Obligations of enterprises in related party transactions

Legal Basis 

• Law on Tax Administration No. 38/2019/QH14;    

• Decree No. 132/2020/ND-CP providing for tax administration of enterprises with related party transactions.    

1. Definition of Related Party Transactions

Pursuant to Clause 22, Article 3 of the Law on Tax Administration, related party transactions are defined as “transactions between related parties.” Related parties are specifically defined in Article 5.1 of Decree No. 132/2020/ND-CP, and include:    

• A party that participates directly or indirectly in the management, control, capital contribution, or investment in the other party;    

• Parties that are under the direct or indirect management, control, capital contribution, or investment of a third party.    

Related parties are further specified in Article 5.2 of Decree No. 132/2020/ND-CP, as follows:    

• An enterprise directly or indirectly holds at least 25% of the equity of the other enterprise; 

• Both enterprises have at least 25% of their owners’ equity held directly or indirectly by a third party;   

• One enterprise is the largest shareholder in terms of owners’ equity and directly or indirectly holds at least 10% of the total shares of the other enterprise;    

• 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 total outstanding loans of the borrowing enterprise with the lending or guaranteeing enterprise are at least equal to 25% of the borrowing enterprise’s owners’ equity and account for more than 50% of the total outstanding medium and long-term debts of the borrowing enterprise.   

The provision in Point d of this Clause does not apply to the following cases:    

d.1) The guarantor or lender is a financial institution operating under the Law on Credit Institutions and does not directly or indirectly participate in the management, control, capital contribution, or investment in the borrowing enterprise or the guaranteed enterprise as prescribed in Points a, c, d, e, g, h, k, l, and m of this Clause.     

d.2) The guarantor or lender is a financial institution operating under the Law on Credit Institutions, and the borrowing or guaranteed enterprise is not directly or indirectly under the management, control, capital contribution or investment of another party as prescribed in Points b, e, and i of this Clause.    

• An enterprise appoints a member of the executive board or controlling authority of another enterprise, provided that the number of members appointed by the first enterprise exceeds 50% of the total number of members of the executive board or controlling authority of the second enterprise; or a member appointed by the first enterprise has the authority to decide on the financial policies or business operations of the second enterprise;    

• Two enterprises have more than 50% of the members of the board of directors in common or have a board member with the authority to decide on financial policies or business operations who was appointed by a third party;

• Two enterprises are managed or controlled in terms of personnel, finance, and business operations by individuals related as: spouses; biological parents, adoptive parents, stepparents, stepmothers, parents-in-law; biological children, adopted children, stepchildren of the wife or husband, daughters-in-law, sons-in-law; siblings of common or half-blood, siblings-in-law of common or half-blood; paternal grandparents, maternal grandparents; grandchildren; paternal aunts, paternal uncles, maternal aunts, maternal uncles, and nieces and nephews;   

• Two business establishments have a head office and permanent establishment relationship or are both permanent establishments of a foreign organization or individual;   

• Enterprises controlled by an individual through the individual’s capital contribution to that enterprise or direct participation in the enterprise’s operation;   

• Other cases where an enterprise (including an independent accounting branch that declares and pays corporate income tax) is under the actual management, control, and decision-making power over the production and business activities of the other enterprise;   

• An enterprise engages in transactions to transfer or receive the transfer of at least 25% of the owners’ contributed capital of the enterprise during the tax period; borrows or lends at least 10% of the owners’ contributed capital at the time of the transaction during the tax period with individuals managing or controlling the enterprise or with individuals in one of the relationships specified in Point g of this Clause.   

• Credit institutions with subsidiaries or with controlling companies or with affiliates of credit institutions as prescribed in the Law on Credit Institutions and its amendments, supplements, or replacements (if any).   

2. Types of Related Party Transactions

Related party transactions include various types, commonly being:    

• Buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning goods and services;    

• Borrowing, lending, financial services, financial guarantees, and other financial instruments;    

• Purchasing, selling, exchanging, leasing, hiring, loaning, borrowing, assigning, transferring tangible assets, intangible assets, and agreements on sharing resources such as assets, capital, labor, and costs among related parties.    

See more: Key aspects of related party transactions

3. Obligations of Enterprises in Related Party Transactions

When related party transactions occur, enterprises have the following obligations:    

• Declaration of related party transactions: Enterprises with related party transactions within the scope of this Decree are responsible for declaring information on the related party relationship and related party transactions in accordance with Appendix I, Appendix II, and Appendix III issued with Decree No. 132/2020/ND-CP, and submitting them together with the Corporate Income Tax Finalization Return.     

• Determination of related party transaction prices: Enterprises must determine the prices of related party transactions in accordance with the arm’s length principle, i.e., the price of transactions conducted between unrelated parties under comparable conditions. Upon request by the competent authority, enterprises are responsible for demonstrating the analysis, comparison, and selection of methods for determining related party transaction prices as stipulated in Decree No. 132/2020/ND-CP.    

• Preparation of transfer pricing documentation: Enterprises must prepare and maintain transfer pricing documentation to demonstrate compliance with the arm’s length principle. This documentation must be prepared before the submission of the Corporate Income Tax Finalization Return.    

• Provision of information and documents as requested by tax authorities: Enterprises are obliged to provide complete, accurate, and timely information and documents related to related party transactions as requested by tax authorities.    

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