What is an affiliated transaction? Is borrowing money from a bank or from a director considered an affiliated transaction? Cases of affiliated transactions, forms of affiliated transactions.
I. What is related party transaction?
Related transactions are transactions in the production and business process between related parties that allow the parties to:
- Directly or indirectly participate in the management, control, and capital contribution to the company;
- Directly or indirectly jointly managed, controlled, contributed capital or invested in another party to achieve common benefits.
II. Purpose of determining related party transactions
Determining related party transactions is to identify and eliminate factors that reduce the corporate income tax liability, due to the influence of related party relationships, which are inconsistent with independent transactions and do not contribute to generating revenue and income for production and business activities.
Therefore, when related party transactions arise, taxpayers must be responsible for declaring information on related party relationships and related party transaction information according to Appendix I, Appendix II, Appendix III issued under Decree 132/2020/ND-CP when settling corporate income tax.
Tax authorities shall manage, inspect and examine transfer pricing based on the principle of independent transactions and the nature of the transaction. From there, they shall decide on the form of non-recognition of transfer pricing that reduces tax obligations, and shall adjust transfer pricing to correctly determine the enterprise’s obligations to the state budget.
III. Cases of related transactions, related transaction relationships
Related parties are parties whose relationships fall into one of the following categories:
- Case 1: One party directly or indirectly participates in the management, control, capital contribution or investment in the other party;
- Case 2: The parties are directly or indirectly under the management, control, capital contribution or investment of the other party.
The above information is specifically regulated in Clause 2, Article 5 of Decree 132/2020/ND-CP dated November 5, 2020 as follows:
- One enterprise directly or indirectly holds at least 25% of the equity of the other enterprise;
- Both enterprises have at least 25% of the owner’s equity held directly or indirectly by a third party;
- One enterprise is the largest shareholder in terms of equity and directly or indirectly holds at least 10% of the total shares of the other enterprise;
- An enterprise guarantees or lends to another enterprise in any form (including loans from third parties secured by the financial resources of the related party and financial transactions of a similar nature) but must satisfy both of the following conditions:
- The loan amount is at least equal to 25% of the equity capital of the borrowing enterprise;
- The loan capital accounts for 50% of the total value of medium and long-term debts of the borrowing enterprise.
- A business appoints a member of the board of directors to manage or control another business under one of the following two conditions:
- The number of members appointed by the first enterprise accounts for more than 50% of the total number of members of the executive board or controlling authority of the second enterprise;
- A member appointed by the first enterprise has the right to decide on the financial policies or business operations of the second enterprise.
- Two enterprises have more than 50% of the same board of directors or have one board member with the right to decide on financial policies or business operations appointed by a third party;
- Two businesses are operated or controlled in terms of personnel, finance and business operations by individuals in one of the following relationships:
- Couple;
- Biological parents, adoptive parents, stepfather, stepmother, parents-in-law, parents-in-law;
- Biological children, adopted children, stepchildren of wife or husband, daughter-in-law, son-in-law;
- Siblings, half-siblings, half-siblings;
- Brother-in-law, brother-in-law, sister-in-law, sister-in-law of the same parent or half-parent, same mother but different father;
- Grandparents, grandchildren;
- Aunt, uncle, paternal uncle and niece.
- Two business establishments have a head office and permanent establishment relationship or are both permanent establishments of a foreign organization or individual;
- Enterprises controlled by an individual through the individual’s capital contribution to that enterprise or direct participation in the operation of the enterprise;
- Other cases in which an enterprise is subject to the actual management, control and decision-making of the production and business activities of the other enterprise;
- Enterprises have transactions to transfer or receive transfers of at least 25% of the capital contribution of the enterprise owner during the tax period, or borrow or lend at least 10% of the capital contribution of the owner at the time of the transaction during the tax period with individuals operating or controlling the enterprise or with individuals in one of the relationships specified in Point g of this Clause.
IV. Forms of related transactions
Related transactions are transactions arising in the production and business process, including:
- Purchase, sale, exchange, rent, lease, borrow, lend, transfer, assign goods and provide services;
- Borrowing, lending, financial services, financial guarantees and other financial instruments;
- Buy, sell, exchange, rent, lease, borrow, lend, transfer, assign tangible assets, intangible assets;
- Agreement to buy, sell, and use common resources such as assets, capital, labor, and share costs between related parties.
Note:
Excluding business transactions for goods and services subject to state price adjustment, implemented in accordance with the provisions of law on prices.
V. Is a bank loan an affiliated transaction?
1. Regulations on bank loan linkage transactions
At Point d Clause 2 Article 5 Decree 132, related-party transactions are stipulated: An enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties guaranteed from the financial resources of the related party and financial transactions of similar nature) with the condition that the loan amount is at least equal to 25% of the capital contribution of the owner of the borrowing enterprise and accounts for 50% of the total value of medium- and long-term debts of the borrowing enterprise, it is considered an related-party transaction.
In there:
- Owner’s equity is determined based on the owner’s equity figures at the time of loan origination;
- Medium and long-term debts are determined as follows:
- Medium-term debt: Debts at the time of closing the accounting books, which is the time of preparing the enterprise’s financial statements, have a remaining payment term of over 1 year to 5 years;
- Long-term debt: Debts at the time of closing the accounting books, which is the time of preparing the enterprise’s financial statements, have a remaining payment period of more than 5 years.
➥ Thus, if during the year the company borrows from the bank and meets both of the following conditions, the transaction between the company and the bank is an affiliated transaction, specifically:
- Loan amount exceeding 25% of the company’s owner’s equity;
- The loan amount accounts for over 50% of the company’s total medium and long-term debt.
Note: If only one of the two above conditions is met, it is not an affiliated transaction.
Related Posts:
>> Regulations on interest expenses for enterprises with related transactions;
>> Notes when preparing corporate financial reports.
2. Example of related party transaction in case of bank loan
Example 1:
Company A has equity of 10 billion VND and has not changed during the year:
- On May 1, 2023, the company borrowed capital from bank K with the disbursed loan amount of 3 billion VND, payment term of 24 months;
- As of the financial statement date of December 31, 2023, the company’s total medium and long-term debt is 5 billion VND.
At that time, the total loan of the company with bank K was 3 billion (this amount was greater than 25% of equity and greater than 50% of medium and long-term debt). Therefore, bank K and company A had related transactions.
Example 2:
Company A has equity of 10 billion VND and has not changed during the year:
- On May 1, 2023, company A borrowed capital from bank K with the disbursed loan amount of 1 billion VND;
- On October 1, 2023, company A borrowed capital from bank Y with the disbursed loan amount of 2 billion VND;
- As of the financial statement date of December 31, 2023, the company’s total medium and long-term debt is 5 billion VND.
At that time, the company’s total loan was 3 billion (this amount was greater than 25% of equity and greater than 50% of medium and long-term debt), but considering each bank, no bank was eligible for a loan greater than 25% of equity. Therefore, company A had no related transactions with both bank K and bank Y.
VI. Is borrowing money from the director an affiliated transaction?
At Point l Clause 2 Article 5 of Decree 132 on related party transactions, it is stipulated that enterprises in one of the following two cases are considered to have related party transactions:
- Enterprises have transactions to transfer or receive transfers of at least 25% of the capital contribution of the enterprise owner during the tax period;
- Enterprises borrow or lend at least 10% of the owner’s capital contribution at the time of the transaction in the tax period to individuals operating or controlling the enterprise or to individuals in one of the relationships prescribed in Point g of this Clause.
➥ Thus, during the year, if an enterprise borrows capital from an individual who operates or controls the enterprise (such as the director, company owner or an individual with an affiliated relationship as prescribed) of at least 10% of the owner’s capital contribution at the time of the transaction, it is considered an affiliated transaction.
For example:
Company B has equity of 10 billion VND. During the year, because the company invested in office renovation, on October 20, 2023, the company borrowed from director T an amount of 2 billion VND with an interest rate of 5%.
In this case, the director operates and controls the enterprise and the director’s loan amount is more than 10% of the equity, so the transaction between company B and director T is an affiliated transaction.
VII. Questions related to regulations on related transactions
1. If a company borrows real estate under the director’s name as collateral for a bank loan or to supplement working capital, is this considered an affiliated transaction?
Pursuant to the provisions of Decree 132/2020/ND-CP dated November 5, 2020, if a company borrows capital from a bank with a loan amount equal to at least 25% of the owner’s equity and accounting for 50% of the total value of the company’s medium and long-term debts, then the transaction between the company and the bank is considered an affiliated transaction.
A company borrowing real estate in the name of the director as collateral is not an affiliated transaction.
2. If a business borrows money from its director, interest-free and repays it within the year, is this considered an affiliated transaction?
Pursuant to the provisions on related party transactions under Decree 132/2020/ND-CP dated November 5, 2020, in the event that a company borrows money from the company director with an amount greater than 10% of equity, without interest, it is considered a related party transaction.
2. What should businesses with related party transactions do? What are the risks if they do not declare related party transactions?
In the year of related party transactions, when finalizing corporate income tax, enterprises need to declare information on related party relationships and related party transactions according to Appendix I, Appendix II, Appendix III issued under Decree 132/2020/ND-CP.
According to Decree 125/2020/ND-CP, if an enterprise has related-party transactions but fails to declare information on related-party relationships and related-party transactions, it will be fined from VND 8,000,000 to VND 15,000,000.
>> See more: Instructions for declaring related transactions arising from borrowing.