Related-party transactions are transactions that are "not based on the normal market price" and are intended to minimize the amount of tax payable to the government.
Below are guidelines for businesses with related-party transactions.
On November 5, 2020, the Government issued Decree 132/2020/ND-CP regulating tax management for enterprises with related-party transactions. Decree 132/2020/ND-CP came into effect on December 20, 2020 and applies from the corporate income tax period of 2020.
Decree No. 20/2017/ND-CP dated February 24, 2017 and Decree No. 68/2020/ND-CP dated June 24, 2020 of the Government regulating tax management for enterprises with related-party transactions ceased to be effective from December 19, 2020.
1. What are related party transactions?
According to this Decree, related-party transactions are 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 to purchase, sell, and jointly use resources such as assets, capital, and labor, and to share costs between related parties, excluding business transactions involving goods and services subject to state price regulation as stipulated by law on pricing.
In summary: Related-party transactions encompass virtually all types of transactions that can occur between related parties.
1.1. Why do businesses need to prepare reports when there are related-party transactions?
Based on the principle of transaction independence and the nature of the activity, the tax liability is determined by the value generated from the nature of the transaction and the production and business activities of the taxpayer.
Related-party transactions are transactions between related parties, and therefore may pose a risk of not adhering to the arm's length principle, potentially reducing the company's tax obligations to the state budget.
Therefore, the tax authorities will adjust the related-party transaction prices to determine the correct tax obligations as stipulated in this Decree.
1.2. 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:
a) One party is directly or indirectly involved in the management, control, capital contribution, or investment in the other party;
b) The parties are directly or indirectly subject to the management, control, capital contribution, or investment of another party.
The related parties in sections (a) and (b) above are specifically defined as follows:
1.3. Checklist for determining whether a business has related-party transactions in the fiscal year (Applicable from 2020 onwards)
| Situation | Content to be checked |
| a | One business directly or indirectly holds at least 25% of the owner's equity of the other business; |
| b | Both businesses have at least 25% of their owner's equity held directly or indirectly by a third party. |
| c | 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; |
| d | 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; |
| f | 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; |
| h | 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; |
| i | 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. |
| j | 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; |
| k | Businesses are controlled by an individual through that individual's capital contribution to the business or direct participation in its management; |
| l | Other cases involve businesses being effectively managed, controlled, and having decisions made by other businesses regarding their production and business operations; |
| m | 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.
2. Cases exempt from declaring and preparing transfer pricing documentation.
The following are cases where taxpayers are exempt from declaring and preparing transfer pricing documentation:
1. Taxpayers are exempt from declaring transfer pricing under sections III and IV of Appendix I issued with this Decree, and are exempt from preparing transfer pricing documentation as prescribed in this Decree, in cases where transactions only occur with related parties that are subject to corporate income tax in Vietnam, apply the same corporate income tax rate as the taxpayer, and neither party enjoys corporate income tax incentives during the tax period, but must declare the grounds for exemption under sections I and II of Appendix I issued with this Decree.
2. Taxpayers are responsible for declaring and determining transfer pricing according to Appendix I issued with this Decree, but are exempt from preparing Transfer Pricing Documentation in the following cases:
a) Taxpayers who have related-party transactions but whose total revenue for the tax period is less than VND 50 billion and whose total value of all related-party transactions during the tax period is less than VND 30 billion;
b) Taxpayers who have signed a Pre-Agreement on the method of determining taxable prices shall submit annual reports in accordance with the law on Pre-Agreements on the method of determining taxable prices. For related-party transactions not covered by the Pre-Agreement on the method of determining taxable prices, the taxpayer is responsible for declaring and determining the transfer pricing in accordance with Article 18 of this Decree;
c) Taxpayers conducting business with simple functions, not generating revenue or expenses from the exploitation or use of intangible assets, with revenue under VND 200 billion, shall apply the net profit margin before deducting interest expenses and corporate income tax (excluding the difference between revenue and expenses of financial activities) on net revenue, including the following sectors:
- Distribution: 5% or more;
- Production: 10% or more;
- Processing: 15% or more.
In cases where taxpayers track and account for revenue and expenses separately for each business segment, the net profit margin before deducting interest expenses and corporate income tax on net revenue corresponding to each segment shall be applied.
In cases where taxpayers can separately track and account for revenue but cannot separately track and account for the expenses incurred in each area of production and business activities, the expenses should be allocated proportionally to the revenue of each area to apply the net profit margin (before deducting interest expenses and corporate income tax) on net revenue corresponding to each area.
In cases where taxpayers cannot separately track and account for the revenue and expenses of each production and business activity to determine the net profit margin before deducting interest expenses and corporate income tax corresponding to each activity, the net profit margin before deducting interest expenses and corporate income tax on net revenue of the activity with the highest margin shall be applied.
If the taxpayer does not apply the net profit margin rate specified in this section, they must prepare a Transfer Pricing Documentation file in accordance with regulations.
3. For taxpayers who are exempt from declaring and preparing transfer pricing documentation as stipulated in Clauses 1 and 2 of this Article, the determination of total deductible interest expenses when calculating taxable corporate income of enterprises with related-party transactions shall be carried out in accordance with Clause 3 of Article 16 of this Decree.
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.
Implementing the above is not easy for businesses; the effective solution is to use professional services: Collaborate with financial, accounting, and tax experts to ensure you follow the correct procedures and comply with legal regulations.
See detailed information about our services in the article.
Related-party transaction consulting and declaration services