On February 10, 2025, the Government of Vietnam issued Decree 20/2025/ND-CP (“Decree 20”), which amends and supplements provisions of Decree 132/2020/ND-CP on tax management for enterprises with related party transactions. This Decree will enter into force on March 27, 2025, and will apply to the tax period from 2024 onwards.
Main Amendments Introduced by Decree 20
Redefinition of Related Parties in Financial Transactions
Decree 20 adjusts the criteria for identifying related parties in financial transactions. Thus, an entity is considered a related party if the total balance of outstanding loans is at least 25% of the borrower’s share capital and exceeds 50% of the total balance of the borrower’s medium and long-term debts. Conversely, financial institutions that do not participate in the management, control, or investment of the borrower company and those where both the lender and the borrower are under common control of another entity are excluded.
Inclusion of Independent Branches as Related Parties
The new Decree specifies that independent branches are considered related parties if they are subject to the management, control, and decision-making of another company regarding their production and business activities.
Expansion of the Definition for Credit Institutions
A new category of related parties is introduced that covers credit institutions with their subsidiaries, holding companies, or affiliates, as defined in the Law of Credit Institutions.
Update of Annex I
Decree 20 introduces a revised version of ‘Annex I – Related Party Disclosures and Related Party Transactions,’ which updates the related party relationships. This new schedule will be effective from the fiscal year 2024 and replaces the previous one outlined in Decree 132.
Responsibilities of the State Bank of Vietnam
The State Bank of Vietnam (SBV) must coordinate the provision of information and data on foreign loans and debt payments of specific enterprises involved in related party transactions, as requested by the Tax Authority. In addition, it must provide information on persons related to management body members, shareholders holding at least 1% of the credit institution’s share capital, and affiliated companies when requested by the Tax Authority.
Transitory Provisions
For fiscal years 2020 to 2023, if taxpayers participated only in loan transactions with financial institutions that, under Decree 132, were considered related parties but are no longer as of 2024 due to the new definitions in Decree 20, they will be able to distribute non-deductible interest expenses equally in the remaining years. Specifically, non-deductible interest expense until the end of 2023 may be allocated to 2024 and 2025, equally for deduction.
Recommendations for Enterprises
Given that Decree 20 will retroactively apply to the fiscal year 2024, companies should:
- Review their transactions and relationships: Ensure that disclosures for the fiscal year 2024 are accurate, using the new Annex I of Decree 20.
- Evaluate non-deductible interest expense: Review non-deductible interest expenses from 2020 to 2023, specifically if they only engaged in loan transactions with financial institutions that are now not considered related parties under the new Executive Order.
- Professional advice: Consult with tax experts to fully understand the implications of Decree 20 and ensure effective compliance with Transfer Pricing regulations in Vietnam.
Source: Vietnam Briefing