Together with the rapid development of the economy, Vietnam enterprises have become one important connection in the global supply chains of products and services. As the result, tax compliance in Vietnamese enterprises relating to transferring pricing (TP) has been broadly discussed at tax conferences in recent years.
This article addresses the ways to identify the related parties following Decree 132, 2020 (i.e. Decree 132/20202/NĐ-CP dated 5 November 2020 on TP), the most updated regulations issued by the Ministry of Finance in Vietnam relating to TP.
Following Article 5 of Decree 132, 2020 related parties are defined as follows:
- A party is directly or indirectly involved in the management, control of, contribution of capital to, or investment in, the other party;
- Parties are directly or indirectly affected by the management, control of, contribution of capital, or investment, from the other party.
In detail, the Decree lists eleven (11) cases that are considered as related parties as below. Please note that the alphabet (i.e. from a to l) is kept to be in line with the order stipulated in the Decree.
- (a) An enterprise directly or indirectly holds 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 one enterprise, and directly or indirectly holds at least 10% of the total share capital of that enterprise;
- (d) An enterprise guarantees or offers another enterprise a loan under any form (including third-party loans guaranteed by financing sources of related parties and financial transactions of the same or similar nature) to the extent that the loan amount equals at least 25% of the 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 the 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) Two enterprises appoint more than 50% of the 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) Two 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) Two business entities are either in relation to head offices and permanent establishments or permanent establishments of overseas entities or individuals;
- (i) Enterprises are under the control of one individual through either his/her capital contribution to that enterprise or his direct involvement in the administration of that enterprise;
- (k) In other cases where an enterprise has its 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.