Article
Promoting access to capital and a transparent business environment
6 March 2025
Ms. Dinh Mai Hanh, Tax Partner, National Transfer Pricing Leader, Deloitte Vietnam, emphasized that the new decree has played an important role in eliminating barriers and enhancing access to financing for enterprises in Vietnam by removing the classification of commercial banks as related parties.
Discussing Decree No. 20/2025/ND-CP (which amends and supplements certain provisions of Decree No. 132/2020/ND-CP dated November 5, 2020, on tax administration for enterprises engaging in related-party transactions), Ms. Dinh Mai Hanh, Tax Partner, and National Transfer Pricing Leader at Deloitte Vietnam, emphasized that the new decree has played an important role in eliminating barriers and enhancing access to financing for enterprises in Vietnam by removing the classification of commercial banks as related parties.
Over the years, tax authorities have intensified oversight of high-value financing transactions, particularly where enterprises borrow from commercial banks. This increased scrutiny arises from findings during tax audits and inspections, where tax authorities identified instances of corporate groups intentionally structuring loan transactions through banks as intermediaries to minimize tax liabilities or shift profits offshore.
Specifically, instead of directly lending to subsidiaries - a transaction that constitutes a related-party transaction - parent companies deposited funds with a commercial bank, which subsequently extended a loan to the subsidiary in Vietnam under arm’s-length terms.
While, in principle, the subsidiary appeared to be borrowing from an independent financial institution without any direct association with the parent company, in practice, the bank merely served as an intermediary, arranging the loan to reduce taxable income and tax liabilities in Vietnam, resulting in erosion of the state’s tax base.
Under Point d, Clause 5 of Decree No. 132/2020/ND-CP (“Decree 132”), a lender and borrower were deemed to have a related-party relationship if the loan amount exceeded 25% of the borrower’s contributed capital and constituted more than 50% of the borrower’s total medium – and long-term debt. As a result, enterprises that secured large loans from commercial banks reaching these thresholds were classified as engaged in related-party transactions.
Many businesses have raised concerns that classifying commercial banks as related parties solely based on the size of loan transactions is not reasonable. What is your perspective on this matter?
This issue posed significant operational challenges for businesses. Our conversations with clients have highlighted a common challenge: enterprises require substantial financing, particularly from commercial banks, to sustain and expand business operations. The ability to secure bank loans is a legitimate commercial necessity. However, under previous regulations, enterprises with large borrowings from commercial banks could be deemed to have a related-party relationship, despite the absence of equity ownership, control, or management influence.
This classification resulted in several implications. First of all, enterprises were required to prepare transfer pricing documentation, which imposed significant administrative costs and resource constraints. Secondly, enterprises were subject to an interest expense deduction cap of 30% of EBITDA, creating financial strain, particularly for businesses in investment phases yet to generate profits. In case of loss-making entities with negative EBITDA, all interest expenses became non-deductible, exacerbating financial pressures.
These constraints posed challenges to accessing legitimate financing, which is a critical factor for business growth, particularly for startups and high-growth enterprises. Restrictions on interest deductibility could adversely impact profitability and limit expansion opportunities.
In your opinion, what is the significance of Decree No. 20/2025/ND-CP (“Decree 20”) eliminating the related-party classification for commercial banks for businesses?
This is a highly positive development that brings tangible benefits to businesses. Under the new provisions of Decree 20, enterprises and commercial banks will no longer be considered related parties unless they have equity ownership, management, or control relationships with each other or through a third party. This change reduces compliance burdens for businesses, particularly in terms of transfer pricing documentation requirements and interest expense limitations, ensuring that tax policies remain reasonable, transparent, and aligned with the principle of “substance over form”.
The removal of this related-party classification not only allows businesses to fully deduct legitimate interest expenses but also enhances access to financing, providing greater financial flexibility for reinvestment, expansion, and improved competitiveness. This is a significant step forward in fostering a healthier and more transparent business environment, supporting the long-term sustainable growth of the corporate sector.
If the related-party classification with commercial banks is no longer applicable, how will the excess interest expenses that exceeded the deductibility cap in previous years be treated?
For enterprises no longer classified as engaging in related-party transactions, interest expenses previously disallowed under historical limits (prior to 2024) are carried forward and deducted evenly over the remaining years within a five-year timeframe.
However, for enterprises still engaged in other related-party transactions, the 30% EBITDA cap on interest deductibility remains applicable. Given these developments, businesses are encouraged to conduct a thorough review of their related-party transaction status to optimize tax benefits while ensuring compliance with the revised regulations.
Besides the aforementioned changes, are there any other notable amendments introduced in Decree 20?
The Decree also introduces a new category of related-party relationships (type m) for credit institutions with their subsidiaries, controlling companies, or affiliated companies, in accordance with the Law on Credit Institutions. Accordingly, Decree 20 tightens regulations on related-party relationships within credit institutions, aligning with the Law on Credit Institutions. The State Bank of Vietnam is now responsible for coordinating with tax authorities to provide information on related parties within credit institutions for tax administration purposes, upon request.
Additionally, the Decree expands the scope of related-party disclosure requirements to include independent-accounting branches, making them subject to transfer pricing regulations. As a result, businesses must review, declare, and prepare appropriate documentation to demonstrate compliance with the arm’s-length principle for transactions involving independent-accounting branches, where applicable.
Furthermore, Decree 20 introduces Appendix I, which replaces the current related-party transaction disclosure form, enhancing transparency and consistency in reporting requirements. Decree 20 takes effect on March 27, 2025, and applies retroactively from the 2024 corporate income tax (CIT) period. Given the significant regulatory updates, we recommend that enterprises promptly assess and evaluate the impact of these changes to ensure timely compliance in the upcoming tax finalization period.
