When is it prohibited to determine medium and long-term debt in related-party transactions in Vietnam from March 27, 2025?

When is it prohibited to determine medium and long-term debt in related-party transactions in Vietnam from March 27, 2025?

Based on point d, clause 2, Article 5 of Decree 132/2020/ND-CP, as amended and supplemented by point a, clause 1, Article 1 of Decree 20/2025/ND-CP (document effective from March 27, 2025), as follows:

An enterprise guaranteeing or lending to another enterprise in any form (including loans from third parties secured from financial resources of affiliated parties and similar financial transactions) with the condition that the total outstanding debt of the borrowing enterprise with the lending or guaranteeing enterprise is at least 25% of the owner's investment of the borrowing enterprise and accounts for over 50% of the total medium and long-term debt of the borrowing enterprise. This regulation does not apply to the following cases:

- The guarantor or lender is an economic organization operating under the Law on Credit Institutions, which does not directly or indirectly manage, control, invest, or contribute capital to the borrowing or guaranteed enterprise as defined at points a, c, d, e, g, h, k, l, and m of clause 2, Article 5 of Decree 132/2020/ND-CP.

- The guarantor or lender is an economic organization operating under the Law on Credit Institutions, and the borrowing or guaranteed enterprise is not directly or indirectly under the control, management, investment, or capital contribution of another party as defined at points b, e, and i of clause 2, Article 5 of Decree 132/2020/ND-CP.

When is it prohibited to determine medium and long-term debt in related-party transactions in Vietnam from March 27, 2025? (Image from the Internet)

What is the method of calculating loan interest cost which is deducted in related-party transactions for corporate income tax in Vietnam (CIT)?

Pursuant to points a, b of clause 3, Article 16 of Decree 132/2020/ND-CP regulating the determination of expenses for tax calculation for enterprises with related-party transactions as follows

Determination of expenses for tax calculation concerning enterprises with related-party transactions

...

3. Total loan interest cost which is deducted when determining income subject to corporate income tax for enterprises with related-party transactions:

a) Total interest expenses after deducting deposit interest and loan interest arising during the period of the taxpayer are deductible when determining the income subject to corporate income tax not exceeding 30% of the total net profit from business activities during the period plus interest expenses after deducting deposit interest and loan interest arising during the period plus depreciation expenses arising during the period of the taxpayer;

b) The portion of non-loan interest cost which is deducted as prescribed at point a of this clause may be carried forward to the subsequent tax period when determining the total loan interest cost which is deducted if the total interest expenses allowable for deduction of the following tax period is less than the limit at point a of this clause. The interest expenses can be carried forward continuously for no more than 5 years from the year following the year the non-loan interest cost which is deducted arise;

...

Thus, according to the above regulations, loan interest cost which is deducted in related-party transactions for corporate income tax are determined as follows:

- Total interest expenses after deducting deposit interest and loan interest arising during the period of the taxpayer are deductible when determining the income subject to corporate income tax not exceeding 30% of the total net profit from business activities during the period plus interest expenses after deducting deposit interest and loan interest arising during the period plus depreciation expenses arising during the period of the taxpayer.

- The non-deductible portion of interest expenses will be carried forward to the subsequent tax period when determining the total loan interest cost which is deducted if the total loan interest cost which is deducted arising in the subsequent tax period is less than 30% of the total net profit from business activities during the period plus interest expenses after deducting deposit interest and loan interest arising during the period plus depreciation expenses arising during the period of the taxpayer.

The period for carrying forward interest expenses is continuous and not exceeding 5 years from the year following the year in which the non-loan interest cost which is deducted arise.

Note: The above-mentioned loan interest cost which is deducted in related-party transactions do not apply to loans made by taxpayers in cases such as: financial institutions, insurance business organizations, official development assistance (ODA) loans, preferential loans from the Government of Vietnam, loans under the national target programs, and loans for investment projects implementing the State's social welfare policies.

What are responsibilities and powers of the Tax Authority in managing costs from related-party transactions in Vietnam?

According to Article 20 of Decree 132/2020/ND-CP, responsibilities and powers of the Tax Authority in managing costs from related-party transactions are regulated as follows:

- Apply risk management in tax administration regarding related party transaction pricing according to the provisions of tax law.

+ Manage and use information of taxpayers engaged in related-party transactions to serve risk management;

+ Apply risk management in planning audits, inspections of enterprises with affiliate relationships and related-party transactions;

+ Manage and utilize cross-border profit reports of taxpayers to support risk management, information exchange as per Vietnam’s commitments in international tax agreements, without using them for tax imposition.

- The Tax Authority, based on principles of analysis, comparison, principles, and methods for determining the prices of related-party transactions as stipulated in this Decree and tax obligation declaration information of enterprises with related-party transactions, will impose tax in the following cases:

+ Taxpayers violate tax laws but implement all policies on accounting, invoices, certificates: Determination of revenue, costs or taxable income to calculate tax obligations is done according to principles of analysis, comparison, transaction pricing methods and database used in managing related party transaction prices stipulated in this Decree;

+ Other cases as prescribed in clause 2, Article 50 of Tax Administration Law 2019, dated June 13, 2019;

+ The Tax Authority is responsible for facilitating taxpayers to justify, explain about figures, data, and independent comparable objects used in the Dossier for determining related transaction prices.

- The Tax Authority is authorized to determine price levels, profit margins, distribution ratios of profit, taxable income, or corporate income tax payable for taxpayers not complying with regulations on declaration, determination of related-party transactions; failure to provide or incomplete provision of information, data declared to determine prices in related-party transactions in the following cases:

+ Taxpayers do not declare, incompletely declare information, or do not submit Appendix I issued with Decree 132/2020/ND-CP;

+ Taxpayers provide incomplete information within the Dossier determining related party prices prescribed in Appendix II, Appendix III issued with this Decree or do not present the Dossier determining related party prices and the data, documents and records used as a base for analysis, comparison, determining prices in the Dossier determining related party prices as requested by the Tax Authority within the time limit prescribed in Decree 132/2020/ND-CP. Information in Dossier determining related party prices is identified as critical if it affects results of selecting similar independent comparable objects; prices determination method for related-party transactions or results of adjusting price level, profit margin, distribution rate of taxpayer’s profit;

+ Taxpayers use information on independent transactions that is not truthful or in line with reality to analyze, compare, declare on determining related party prices or base their determinations on illegal, invalid documents, data and evidence or do not clarify the origins to determine price levels, profit margins, or allocation rates of profit applicable to related-party transactions;

+ Taxpayers violate provisions on the determination of related party prices in Article 19 of this Decree;

+ The database for tax imposition complies with provisions of Tax Administration Law Tax Administration Law 2019 dated June 13, 2019.

- The Tax Authority is responsible for ensuring the confidentiality of information provided by taxpayers relating to the determination of related party prices in accordance with this Decree. Information provision to agencies, organizations follows the provisions in clause 5, Article 3 of Decree 132/2020/ND-CP.

- In cases where inspections reveal issues regarding mechanisms, policies concerning specific sectors or industries, the Tax Authority will consult with relevant agencies, organizations, individuals, specifically:

+ Specialized management agencies, professional associations;

+ The Tax Authority is responsible for providing dossiers, information, and documents relating to the determination of related party prices to specialized agencies, organizations for consultation. Agencies and units requested for consultation must ensure the confidentiality of information according to the law.

- The Tax Authority exchanges information with taxpayers and counterpart Tax Authority under pre-consultation procedures before, during, and after inspections on related party transaction prices as follows:

+ When applying risk management in tax administration for related party transaction prices, if the Tax Authority deems it necessary to exchange information beforehand with taxpayers on Appendix I issued with Decree 132/2020/ND-CP and the Dossier for determining related party prices of taxpayers, the Tax Authority shall send an official dispatch requesting consultation with taxpayers to exchange, provide preliminary information on the Dossier for determining related party prices of taxpayers according to Decree 132/2020/ND-CP;

+ In cases where the Tax Authority needs to make contact, exchange with counterpart Tax Authorities on cross-border profit reports and other related information in accordance with provisions of the bilateral procedure clause and information exchange in relevant tax agreements. If necessary, the Tax Authority informs taxpayers in writing about the temporary suspension of inspections to exchange information with counterpart Tax Authorities as per tax law regulation.

- The Tax Authority implements the automatic information exchange mechanism according to Vietnam’s international commitments within international tax agreements. Annually, the Tax Authority announces the list of foreign Tax Authorities engaged in automatic information exchange for national cross-border profit reports of taxpayers on the electronic portal of the tax industry.

- The Tax Authority adjusts the determination of related party prices according to bilateral agreements stipulated in relevant tax treaties.

- Where the Tax Authority signs an Advance Pricing Agreement (APA) with a taxpayer, the Tax Authority is responsible to:

+ Manage, inspect, audit related-party transactions outside the scope of the APA according to risk management principles;

+ Manage, inspect, audit compliance of the taxpayer's signed APA as stipulated.