Tax administration for related-party transactions: New regulations addressing business challenges

Decree No. 20/2025/ND-CP ("Decree 20") was promulgated on February 10, 2025, and will take effect on March 27, 2025, to address these shortcomings. However, whether the amendments truly meet the demands of modern tax administration and create a more favorable environment for businesses remains to be verified.

Decree No. 132/2020/ND-CP ("Decree 132") was developed based on the fundamental principles of the Law on Tax Administration and the Law on Corporate Income Tax to regulate transfer pricing issues and optimize profit allocation among related-party enterprises. While Decree 132 has contributed to enhancing transparency in related-party transactions and reducing transfer pricing loopholes, it has also raised concerns for businesses regarding the deductibility of interest expenses, particularly when loans from credit institutions are classified as related-party transactions under Decree 132. To address these issues, Decree 20 has amended and supplemented Article 1, specifically revising and supplementing Points d, k, and m of Clause 2, Article 5 of Decree 132. These amendments are expected to have significant implications for business operations.

Resolving key issues

Firstly, Decree 20 expanded definition of related parties in line with the Law on Credit Institutions

Under the revised provisions in Point d, Clause 2, Article 5 of Decree 132, the term "total outstanding loan balance of enterprises" has been replaced with "total outstanding balance" in Decree 20. This broader term better encompasses all outstanding debts of an enterprise with related parties, rather than being limited to a single independent loan. The term "total outstanding balance" also aligns with the provisions of the Law on Credit Institutions regarding the determination of the total credit balance for individual and corporate customers. Additionally, Decree 20 expands the scope of related parties by including subsidiaries, controlling companies, and affiliated companies of credit institutions under Point m, Clause 2, Article 5. Consequently, borrowing transactions between a subsidiary, a controlling company, or an affiliated company and a credit institution will be classified as related-party transactions.

At the same time, Decree 20 clarifies that guarantors and lenders under the Law on Credit Institutions shall not be deemed related parties if they do not directly or indirectly participate in the management, control, capital contribution, or investment in the borrowing enterprise or if they are not under the control of a common third party. This revision effectively addresses taxpayers' concerns regarding the classification of lending institutions, such as commercial banks or other credit institutions, as related parties, preventing unnecessary restrictions on the deductibility of interest expenses based on the EBITDA limitation rule.

Similarly, Point k, as amended in Decree 20, expands the definition of related parties to include branches that maintain independent tax registration and corporate income tax payment but are effectively controlled and managed by the parent company.

Secondly, carryforward of non-deductible interest expenses due to changes in related-party classification

Under the revised regulations, interest expenses that were previously non-deductible due to related-party classification can now be carried forward to future tax periods. Specifically, non-deductible interest expenses may be carried forward and deducted in subsequent tax periods, provided that the net interest expense-to-EBITDA ratio does not exceed 30% during the applicable years.

Decree 20’s revisions redefine certain related-party relationships in transfer pricing transactions, effective from the corporate income tax period of 2024. Consequently, some businesses previously classified as related parties under Decree 132 may no longer be considered related parties under Decree 20. This raises the question: Can interest expenses incurred before 2024, which were previously non-deductible, be carried forward to future tax periods?

Decree 20 addresses this issue explicitly in Article 3, allowing non-deductible interest expenses that were not carried forward before the end of 2023 to be evenly allocated across subsequent tax periods. This provision enables businesses to gradually deduct previously restricted interest expenses over future fiscal years.

Source: The Saigon Times

Significant implications for businesses

The amendments in Decree 20 introduce clear benefits for businesses, particularly those previously classified as related parties under Decree 132 but no longer subject to such classification under the new decree.

Specifically, when an enterprise is no longer considered a related party under Decree 20, the restrictions on interest expense deductions, which previously imposed financial burdens due to strict limitations, are relaxed. Under point a, Clause 3, Article 16 of Decree 132, deductible interest expenses were capped if the net interest expense-to-EBITDA ratio exceeded 30% during the tax period. With the updated classification, businesses can now apply these limitations more flexibly, maximizing the benefits of deductible interest expenses and reducing tax burdens while improving cash flow.

Moreover, the provision allowing the carryforward of previously non-deductible interest expenses offers businesses a smoother transition. Many enterprises struggled with interest expense deductions under Decree 132 due to their classification as related parties. The revised framework in Decree 20 enables these businesses to carry forward such expenses, easing cash flow pressures and providing time to update accounting records and optimize tax reporting procedures.

From a practical perspective, businesses previously constrained by the old regulations faced increased tax liabilities and reduced net profits due to restrictions on deductible interest expenses. By removing certain entities from related-party classification, Decree 20 reduces the strict limitations on interest expense deductions, allowing businesses to fully utilize their interest costs, lower tax burdens, enhance financial liquidity, and maintain stable working capital.

In conclusion, the changes introduced in Decree 20 offer a new regulatory approach that grants businesses greater flexibility in deducting interest expenses and carrying forward previously non-deductible interest costs. At the same time, the decree provides tax authorities with a more objective framework for assessing related-party transactions.

Lawyer Cao Nguyen Bao Lien

HM&P Law Firm

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