What is the related party relation between production and business organizations in Vietnam? Is the enterprise in the related party relation entitled to deduct loan interest when calculating taxable income in Vietnam?
What is the related party relation between production and business organizations in Vietnam?
According to the provisions of Article 5 of Decree No. 132/2020/ND-CP on organization of production and trading of goods and services which transactions have occurred as follows:
Related parties
1. Related parties are parties having relationships where:
a) A party is directly or indirectly involved in the management, control of, contribution of capital to, or investment in, the other party;
b) Parties are directly or indirectly affected by the management, control of, contribution of capital, or investment, from the other party.
2. Related parties referred to in Clause 1 of this Article shall be subject to the following specific provisions:
a) An enterprise participates directly or indirectly in at least 25% of the other enterprise’s equity;
b) Each of the two enterprises has at least 25% of its equity held, whether directly or indirectly, by a third party;
c) An enterprise is the shareholder having the greatest ownership interest in the other enterprise, or participates directly or indirectly in at least 10% of total share capital of the other enterprise;
d) An enterprise guarantees or offers another enterprise a loan under any form (even including third-party loans guaranteed by financing sources of related parties and financial transactions of same or similar nature) to the extent that the loan amount equals at least 25% of equity of the borrowing enterprise and makes up for more than 50% of total medium and long term debts of the borrowing enterprise;
dd) An enterprise appoints a member of the executive board responsible for the leadership or control of another enterprise provided the number of members appointed by the former accounts for more than 50% of total number of members of the executive board responsible for the leadership or control of the latter; or a member appointed by the former has the right to decide financial policies or business activities of the latter;
e) Both related enterprises appoint more than 50% of membership of the executive board or have one member of the executive board authorized to decide financial policies or business activities who is appointed by a third party;
g) Both enterprises are managed or controlled in terms of their personnel, financial and business activities by individuals, each of whom is in one of the following relationships with the others such as a wife, husband, natural/foster father, natural/foster child, natural/foster older/younger sibling, brother/sister-in-law, maternal/paternal grandfather/grandmother, maternal/paternal grandchild, and maternal/paternal aunt, uncle and nibling;
h) Both business entities have transactions, either between their head offices and permanent establishments or between permanent establishments of overseas entities or individuals;
i) Enterprises are put under control of one individual through either his/her capital participation into that enterprise or his direct involvement in the administration of that enterprise;
k) In other cases where an enterprise has their business activities managed, controlled or decided de facto by the other enterprise;
l) A related enterprise performs the disposition or acquisition transaction in at least 25% of their equity within a tax period; the borrowing or lending transaction in at least 10% of their equity performed at the transaction time falling within a tax period with a person holding the executive office or the controlling interest in the enterprise, or with a person in one of the relationships prescribed in point g of this clause.
Thus, one of the parties has a relation where one party directly or indirectly participates in the management, control, capital contribution or investment in the other party; or where the parties are directly or indirectly jointly managed, controlled, contributed capital or invested by another party as a related party.
What is the related party relation between production and business organizations in Vietnam? Is the enterprise in the related party relation entitled to deduct loan interest when calculating taxable income in Vietnam? (Image from the Internet)
Is the enterprise in the related party relation entitled to deduct loan interest when calculating taxable income in Vietnam?
Official Dispatch No. 51206/CTHN-TTHT in 2022, issued by Hanoi Tax Department, guiding Pharmaceutical Joint Stock Company on deductible loan interest expenses when calculating corporate income tax as follows:
Pursuant to the provisions of Clause 1, Article 2 of Decree No. 132/2020/ND-CP, enterprises are payers of the corporate income tax having transactions with their related parties under Article 5 of Decree No. 132/2020/ND-CP.
According to the provisions of Article 16 of Decree No. 132/2020/ND-CP on determination of expenses for tax calculation for enterprises having related-party transactions:
Determination of costs for assessment of taxes on enterprises engaged in related-party transactions
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3. Total loan interest cost is deducted in case of determining the income subject to corporate income tax of the enterprise engaged in related-party transactions:
a) Total loan interest cost arising after deducting deposit interests and lending interests within a specific taxable period which is deducted during the process of determination of income subject to the corporate income tax is not 30% more than the net profit generated from business activities within the taxable period plus loan interest costs arising after deducting deposit interests and lending interests arising within the taxable period plus depreciation/amortization expenses arising within that period of a taxpayer;
b) The portion of loan interest cost which is non-deductible as prescribed in point a of this clause is carried forward to the next taxable period for the determination of total loan interest cost deductible if total loan interest cost deductible in the next taxable period is lower than the amount prescribed in point a of this clause. The loan interest costs may be carried forward for a maximum consecutive period of 05 years, counting from the year following the year in which non-deductible loan interest costs arise;
c) The provision in Point a of this Clause shall not apply to loans of taxpayers that are credit institutions as defined in the Law on Credit Institutions; insurance companies as defined in Law on Insurance Business; ODA loans and concessional loans of the Government which are granted to enterprises in the on-lending form; loans intended for implementing national target programs (including new rural area development programs and sustainable poverty reduction programs); loans invested in programs or projects for implementation of State social welfare policies (e.g. resettlement housing, worker or student housing and social housing, and other social welfare projects or programs);
d) Taxpayers must declare the rate of loan interest costs arising within a specific taxable period according to Form No. I enclosed herewith.
At the same time, Article 6 of Circular No. 78/2014/TT-BTC (amended by Article 4 of Circular No. 96/2015/TT-BTC) provides for deductible and non-deductible expenses when calculating taxable income as follows:
Deductible and non-deductible expenses when calculating taxable income
1. Except for the non-deductible expenses prescribed in Clause 2 of this Article, every expense is deductible if all of these following conditions are satisfied:
a) The actual expense incurred is related to the enterprise’s business operation.
b) There are sufficient and valid invoices and proof for the expense under the regulations of the law.
c) There is proof of non-cash payment for each invoice for purchase of goods/ services of VND 20 million or over (including VAT).
The proof of non-cash payment must comply with regulations of law on VAT.
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2. The expenses below are not deductible when calculating taxable income:
2.1. Expenses that do not meet all of the conditions in Clause 1 of this Article.
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2.17. Payment of interest on loan serving business operation taken from entities other than credit institutions or business organizations which exceeds 150% of basic interest rate announced by the State bank at the time of taking the loan.
Thus, in case an enterprise has related-party transactions, the total interest expense (after deducting deposits and loan interest) incurred in the period of the enterprise is deductible when calculating taxable income. In addition to meeting the conditions specified in Clause 1, Article 4 of Circular No. 96/2015/TT-BTC, it must also meet the additional conditions that must not exceed the limit of deductible interest expenses as prescribed in Clause 3, Article 16 of Decree No. 132/2020/ND-CP.
What documents are included in the transfer pricing files?
According to the provisions of Clause 4, Article 18 of Decree No. 132/2020/ND-CP, taxpayers shall be responsible for retaining and providing the transfer pricing files, including:
- Interrelationship and related party transaction information provided in the form given in Appendix I to Decree No. 132/2020/ND-CP;
- Local files, including information about transfer pricing, transfer pricing policies and methods, prepared and deposited at taxpayers’ offices according to the directory of information and documents prescribed in Appendix II to Decree No. 132/2020/ND-CP;
- Master files containing information about business activities of multinational groups, transfer pricing policies and methods of global groups and policies on allocation of income and decentralization of operations and functions in value chains of groups according to the directory of information and documents prescribed in Appendix III to Decree No. 132/2020/ND-CP;
- Country-by-Country reports of profits of ultimate parent companies prescribed in clause 5 of this Article and Appendix IV to Decree No. 132/2020/ND-CP.
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