Conditions for occurrence affiliate transactions This is a key factor in helping businesses correctly identify the nature of related-party relationships and comply with tax regulations. Decree 132/2020/ND-CPIn practice, a business can be considered to have related-party transactions simply by satisfying one of the 14 conditions regarding ownership, control, management, or financial-business relationships. Understanding and correctly assessing the conditions for related-party transactions not only helps reduce the risk of tax arrears and tax assessments, but also ensures transparency in tax administration. This article will analyze in detail the 14 conditions for related-party transactions to help you proactively review and comply with legal regulations.
14 conditions for the occurrence of related-party transactions according to Decree 132/2020/ND-CP
According to Clause 2, Article 5 of Decree 132/2020/ND-CP, related-party transactions are defined when the participating parties have an affiliated relationship. Based on these relationships, there are a total of 14 conditions for the occurrence of related-party transactions that businesses need to review:
Capital linkage conditions (ownership and control)
This group focuses on the level of direct or indirect equity ownership between the parties, which is the most common form of association:
- A business directly or indirectly holds at least 25% of the capital contribution of another business.
- Both businesses are controlled by a third party (this party directly or indirectly holds at least 25% of the capital contribution of each business).
- Businesses that directly or indirectly hold at least 50% of debt owed by other businesses, while also guaranteeing loans for those businesses, constitute a new and important condition for related-party transactions, related to financial control.
- The company has an agreement allowing affiliated parties to use intangible assets (copyrights, trademarks, technology), and the cost of using these assets accounts for more than 50% of the total production and business costs (before deducting interest expenses and profit).
More importantly than capital, the conditions for related-party transactions extend to the scope of power control and management, as clearly demonstrated in the following set of conditions.
Group of conditions related to management and operation
Affiliate relationship It's not just about capital; it extends to managerial power and personal connections.
- Two businesses must have at least half of their senior management or executive directors appointed or controlled by one party. The power to make policy and strategic decisions is considered a clear condition for the emergence of related-party transactions.
- Two businesses must have at least half of their senior management or executive directors as members of the same family (the definition of family is specified).
- A business is under the de facto control of an individual through that person's management and control of decisions regarding the company's core financial or operational matters. Although not directly owning the capital, this control is still considered a condition for the existence of related-party transactions.
- Both businesses are under the de facto control of a single individual, who manages and controls the decisions regarding the financial or core business operations of both companies.
Besides capital and operational control, the conditions for related-party transactions are also clearly demonstrated through financial and business dependence, even without a direct ownership relationship.
Other financial and business related conditions
These cases are more complex, focusing on the financial and business interdependence between the parties, even in the absence of direct equity ownership:
- A business receiving loans from an affiliated party must have at least 10% of its equity capital, and these loans must be for a minimum of 12 months within the tax year.
- Businesses that supply or purchase goods, services, fixed assets, etc., from related parties where the transaction value accounts for 50% or more of the total revenue or total production and business costs of the seller or buyer.
- The business guarantees or permits an affiliated party to use intangible assets (trademarks, technology, trade secrets), and the cost of using these assets accounts for more than 50% of the total cost of the user.
- Two businesses engage in transactions involving the purchase, sale, exchange, lease, rental, or borrowing of fixed assets with a value exceeding 10% of the total asset value of the receiving party.
- Businesses are subject to control over their production and business operations through contractual agreements, trademarks, or franchise agreements.
- Businesses receive control over operations, finance, and production through organizations and investment funds held by the government and international organizations.
Although identifying all 14 conditions for the occurrence of related-party transactions may seem complex, not every business with related-party transactions is required to file detailed records. Below are some special cases where the tax authorities allow exemption from filing, helping to reduce the compliance burden.
When are related-party transactions exempt from declaration?
Identifying the conditions under which related-party transactions occur does not mean that businesses are required to prepare a complete transfer pricing documentation. Decree 132/2020/ND-CP stipulates cases where declaration is exempted, helping to reduce the compliance burden for small and medium-sized enterprises:
Conditions for exemption from declaring related-party transactions.
Businesses may be exempt from preparing transfer pricing documentation and from declaring information in Forms 01, 02, and 03 if they simultaneously meet the following conditions:
- Both are subject to the same corporate income tax rate (CIT) 20%, and neither enjoys any tax incentives.
- Businesses with annual revenue under 50 billion VND and total related-party transactions during the period under 30 billion VND per year.
- Businesses that have signed advance pricing agreements (APAs) according to Circular 201/2013/TT-BTC.
- Businesses with simple functions (such as manufacturing to order) do not face inventory risks, do not incur any costs such as marketing, market research, etc., and have annual revenue under 200 billion VND.
Being exempt from declaration does not change the nature of the related-party relationship, but it helps businesses focus their resources more effectively.
Mandatory rule: Fill in basic information on Form 01
Although exempt from submitting detailed documentation, businesses must still submit Form 01 and complete sections I, II, III, and IV, as stipulated in Decree 132/2020/ND-CP and its guiding circular.
The nature of mandatory declaration:
- Exemption from documentation: This means being exempt from preparing documents proving the independence of the transaction price (functional analysis, comparison, etc.).
- Mandatory declaration: This involves declaring basic information for the tax authorities to understand, such as: Who the related party is, what the related party relationship is (what conditions give rise to related party transactions), and the total value of the transactions.
Items to be declared in Form 01:
- Section I (General Information): Name and tax identification number of the declaring business.
- Section II (Information on Related Parties): Declare the name, tax identification number, and country of residence of the related parties with whom the transaction takes place.
- Section III (Basis for determining related party relationships): Declare the grounds, that is, clearly indicate which of the 14 conditions under which a related party transaction arises.
- Section IV (Information on related-party transactions): Declare the total value of related-party transaction groups (buying and selling goods, services, borrowing, lending, etc.).
Obligations to declare and documentation of related-party transactions.
After determining the conditions under which related-party transactions occur, businesses must fulfill their declaration obligations as required by law.
Standard procedures for declaring related-party transactions in 2025.
The process of disclosing related-party transactions is not simply about filling out forms, but a series of legally compliant actions aimed at demonstrating the reasonableness of the transfer pricing under the Independent Transaction Principle. This process comprises two core tasks:
Fill out the required forms.
These forms are submitted along with the Corporate Income Tax Return and serve as the basis for the tax authorities to screen for risks:
- Form 01: Declaration of Information on Related-Party Transactions - Mandatory for all businesses with related-party transactions (except for cases exempted from declaration in Section III). This form summarizes information about the related-party relationship and the total transaction value, helping tax authorities quickly identify the conditions under which a business has related-party transactions.
- Form 02: Information on Groups and Corporations, intended for declaring information on the organizational structure, business model, and global value chain of the group of companies, applicable to businesses with large international transactions.
- Form 03: Country-by-Country Profit Report. This form is applicable to ultimate parent companies in Vietnam with consolidated global revenue of VND 18,000 billion or more, or subsidiaries in Vietnam with foreign parent companies subject to the CbCR (Country-by-Country Profit Report) requirement. This is an important tool for the automatic exchange of tax information between countries.
Note: The deadline for submitting these forms is no later than 90 days after the end of the fiscal year.
Prepare a Transfer Pricing Documentation File.
This is the most important component, requiring high expertise to demonstrate the reasonableness of the transaction price. This document does not need to be submitted with the tax return, but must be completed before submitting the Corporate Income Tax Final Settlement Return and be ready to be provided to the tax authorities within 15 working days of request.
The documentation structure adheres to BEPS standards, comprising three levels and applied depending on the size and international nature of the business:
- Local File: Provides detailed analysis of related-party transactions in Vietnam, including functional analysis, risks, assets, and independent comparisons (competitor companies).
- Master File: An overall description of the Group's business operations, value chain, and global transfer pricing policy.
- Country-by-Country Report (CbCR): Provides an overview of the Group's global distribution of revenue, profits, taxes, and economic activities.
The Arm's Length Principle
The core principle of transfer pricing is the “Arm’s Length Principle.” This principle stipulates that the price of related-party transactions must be determined as if the participating parties were completely independent entities.
To demonstrate that transfer pricing is reasonable, businesses need to prepare a Transfer Pricing Documentation based on five main methods:
- Method 1: Comparable Uncontrolled Price (CUP).
- Method 2: Resale Price Method (RPM).
- Method 3: Cost Plus Method (CPM).
- Method 4: Profit Split Method (PSM).
- Method 5: Transactional Net Margin Method (TNMM).
Therefore, mastering all 14 conditions for the occurrence of related-party transactions and strictly adhering to the declaration process is a mandatory requirement, creating a solid foundation for businesses to proactively protect their legitimate interests and optimize tax costs in an increasingly complex business environment.
Conclusion and recommendations
Understanding the 14 conditions for the occurrence of related-party transactions as stipulated in Decree 132/2020/ND-CP is a key principle that helps businesses avoid unnecessary legal and financial risks.
In reality, tax authorities are increasingly tightening their inspections of transfer pricing. If businesses do not correctly identify the nature of transfer pricing and fail to prepare complete declarations, they risk having their profits adjusted and taxes assessed unfairly. Given this tight control and complex compliance requirement, businesses should immediately take the following steps to strengthen their legal position:
- Regular review: Quarterly or annually, businesses need to review all related-party transactions to ensure that no relationships are overlooked.
- Establish pricing policy: As soon as linked transactions are detected, establish an internal pricing policy based on the Independent Transactions Principle.
- For complex or international transactions, seek professional advice to ensure that transfer pricing documentation is fully prepared and robust.
Understanding the conditions under which related-party transactions occur is not only about compliance, but also about protecting the legitimate interests of the business.
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