Stay compliant with Vietnam’s latest regulations on related party transactions. Explore key provisions of Decree 20 and its impact on transfer pricing, disclosure requirements, and tax compliance.
On February 10, 2025, the Vietnamese government introduced Decree No. 20/2025/ND-CP (“Decree 20”) to amend certain articles provided under Decree 132/2020/ND-CP (“Decree 132”). The decree, effective March 27, 2025, will provide a more transparent guide for tax compliance relating to transfer pricing concerns.
Decree 20 amends and supplements several articles specified in Decree 132 concerning the tax administration of enterprises involved in related party transactions. The decree will apply from the financial year 2024 onwards. This article outlines the key changes introduced by this decree and provides recommendations from Dezan Shira & Associates for businesses to ensure full compliance.
Key changes regarding related party transactions in Vietnam
Changes in the determination of related parties through financial borrowings
Decree 20 amends conditions to determine an entity as a related party via financial borrowings, which provide that the outstanding balance of covered borrowings must be:
- From 25 percent of the borrower’s equity; and
- From 50 percent of the total outstanding balance of medium and long-term liability.
However, the decree also supplements two exemptions for financial institutions, which disqualify them as related parties, as follows:
- No common controllership: The lender or guarantors, as a financial institution, and the borrower do not have direct or indirect control over each other. The financial institution does not participate in the borrower’s management, capital contribution, or investment.
- Sharing controllership: Both the lender, as a financial institution, and the borrower are under the common control of another party.
Supplements for related party cases
Decree 20 modifies descriptions for certain related parties as follows:
- Branches considered related parties: A branch is deemed a related party if it satisfies the following conditions:
- Being an independent branch;
- Paying corporate income tax (CIT); and
- Being subject to the actual management, control, and decision-making concerning another enterprise’s production and other business activities.
- Credit institutions with subsidiaries/controlling companies/affiliates: Credit institutions with subsidiaries, controlling companies, or affiliates are regarded as related parties if they fulfill the requirements set forth in the Law on Credit Institutions and any amendments, supplements, or changes if applicable.
New template of Appendix I
Decree 20 has introduced a revised version of ‘Appendix I – Disclosure of Related Parties and Related Party Transactions,’ updating related party relationships. This updated template, effective from the financial year 2024, replaces the existing one outlined in Decree 132.
Overseeing related party transactions in Vietnam
Under Decree 20, the State Bank of Vietnam (SBV), within the scope of its duties and powers, is responsible for:
- Coordinating the provision of information and data on foreign loans and debt repayments of specific enterprises involved in related party transactions, as requested by the Tax Authority. The information must include data on:
- Loan turnover;
- Interest rates;
- Interest and principal payment periods;
- Actual capital withdrawals;
- Debt repayments (principal and interest); and
- Other relevant information (if any).
- Coordinating to provide information reported in accordance with legal regulations regarding:
- Related persons of members of the Board of Directors, members of the Board of Members, members of the Board of Supervisors, General Director (Director), Deputy General Director (Deputy Director), and equivalent positions as prescribed in the Charter of the credit institution;
- Related persons of shareholders owning one percent or more of the charter capital of the credit institution; and
- Affiliated companies of the credit institution, as listed in the SBV’s management data system, when requested by the Tax Authority.
Transitional terms
If, during the tax years of 2020, 2021, 2022, and 2023, taxpayers engaged solely in related party borrowing transactions with financial institutions under Decree 132 and no longer qualify as related parties from 2024 due to disqualification conditions in Decree 20, they may allocate non-deductible expenses equally across the remaining years. Specifically, non-deductible interest expenses as of the end of 2020 can be allocated equally to 2024 and 2025 for deduction.
Recommendations for businesses
The updated regulations on related party transactions are part of Vietnam’s ongoing efforts to address taxpayers’ challenges under Decree 132, align with international standards, and improve transfer pricing compliance. Since the decree will be applied retroactively, businesses are encouraged to take the following steps to avoid non-compliance issues:
- Ensure accurate disclosures for the 2024 tax year: Appendix I of Decree 20 will be used starting from the financial year 2024. In addition, businesses should review transactions with their independent branches for declaration purposes.
- Review non-deductible interest expenses: Businesses must re-assess non-deductible interest expenses from 2020 to 2023, especially if they engaged solely in related party borrowing transactions with financial institutions and now meet the disqualification conditions in Decree 20. Any disallowed expenses shall be equally allocated to the respective remaining years for claiming deduction in such years.
- Consult with tax professionals: Seeking expert advice on the implications of Decree 20 will help businesses navigate Vietnam’s transfer pricing compliance requirements more effectively.
