Determining whether an enterprise has related party transactions (FDIs) is the first and most important step for an enterprise to fully comply with the provisions of the Decree 132/2020/ND-CP, avoiding transfer pricing risks and increasingly tightened tax sanctions. In the context of tax authorities continuously strengthening inspections and checks, understanding the nature of related-party relationships, related-party transactions and the accompanying legal criteria not only helps businesses prevent the risk of being taxed, collected, and fined, but also strengthens financial transparency and management reputation. This article serves as a detailed guide, helping you delve into the nature of related-party transactions, thoroughly explaining the criteria and how to identify businesses with related-party transactions according to 4 core relationship groups. All analysis is based on Decree 132/2020/ND-CP, the fundamental legal document regulating this field. To better understand this legal foundation, you can refer to Related transactions Decree 132.
Affiliate Concept
Clause 2, Article 5 of Decree 132/2020/ND-CP Affiliated parties (or affiliate relationships) are defined as enterprises that have a direct or indirect relationship in terms of capital ownership, control, operation or management, leading to the possibility that one party can influence the other party's decisions in business transactions.
Determining whether an enterprise has related-party transactions must begin with identifying the related-party relationship.
Concept of Affiliate Transactions
Related transactions (GDLK) are transactions arising in business, purchase, sale, supply and exchange relationships between related parties.
- Scope of GDLK: Very broad, including buying and selling goods, providing services, leasing assets, lending capital (deposits or loans), transferring intangible assets (copyrights, trademarks), cost sharing agreements, etc.
- Management objective: Tax authorities manage related transactions to ensure that these transactions are carried out in accordance with the Arm's Length Principle, i.e. the transaction value must be equivalent to the transaction value carried out between unrelated parties under similar market conditions.
Common forms of related party transactions include: selling goods at low prices, buying goods at high prices, paying higher interest than the market, paying royalties or management services without basis, etc. All are aimed at transferring profits from high tax areas to low tax areas. To know specifically each form, how it works and whether it violates the Law or not?
See details: Common forms of Transfer Pricing
Detailed instructions on determining businesses with related transactions
Decree 132/2020/ND-CP clearly stipulates 10 specific cases to determine whether an enterprise has related-party transactions. For ease of application, we can classify these 10 cases into 4 core relationship groups.
Group 1: Capital Ownership Relations
To determine whether an enterprise is in the case of related-party transactions according to Decree 132/2020/ND-CP or not, the ownership and management rights are the most important factors. These relationships are often identified through the direct or indirect capital contribution ratio or the fact that one party has the right to control the management activities of the other party. The table below summarizes the most common cases to help enterprises accurately identify related-party relationships according to regulations.
| Case | Describe | For example |
| Direct ownership | One enterprise directly holds 25% of the other enterprise's capital contribution. | Company A owns 30% of charter capital of Company B, leading to A and B being Affiliated Parties. |
| Indirect ownership through third parties | Both enterprises have 25% of contributed capital directly held by the same third party. | Company C owns 40% of capital of Company X and 35% of capital of Company Y. This leads to X and Y being Associated Parties. |
| Executive and personnel relations | A third party holds 25% of capital contribution of an enterprise and is the largest shareholder or has the right to decide on the management of the remaining enterprise. | A owns 50% B; B owns 60% C. A indirectly owns 30% C, leading to A and C being Associated Parties. |
From the above criteria, businesses can quickly compare to identify whether they are in a case of related-party transactions or not. Understanding and determining correctly from the beginning helps businesses comply with tax management regulations, avoiding the risk of being taxed or fined in future inspections and audits.
Group 2: Relationships on management control and borrowing
To clearly illustrate how to identify enterprises with related-party transactions according to Decree 132/2020/ND-CP, especially in the group of management control and borrowing relationships. The table below helps enterprises have an intuitive view of legal conditions and practical analysis, from which enterprises can easily review and apply to tax risk management.
| Case | Describe | Analysis and examples |
| Key Executive Relationships | Two enterprises are under the management or control of key personnel by the same individual or organization, where: Occupy over 50% of the total number of Board of Directors members or hold key management positions with the highest decision-making power. | For example: Individual A is concurrently the General Director of Company X and Chairman of the Board of Directors of Company Y. If these positions create control or majority in the leadership, X and Y are considered related parties. Meaning: Personnel control is one of the most important ways to identify a business with related-party transactions, as it exerts direct influence over financial policies, strategies and business decisions between the two parties. |
| Loan or capital guarantee relationship | An enterprise guarantees or lends to another enterprise when it simultaneously satisfies two conditions: Loan or guarantee from 25% equity capital of the capital recipient; The loan or guarantee accounts for over 50% of the total medium and long-term debt of the capital recipient. | Note: If the loan comes from an independent credit institution (bank), it does not create a affiliated relationship, unless the loan is guaranteed by an affiliated third party. Meaning: This is a form of association through financial dependence, allowing the lender or guarantor the ability to influence the activities of the recipient. |
Thus, through the above table, enterprises can easily identify the most important cases of related-party relationships in terms of personnel control and borrowing, thereby applying the method of determining enterprises with related-party transactions accurately and completely. Understanding these criteria not only helps enterprises comply with Decree 132/2020/ND-CP but also minimizes the risk of tax assessment, tax collection and administrative sanctions, while strengthening the transparency and effectiveness of financial management.
Group 3: Economic dependence and intangible assets
To better understand how to identify related-party transactions arising from economic dependence and intangible assets, businesses can refer to 3 typical cases according to Decree 132/2020/ND-CP. The table below summarizes the identification criteria, detailed descriptions and illustrative examples to help businesses easily apply them in practice.
| Case | Criteria | Describe | For example |
| Depends on raw material source or output | Enterprises supplying more than 50% of input materials or more than 50% of output products to other enterprises. | Transaction value is calculated based on the largest transaction value in the fiscal year. | Company Z is the exclusive supplier of materials to Company Q, with sales accounting for 60% of Q's total raw material costs. Z and Q are Associated Parties. |
| Use of Intangible Assets | Two businesses jointly use intangible assets and have a third party involved in control or decision-making. | Intangible assets include brands, technology, know-how; control from third parties is key to determining GDLK. | Two businesses jointly use technology controlled by an affiliated third party; the use of the technology is coordinated by the affiliated third party. |
| Depends on Service Cost | Enterprises receive over 50% service costs from affiliated service providers. | Applicable to IT, accounting, management services… | Company A (Vietnam) receives IT, accounting, and management services from Company B (foreign), the cost accounts for 55% of A's total service cost. A and B are related parties. |
Thus, the above 3 cases show that the way to determine whether an enterprise has related-party transactions is not only based on direct ownership or control, but also includes dependent relationships in terms of raw material sources, service costs and the use of intangible assets. Mastering these criteria helps enterprises ensure full declaration, compliance with Decree 132/2020/ND-CP and prevent tax risks related to related-party transactions.
Group 4: Other relationships
In addition to ownership, control and economic dependence relationships, Decree 132/2020/ND-CP also expands the scope of identifying related-party transactions through relationships of a substantial nature. This case allows tax authorities to consider specific relationships or agreements, although they do not meet specific capital ratios or conditions, but have a real impact on production - business activities and transaction valuation, in order to effectively combat transfer pricing.
Case of Essential Relationship
Other cases as prescribed by law are determined by the tax authority based on the nature of control or actual impact on production and business activities, transaction pricing to prevent transfer pricing.
- Meaning: This is an open provision, allowing the tax authority to apply the principle of substance over form. For example, even if the capital contribution ratio does not reach 25%, but there is an exclusive agreement or a special financial support commitment that is dominant, it can still be considered an Associated Party.
Distinguishing between Affiliate Relationships and Affiliate Transactions
A common question is: “If there is an affiliated relationship but no affiliated transactions, do I have to declare it?”
The distinction between “Related Party” and “Related Transaction” is extremely important in determining whether an enterprise has related party transactions and tax reporting obligations.
| Criteria | Affiliated Party | Affiliate transactions |
| Nature | Legal relationship, ownership, control. | Economic transactions arise. |
| Identify | Based on the cases prescribed in Decree 132/2020/ND-CP. | Based on the actual transactions between the Affiliates. |
| Obligation | An obligation to prepare a Valuation Document may arise if the threshold is exceeded. | A declaration obligation certainly arises (except in cases of exemption). |
As the table above shows, although closely related, Related Parties and Related Transactions have different natures and scopes. Related Parties are legal and controlling relationships, while Related Transactions are actual economic transactions. Clearly distinguishing between these two concepts is the basis for enterprises to correctly determine their declaration obligations, prepare price determination records and fully comply with Decree 132/2020/ND-CP, thereby preventing tax risks and ensuring financial transparency.
Responsibility for declaration and calculation of related party transactions
Once it is determined that an enterprise has related party transactions and related party transactions have arisen, the enterprise must fulfill its tax declaration obligations as prescribed.
How to declare the Associated Transactions Appendix
Enterprises with related parties must declare and submit the annual Corporate Income Tax (CIT) finalization declaration.
Declaration form
Use Form No. 01/GDLK issued with Decree 132/2020/ND-CP, including 4 main parts:
- Part I: General information.
- Part II: Determine the relationship (declare the form of relationship according to the cases analyzed above).
- Part III: Declaration of related party information and business results.
- Part IV: Choosing a method to determine the price of a transaction.
How to calculate related party transactions (Price adjustment)
“The method of calculating Related Transactions” is essentially the re-determination of the price of related transactions according to the Independent Transaction Principle. This is the core of anti-transfer pricing.
Decree 132/2020/ND-CP stipulates common price determination methods:
- Comparable Uncontrolled Price (CUP) method.
- Resale Price Method (RPM).
- Cost Plus Method (CPM).
- Transactional Net Margin Method (TNMM).
- Profit Split Method (PSM).
Uncontrolled Transaction Threshold: Enterprises must demonstrate that their related transactions are within the standard price range or profit margin of comparable independent transactions. If not, the tax authority may make an upward adjustment to the taxable income.
Responsibility for preparing the GDLK price determination dossier
In addition to the declaration, the enterprise is also responsible for preparing the TP dossier to demonstrate how to determine the enterprise has related party transactions and the valuation of related party transactions is reasonable. TP dossier includes:
- Local File: Details of the business, transactions that have occurred, functional analysis and comparison.
- Master File: Overview of the multinational corporation.
- Country-by-Country Reporting (CbCR): For large corporations with consolidated revenue from VND 18,000 billion.
Cases of exemption from declaration and preparation of valuation dossier
Decree 132 provides specific conditions for businesses to be exempted from preparing Price Determination Documents, helping to reduce the compliance burden for small and medium-sized enterprises or those with low transfer pricing risks.
Enterprises are exempted from preparing a Profile if they meet one of the following conditions:
Conditions on Transaction Size and Value:
- Total revenue generated during the tax period is less than 50 billion VND;
- Total value of all related transactions arising in the tax period is under 30 billion VND.
Conditions for the Effectiveness of the Advance Pricing Agreement (APA):
- The Enterprise has signed an Advance Pricing Agreement (APA) and continues to comply with this Agreement.
Low Transfer Pricing Risk Conditions (Simple Transfer Pricing):
- Enterprises only have transactions with related parties that are subject to corporate income tax in Vietnam;
- Apply the same corporate income tax rate as the related party (i.e. there is no difference in tax rates);
- Both parties involved are not entitled to corporate income tax incentives during the tax period (except for administrative procedure incentives);
- Total revenue generated during the tax period is less than 200 billion VND;
- Apply the net profit margin before interest and corporate income tax on net revenue, after deducting interest expenses and non-deductible expenses as prescribed for distribution from 5% or more, for production from 10% or more and for processing from 15% or more.
Even if exempted from preparing a Profile, the enterprise must still:
- Fully declare information about GDLK in Form 01 (GDLK Appendix attached to Corporate Income Tax Finalization).
- Compliance with the arm's length principle is required (prices must be within market price range).
- Pay special attention to the interest expense limit.
Serious legal consequences when it is not possible to determine whether there is an affiliated transaction
Failure to correctly identify enterprises with related-party transactions is not only an administrative procedural shortcoming, but also entails serious legal consequences in many aspects: from the risk of tax authorities re-determining taxable income, collecting tax and late payment interest, to administrative sanctions and negative impacts on reputation and corporate governance. These consequences can be analyzed in detail according to each specific aspect such as: Risk of tax determination, administrative sanctions, and impacts on reputation and corporate governance.
Tax Assessment Risk
If the tax authority discovers that an enterprise has identified itself as having related-party transactions but has not declared them or declared them incorrectly, the tax authority has the right to:
- Setting transaction prices: Adjusting transaction prices according to the principle of independent transactions, increasing the taxable income of the enterprise.
- Tax collection: Require businesses to pay the difference in corporate income tax, along with late payment interest (calculated from the due date of submitting the declaration)
Administrative sanctions
Pursuant to the Law on Tax Administration, enterprises may be penalized:
- Penalty for under-declaration: Fine for under-declaration resulting in under-payment of tax.
- Penalty for failure to declare: Fine for failure to declare or incomplete declaration of trading information.
- Penalty for failure to prepare or provide Valuation Documents: The penalty can be very large if the enterprise fails to provide complete Documents as required when the tax authority inspects.
Impact on reputation and governance
Being taxed and penalized not only causes financial damage but also seriously affects the reputation of the business, especially when the business is looking for investment, M&A, or working with international partners.
GDLK tax risk management is an integral part of modern corporate governance. To ensure accuracy and compliance, businesses should consult Auditing Services professional.
Proactive review and compliance
Determining whether a business has related-party transactions is not only a tax declaration procedure but also an important financial risk management strategy. Decree 132/2020/ND-CP has provided a clear and detailed legal framework with 10 specific cases for businesses to self-review.
To determine if a business has related party transactions, the following steps must be taken:
- Periodic review: Annually, create a diagram of ownership and control relationships to identify enterprises with related transactions according to 4 relationship groups (capital, control, finance, economy).
- GDLK Assessment: Check if there are any transactions between related parties.
- Prepare the valuation dossier: Compare with the exemption thresholds, proactively prepare the dossier according to the independent transaction principle, use the calculation of related-party transactions based on international standard methods.
GDLK compliance not only protects businesses from tax audit risks but also helps optimize financial and tax structures in a legal and sustainable manner.
If you need to learn more about how to declare an Associated Transaction Appendix or analyze in detail the complex form of related-party relationships in your group. Please contact MAN – Master Accountant Network for advice and support.
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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.
Editor MAN – Master Accountant Network