply:
– Regarding the determination of related-party transactions: Point d, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates: “d) An enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties secured by the financial resources of the related party and financial transactions of a similar nature) provided that the loan amount is at least 25% of the owner's equity of the borrowing enterprise and accounts for over 50% of the total value of the borrowing enterprise's medium and long-term debts.”
If a company borrows from a commercial bank at a rate exceeding 25% of its equity and accounts for over 50% of the total value of its medium and long-term debts, it is considered a related party. In this case, transactions arising between the two parties are related-party transactions.
– Regarding the determination of the 25% equity ratio, it is calculated based on the total outstanding debt.
March 11, 2021 | Response from the General Department of Taxation
Question:
Is a business borrowing money interest-free from its director considered a linked transaction?
Reply:
According to Decree No. 132/2020/ND-CP:
– In the case of a CEO or business controller, if the business borrows from the CEO of a company in which the owner has at least 10% of the capital contribution, it is determined to be an affiliated company, and the loan transaction is an affiliated transaction.
March 11, 2021
Response from the General Department of Taxation
Question:
Is a business that rents the director's property to use as an office considered a joint venture?
Reply:
According to Decree No. 132/2020/ND-CP:
The transaction involving the director renting the property to use as an office is not a related-party transaction.
March 11, 2021
Response from the General Department of Taxation
Question:
In 2020, the company incurred losses and borrowed money from the director to cover expenses during the period (the director was hired by the business owner to manage the company). Is this considered a related-party transaction? If so, how should it be declared?
Reply:
Point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:
“l) Enterprises that have transactions involving the transfer or acquisition of at least 25% of the owner's capital contribution during the tax period; or borrowing or lending at least 10% of the owner's capital contribution at the time of the transaction during the tax period with individuals managing or controlling the enterprise or with individuals in a relationship as stipulated in point g of this clause.”
Based on the above regulations, if a company borrows from its CEO or supervisory director at a rate of at least 10% of the owner's equity, it is considered an affiliated company, and the loan transaction between the company and the director is an affiliated transaction.
During the fiscal year, if a business has related-party transactions falling within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the transfer pricing of these transactions. Taxpayers must declare information on related-party relationships and related-party transactions according to Appendix I, Appendix II, and Appendix III issued with Decree 132/2020/ND-CP and submit them together with the Corporate Income Tax Return.
March 18, 2021
Response from the General Department of Taxation
Question:
The company is a limited liability company with two shareholders. The General Director holds 80% of the capital, and the Deputy General Director holds 20%. In 2020, due to a shortage of funds for production and business operations, the company sometimes borrowed money from the two shareholders at 0% interest and sometimes lent money to them at the bank interest rate at the time. The total amount borrowed and lent to the two shareholders exceeded 10% of the charter capital (by the end of 2020, all borrowed money had been repaid, but the outstanding loan balance remained). My question is:
1. Are the borrowing and lending transactions mentioned above considered related-party transactions?
2. Is it necessary to prepare an appendix to related-party transactions when filing corporate income tax returns at the end of the year?
3. If the two members borrow money at 0% interest, will they be subject to personal income tax?
4. Is the company required to issue invoices for the monthly interest payments received from the two members mentioned above?
Reply:
1. Point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates
“l) Enterprises that have transactions involving the transfer or acquisition of at least 25% of the owner's capital contribution during the tax period; or borrowing or lending at least 10% of the owner's capital contribution at the time of the transaction during the tax period with individuals managing or controlling the enterprise or with individuals in a relationship as stipulated in point g of this clause.”
Based on the above regulations, if a company borrows from its General Director and Deputy General Director, or if the amount borrowed or lent is at least 10% of the owner's equity, it is considered an affiliated company, and the borrowing transaction between the company and the General Director and Deputy General Director is an affiliated transaction.
2. During the fiscal year, if an enterprise has related-party transactions falling within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the transfer pricing of these transactions and for declaring information on related-party relationships and transactions according to Appendix I, Appendix II, and Appendix III issued with Decree 132/2020/ND-CP, and submitting them together with the Corporate Income Tax Return.
3. If an individual lends money to a company at a 0% interest rate, that individual will be subject to personal income tax assessment.
Businesses are advised to study the above regulations and apply them appropriately based on their specific circumstances.
March 18, 2021
Response from the General Department of Taxation
Question:
1/ The company is short of capital and borrows money interest-free from the Director. Is this transaction considered a related-party transaction? How should this transaction be presented in the annual financial statements?
2/ Decree 132 of 2020 states: "The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer." Does this mean that interest expense is capped at 30%?
Reply:
If a company borrows from its Director (the person who manages and controls the company) at a rate of at least 10% of the owner's equity, it is considered an affiliated company, and the loan transaction between the company and its Director is an affiliated transaction. When settling corporate income tax, information on affiliated transactions must be declared in accordance with the provisions of Decree No. 132/2020/ND-CP.
During the fiscal year, if a business has related-party transactions falling within the scope of Decree No. 132/2020/ND-CP, it is responsible for declaring and determining the transfer pricing of these transactions. Taxpayers must declare information on related-party relationships and related-party transactions according to Appendix I, Appendix II, and Appendix III issued with Decree 132/2020/ND-CP and submit them together with the Corporate Income Tax Return.
The total interest expense deductible when determining taxable income for corporate income tax purposes is determined according to point a, clause 3, Article 16 of Decree 132/2020/ND-CP as follows:
“a) The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer;”
March 18, 2021
Response from the General Department of Taxation
Question:
1/ Can a joint-stock company lacking working capital borrow from an individual – who is not a shareholder but is related to a shareholder – at a 0% interest rate?
2. Would the above case be considered a related-party transaction? If so, how would that apply?
Reply:
Point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulates:
“l) The enterprise has transactions involving the transfer or acquisition of at least 25% of the owner's capital contribution during the tax period; borrowing or lending at least 10% of the owner's capital contribution at the time the transaction occurs during the tax period with individuals managing or controlling the enterprise or with individuals in a relationship as stipulated in point g of this clause.”
Based on the above regulations, if a company borrows money from an individual who is related to a shareholder (the person managing or controlling the business) and the amount exceeds 10% of the company's equity, it is considered an affiliated transaction. Therefore, the loan transaction between the company and that individual, who is related to the shareholder, is an affiliated transaction.
Businesses that have related-party transactions are obligated to declare and determine the transfer pricing in accordance with the provisions of Decree No. 132/2020/ND-CP.
March 18, 2021
Response from the General Department of Taxation
Question:
According to Decree 132, the company borrowed over 25% of its equity to finance its business operations. Is this considered a related-party transaction?
Reply:
Points d and l of Clause 2, Article 5 of Decree No. 132/2020/ND-CP stipulate:
“d) An enterprise guarantees or lends capital to another enterprise 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 enterprise and accounts for more than 50% of the total value of the borrowing enterprise's medium and long-term debts.”
Based on the above regulations, if a company borrows from a bank with a loan amount exceeding 25% of the company's owner's equity and accounting for over 50% of the total value of the company's medium and long-term debts, then the company and the bank are considered to have an affiliated relationship. In that case, transactions arising between the company and the bank are considered related-party transactions.
March 18, 2021
Response from the General Department of Taxation
Note: It's important to distinguish between equity capital and contributed capital. Using the phrase "25% equity capital" in this question is inaccurate.
Question:
Company A is a subsidiary of Company B (A&B are businesses in Vietnam), Company B is a subsidiary of Company C abroad, and Company A borrows money from Company C. Is this loan transaction considered a related-party transaction? Is there a maximum limit of 30% of EBITDA on deductible interest expense for Company A?
Reply:
– Points a and b of Clause 2, Article 132/2020/ND-CP stipulate:
“a) One enterprise directly or indirectly holds at least 25% of the owner's equity of the other enterprise;
b) Both businesses have at least 25% of their owner's equity held directly or indirectly by a third party;”
Therefore, if company A is a subsidiary of company B (A&B are businesses in Vietnam), and company B is a subsidiary of company C abroad, and company A indirectly holds at least 25% of the capital contribution (through company B), then they are considered related parties. In this case, the loan transaction between company A and company C is a related-party transaction, and the total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense (after deducting interest on deposits and loans incurred during the period) plus depreciation expense incurred during the period of the taxpayer.
March 18, 2021
Response from the General Department of Taxation
Question:
The company borrowed from a bank to supplement its working capital, using real estate registered under the director's name as collateral. The loan amount exceeded the company's equity. Is this considered a related-party transaction, and does it need to be declared?
Reply:
Clause 2 of Article 1, and points d and l of Clause 2 of Article 5 of Decree No. 132/2020/ND-CP stipulate:
“2. Related-party transactions subject to the provisions of this Decree include transactions involving the purchase, sale, exchange, lease, rental, borrowing, lending, transfer, and assignment of goods; provision of services; borrowing, lending, financial services, financial guarantees, and other financial instruments; purchase, sale, exchange, lease, rental, borrowing, lending, transfer, and assignment of tangible and intangible assets; and agreements for the purchase, sale, and shared use of resources such as assets, capital, labor, and cost sharing between related parties, excluding business transactions involving goods and services subject to state price regulation as stipulated by law on pricing.
d) An enterprise guarantees or lends capital to another enterprise 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 enterprise and accounts for more than 50% of the total value of the borrowing enterprise's medium and long-term debts;
l) The enterprise has transactions involving the transfer or acquisition of at least 25% of the owner's capital contribution during the tax period; or borrowing or lending at least 10% of the owner's capital contribution at the time the transaction occurs during the tax period with individuals managing or controlling the enterprise or with individuals in a relationship as stipulated in point g of this clause.
Based on the above regulations, if a company borrows capital from a bank with a loan amount equal to at least 25% of the company's owner's equity and exceeding 50% of the total value of the company's medium and long-term debts, then the company and the bank are considered to have an affiliated relationship. In that case, transactions arising between the company and the bank are considered related-party transactions.
A director lending real estate to a company for use as collateral is not considered a related-party transaction.
During the fiscal year, if the Company has any related-party transactions, it is obligated to declare and determine the transfer pricing in accordance with Decree No. 132/2020/ND-CP.
March 18, 2021
Response from the General Department of Taxation
Complying with regulations and following proper procedures not only helps you avoid legal risks but also contributes to the transparency and financial health of your business.
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Related-party transaction consulting and declaration services