Regulations on affiliate transactions Transfer pricing is currently a focal point of attention for the business community as tax authorities increasingly tighten control over it. Understanding and complying with regulations on related-party transactions not only helps businesses avoid the risk of tax arrears and penalties, but also contributes to ensuring financial transparency, compliance with Decree 132/2020/ND-CP and OECD standards. This article will help you understand the legal framework, declaration obligations, preparation of documentation for price determination, and important new points in 2026 so that businesses can proactively prevent risks and optimize their legal tax obligations.
What are the regulations on related party transactions?
Regulations on related-party transactions are a system of legal rules issued by the Government and the Ministry of Finance, aiming to manage and control transactions between related parties, i.e. enterprises that have ownership, management or financial, capital and human resource dependence relationships.
According to Decree 132/2020/ND-CPThese regulations help ensure that transaction prices between related parties correctly reflect market prices (independence principle), preventing transfer pricing to evade taxes or reduce taxable income in Vietnam.
Simply put, regulations on related party transactions are a legal framework that requires businesses with related party relationships to:
- Fully declare information on related transactions
- Prepare transfer pricing documents (Master file, Local file, CbCR)
- Comply with market price principles
Regulations on related-party transactions are tools to help tax authorities detect and prevent transfer pricing and help businesses properly fulfill their tax obligations and avoid legal risks in the context of international integration.
Core legal basis for the regulation of related party transactions
Compliance with regulations on related party transactions in Vietnam is mainly regulated by the following legal documents:
Decree 132/2020/ND-CP regulating related-party transactions
Decree No. 132/2020/ND-CP of the Government, issued on November 5, 2020, is the most comprehensive and detailed legal document on tax management for enterprises with related-party transactions. This Decree replaces Decree 20/2017/ND-CP, overcomes limitations on controlling loan interest expenses and clarifies documents and methods for determining prices.
Understanding Decree 132/2020/ND-CP is mandatory for compliance with current regulations on related-party transactions.
Principle of independent trading
This is the fundamental and essential principle governing all regulations on related-party transactions, built on international practice. The core content of this principle is expressed through the following points:
- Accordingly, the price of related-party transactions must be determined through analysis and comparison with equivalent independent transactions (transactions between unrelated parties).
- Decree 132/2020/ND-CP affirms that the value of a related-party transaction is considered inconsistent with an independent transaction if it is established for the purpose of reducing the corporate income tax liability payable in Vietnam.
Objectives of Decree 132/2020/ND-CP regulating related-party transactions
Regulations on related party transactions Decree 132/2020/ND-CP built on the Arm's Length Principle and OECD's BEPS Action 13 guidance, with three main objectives:
- Prevent transfer pricing: Ensure transactions between related parties are properly valued at market value, reflecting their true economic nature.
- Increase financial transparency: Require businesses to clearly declare and establish documents proving related-party transactions according to international standards.
- Ensuring fairness in tax obligations: Helping tax authorities correctly determine taxable income in Vietnam, avoiding budget losses.
According to the General Department of Taxation, since Decree 132/2020/ND-CP regulating related-party transactions came into effect, many FDI enterprises have had to adjust and reduce unreasonable expenses and supplement documentation to determine transfer pricing.
Scope of application of related party transaction regulations
Before applying the regulations on related-party transactions, enterprises must determine whether they are within the scope of related-party relationships. According to Clause 2, Article 5 of Decree 132/2020/ND-CP, enterprises are determined to have related-party relationships when they fall into one of the following 10 specific cases:
- An enterprise directly or indirectly holds at least 25% of equity capital of the other enterprise.
- Both businesses have at least 25% of 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 equity of the other enterprise.
- An enterprise guarantees or lends capital to another enterprise on the condition that the loan accounts for at least 25% of equity and accounts for more than 50% of total value of long-term debts.
- A business whose business and financial decisions are controlled by another business.
- One or more individuals playing a key role in management and operation (such as Director, General Director, member of the Board of Directors) of two enterprises are family relatives (wife, husband, father, mother, children, brothers, sisters).
- Two businesses are under the direction or control of one individual through voting rights or contracts.
- Two businesses have a relationship with each other through business cooperation.
- One enterprise transfers technology, trademarks, brands, etc. to another enterprise.
- Other businesses that are controlled, operated in terms of business, finance, personnel, or that employ key personnel.
After identifying the related parties and transactions subject to Decree 132/2020/ND-CP, the next step and also the most important compliance requirement is to prepare and maintain Related Party Transaction Records to demonstrate the application of the arm's length principle.
Transfer pricing determination dossier
The preparation and maintenance of Affiliate Transaction Records is the most important element in demonstrating compliance with the regulations on affiliate transactions and the independence principle.
The 3-level Profile structure is based on the OECD recommendation on BEPS Action 13:
- Local File: Focuses on the specific related party transactions of the reporting entity in Vietnam, including functional, asset, risk analysis (FAR analysis) and price comparison. This is a mandatory document for most businesses.
- Master File: Provides a comprehensive picture of the group's global operations, transfer pricing strategy and value chain. This profile applies to multinational corporations.
- Country-by-Country Report (CbCR): Applicable to corporations with total global consolidated revenue of VND 18,000 billion or more. Provides aggregate information on income distribution, taxes paid and business activities by country.
To ensure full compliance with regulations on related-party transactions, enterprises need to pay special attention to strict regulations on deadlines for submitting and storing records as required by tax authorities.
Submission and storage time
Regulations on related-party transactions require businesses to strictly comply with two important timelines to avoid being fined by tax authorities for violations.
- Deadline for Submission of Declaration (Form 01): The Related Party Transaction Declaration (Form 01 according to Decree 132/2020/ND-CP) must be submitted at the same time as the Corporate Income Tax Finalization Declaration.
- Time limit for storing and presenting documents: Complete documents (Local File, Master File) must be prepared and stored at the enterprise before submitting the Corporate Income Tax Finalization Declaration. Enterprises must present documents to the tax authority within 15 working days from the date of receiving the request (or 30 days in special cases).
After mastering the requirements for declaration, preparation and storage of records, the next professional focus of the enterprise is to accurately apply economic methods according to Decree 132/2020/ND-CP to determine the price of related-party transactions according to the independence principle.
Methods of determining transfer pricing
Choosing the right method is key to complying with regulations on related party transactions. According to Decree 132/2020/ND-CP regulating related party transactions, the 5 specific methods for determining the price of related party transactions are as follows:
- Comparable Uncontrolled Price (CUP) method: Compares the selling price of a product or service in an associated transaction with the selling price of an equivalent independent transaction. This is the preferred method if highly reliable comparable data can be found.
- Resale Price Method (RPM): Based on the resale price of the product to an independent party, then subtract the reasonable gross margin of the related party to determine the initial purchase price.
- Cost Plus Method (CPM): Based on the cost of production or service provision, then add a reasonable gross profit margin (Gross Markup) to determine the selling price to the related party.
- Transactional Net Margin Method (TNMM): This is the most common method in practice when applying regulations on related party transactions. It compares the net profit margin of the related party (e.g., Net profit on sales) with the net profit margin of independent parties performing similar functions.
- Profit Split Method (PSM): Applied when the transaction is too complex, involves unique intangible assets, requiring both parties to contribute significant value. The resulting profits are divided based on the relative contribution of each party.
While the correct application of economic methods is fundamental, transfer pricing regulations provide exemptions to reduce the compliance burden for some businesses, while also warning of serious risks such as interest expense manipulation.
Exemptions from preparing Transfer Pricing Documents
Enterprises are exempted from preparing Transfer Pricing Documents if they meet one of the following criteria:
- Total revenue generated is under VND 50 billion and total value of all related transactions generated during the period is under VND 30 billion.
- Enterprises have signed an Advance Pricing Agreement (APA)
- Enterprises only carry out simple related transactions,No revenue or expenses from exploitation and use of intangible assets, with revenue under VND 200 billion.
However, even if exempted from the obligation to prepare a Transfer Pricing Document, enterprises still have to face another strict regulation in the regulations on related transactions related to financial structure, which is controlling interest expenses.
Control interest expense 30% EBITDA
A key point of the regulation on related-party transactions under Decree 132/2020/ND-CP is the control of deductible interest expenses when calculating corporate income tax. Total net interest expenses (after deducting deposit interest and loan interest) exceeding 30% of EBITDA (Earnings before tax, interest, depreciation and amortization) will be excluded from deductible expenses. This is one of the biggest barriers that businesses with related-party relationships have to face.
See details: Control interest costs
Common mistakes when businesses do not comply with regulations on related transactions
In practice, many businesses still encounter common errors when declaring and preparing related-party transaction records, leading to the risk of being subject to tax arrears or administrative penalties:
- Missing or failing to declare information on related party transactions: Many businesses omit transactions between related parties in their corporate income tax returns, making their records incomplete and causing suspicion from tax authorities.
- Failure to file or incomplete documentation: Lack of Local file, Master file or CbCR is one of the serious errors. Even if the file is filed, if the information is not detailed and there is no transparent comparison database, the enterprise can still be subject to transfer pricing adjustments.
- Using the wrong method to determine transfer pricing: Enterprises apply methods that are not suitable to the nature of the transaction or comparable data, leading to declared prices that are far from the market price principle (Arm's Length Principle), increasing the possibility of being subject to tax arrears.
Seemingly small errors in related party transaction records can expose businesses to significant tax risks. Therefore, understanding the penalty levels and collection mechanisms is an important step to help businesses proactively prevent and comply with the law.
How are businesses punished when they violate regulations on related transactions?
According to Decree 125/2020/ND-CP, the penalties for violations regarding the time of preparation and submission of related-party transaction dossiers are as follows.
“A fine from VND 8,000,000 to VND 15,000,000 shall be imposed for one of the following acts:
- Submitting tax declaration documents 61 to 90 days past the prescribed deadline;
- Submitting tax declaration documents 91 days or more after the prescribed deadline but no tax payable arises;
- Not submitting tax return but no tax payable;
- Failure to submit appendices as prescribed in tax management regulations for enterprises with related transactions attached to corporate income tax settlement dossiers.
A fine of between VND 15,000,000 and VND 25,000,000 shall be imposed for the act of submitting a dossier more than 90 days after the deadline for submitting a tax declaration dossier, with tax payable arising and the taxpayer having paid the full amount of tax and late payment to the state budget before the tax authority announces the decision to conduct a tax audit or inspection or before the tax authority makes a record of the act of late submission of a tax declaration dossier as prescribed.”
In addition, if an enterprise fails to submit a dossier of related-party transactions or intentionally fails to fulfill its obligation to declare within the time limit for preparing and submitting a dossier of related-party transactions, the penalty will be very severe. According to the law on tax administration, an enterprise may be fined based on the percentage of the under-declared tax, usually 20% of the under-declared tax due to the act of not declaring or making incorrect declarations leading to a lack of tax obligations. In addition, if the tax authority determines that there are signs of tax evasion, the penalty may be increased to 1-3 times the amount of tax evaded, along with additional collection and late payment fees.
Conclusion and recommendations
Compliance with regulations on related party transactions is not only a legal obligation but also a key factor in protecting businesses from tax and legal risks. In the context of tax authorities increasingly strengthening inspections and examinations of transfer prices, every small error in records or declarations can lead to tax arrears, late payment penalties and affect the reputation of businesses.
If your business needs support in reviewing, preparing documents or consulting on compliance with regulations on related-party transactions, please contact us immediately. MAN – Master Accountant Network for detailed, accurate and practical instructions.
Contact information
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Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
Editorial Board: MAN – Master Accountant Network