With the legal framework for related-party transactions as stipulated in recent times, especially the latest Decree 132/2020/ND-CP, businesses are required to declare related-party transactions and submit them along with their corporate income tax (CIT) returns. However, Decree 132/2020/ND-CP introduced several amended and additional provisions related to the identification of related parties, causing confusion and difficulties for many company accountants who often overlook these transactions. Drawing on RSM's extensive experience in assisting companies with related-party transaction declarations for many years, here are some related-party transactions that businesses often miss when declaring and settling CIT.
1. Is aa loan transaction with a commercial bank considered a related-party transaction?
Based on the provisions of Point d, Clause 2, Article 5 of Decree No.132/2020/ND-CP, which defines related parties:
“d) A company guarantee or lends to another company under any from (including loans from third parties secured from the financial resources of related parties and financial transactions of similar nature) with a condition that the amount of the loan is at least 25% of the contributed capital of the borrowing company and accounts for over 50% of the total value of medium- and long-term debts of the borrowing company."
Based on the above regulation, when a company borrows money from a bank, and the amount borrowed is greater than 25% of the contributed capital of the company and accounts for over 50% of the total value of the company's medium-and long-term debts, there is a considered to be a related-party relationship between the company and the bank. In this case, the transactions between the company and the bank are classified as related-party transactions.
This was detailed on the General Department of Taxation's website on March 18, 2021. However, it's important to note that the provisions of Point d, Clause 2, Article 5 of Decree No. 132/2020 are not new regulations. Similar regulations were already in place under Decree No. 20/2017/ND-CP, and these provisions have been consistently implemented for nearly five years. These regulations were applied in the tax settlements for corporate income tax in 2017, 2018, and 2019. However, no business and no tax authority has yet defined the lending relationship between a bank and a business as a related-party transaction. Therefore, following the guidance from the seminar of the General Department of Taxation, businesses should pay attention to include loan transactions with commercial banks in their related-party transaction declarations.
2. Is borrowing money from the company's director considered a related-party transaction?
The General Department of Taxation also made a response based on Point d and Point l, Clause 2, Article 5 of Decree No. 132/2020/ND-CP. This response was provided on March 18, 2021, as follows:
“In the case where the company borrows money from the business owner who is also the legal representative overseeing and controlling the business, and the borrowed amount exceeds 10% of the owner's capital, it is considered a related-party transaction. In this scenario, the loan transaction between the company and the business owner is a related-party transaction.”
3. Renting an office space from the director, is this considered a related-party transaction?
According to the regulations in Article 5 of Decree No. 132/2020/ND-CP, there is no mention of renting an office from a director in the context of related-party transactions. Therefore, in this case, it is not considered a related-party transaction.
4. Borrowing interest-free money from individuals with a family relationship
The General Department of Taxation provided a response on March 18, 2021, on their website, as follows:
According to the regulations in Article 5 of Decree No. 132/2020/ND-CP, specifically point l, it states:
"l) The enterprise has transactions involving the transfer or receipt of capital contributions of at least 25% of the owner's capital contribution during the tax calculation period, borrowing or lending involving at least 10% of the owner's capital contribution at the time of the transaction within the tax calculation period with individuals who manage, control the enterprise, or with individuals related through the relationships specified in point g of this clause."
Based on the above regulations, in the case where a company borrows money from an individual who has a family relationship with a shareholder (i.e., someone who manages or controls the company) in an amount exceeding 10% of the owner's capital contribution, it is considered a related-party transaction. In this scenario, the loan transaction between the company and the individual with a family relationship to the shareholder is a related-party transaction.
Enterprises with related-party transactions are required to declare and determine the prices of related-party transactions in accordance with the provisions of Decree No.132/2020/ND-CP.
Above are some common situations where businesses often face dificulties and confusion when identifying related parties according to the new regulations of Decree 132. However, in practice.
5. How can RSM assist businesses?
Our tax experts are always ready to provide businesses with useful services to ensure compliance and help them identify potential tax risks and savings opportunities. Furthermore, with our long-standing working relationships with the General Department of Taxation, local tax authorities, and other government agencies, we also support businesses in working more effectively with the government and tax authorities:
Our services include:
Corporate income tax finalization support services.
In-depth tax review services.
Regular consulting services.
Tax inspection support services.
Case-specific advisory services.
Assistance with Double Taxation Agreements (DTA) applications.
Government relations support services.
Contact us today to find out how our tax consulting experts can assist with your corporate income tax compliance.
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