Corporate income tax with related parties is becoming one of the common reasons why many small and medium-sized enterprises (SMEs) are subject to tax arrears during recent audits. Many businesses with revenue under 50 billion VND are eligible for preferential tax rates (Article 17%) but overlook the factor of related-party relationships with the parent company, partners, or individual managers. As a result, when tax authorities review these businesses according to regulations... Decree 132/2020/ND-CP, Businesses may face adjustments to the 20% tax rate, tax arrears, and significant penalties. This article will comprehensively analyze the regulations on corporate income tax for related parties, how to identify risks, and practical solutions to help businesses correctly declare and optimize their tax obligations in 2026.
An overview of corporate income tax incentives for SMEs in 2026.
To understand why many small and medium-sized enterprises (SMEs) lose tax incentives when they engage in related-party transactions, it's necessary to first examine the overall picture of corporate income tax incentives for SMEs in 2026. Current regulations not only determine tax rates based on revenue but also impose numerous conditions related to business structure and related-party transactions. Understanding the legal basis, applicable tax rates, and the significance of these incentives will help businesses correctly determine their tax obligations from the outset, avoiding the risk of tax arrears during future audits.
Legal basis and latest tax rates
In 2026, corporate income tax regulations stabilized following a long-term tax reform roadmap. The government continues to maintain its stance of supporting SMEs, aiming to boost economic growth through preferential and attractive tax rates lower than the standard rate.
Specifically, based on current legal regulations:
- Tax rate 15%: Applicable to "micro" enterprises with total annual revenue not exceeding 3 billion VND.
- Tax rate 17%: Applicable to small businesses with total annual revenue from over 3 billion VND to no more than 50 billion VND.
- Tax rate 20%: Applies to large enterprises, projects exploiting rare and important resources, and most importantly, to SMEs with related parties that do not meet the preferential conditions.
The economic significance of preferential policies.
Reducing the tax rate from 3% to 5% is not simply about reducing the amount paid to the state budget. Applying a tax rate of 17% instead of 20% helps businesses save enough money to cover operating costs or reinvest in technology. However, this "gift" comes with strict control conditions to prevent abuse.
Debunking the "Affiliated Parties" Rule: A Blind Spot Causing Businesses to Lose Tax Incentives
Why does corporate income tax for related parties become a barrier to preferential treatment? To answer this question, businesses need to clearly understand the definition of related-party relationships.
Why are tax authorities interested in related parties?
In tax administration, transactions between related parties are often suspected of being "transfer pricing." Businesses may adjust purchase/sale prices between companies within the same system to shift profits from high-tax rate locations to low-tax rate locations. To prevent this, the law stipulates that: If a business has a parent-subsidiary relationship with another business, the parent-subsidiary company will be deprived of tax incentives to ensure fairness.
Cases for identifying affiliated parties according to Decree 132/2020/ND-CP
According to Article 5 of Decree 132/2020/ND-CP, related parties are those parties that have a relationship falling under one of the following cases:
- Direct or indirect ownership of capital. One party directly or indirectly holds at least 25% of the other party's equity capital.
- Both companies are subject to third-party ownership. Both businesses have at least 25% of equity capital held directly or indirectly by a third party.
- Largest shareholder. One business is the largest shareholder in terms of equity capital of another business and directly or indirectly holds at least 10% of the total shares of the other business.
- Large loan guarantees or financing. One business guarantees or provides a loan to another business in any form (including third-party guaranteed loans from related-party financing sources) provided that the loan amount is at least 25% of the borrower's equity and exceeds 50% of the total value of the borrower's medium and long-term debt.
- Right to appoint management board. One enterprise appoints members of the management board or controlling entity of another enterprise, provided that the number of members appointed by the first enterprise exceeds 50% of the total number of members of the management board or controlling entity of the second enterprise; or a member appointed by the first enterprise has the right to decide on the financial policy or business operations of the second enterprise.
- Jointly appointed by a third party. Two businesses may have more than one executive board member or a board member with the authority to make decisions on financial or business policies appointed by a third party.
- Both businesses are run by relatives. These two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals belonging to one of the following family relationships (spouse; biological father, adoptive father, biological mother, adoptive mother, father-in-law, mother-in-law, father-in-law, mother-in-law; biological child, adopted child, daughter-in-law, son-in-law; siblings with the same parents, half-siblings, half-siblings; brother-in-law, sister-in-law, daughter-in-law of a person with the same parents or half-siblings, or half-siblings).
- Head office – permanent establishment relationship. Two business establishments have a head office and permanent establishment relationship, or both are permanent establishments of a foreign organization or individual.
- De facto control. Businesses are controlled by an individual through that individual's capital contribution to the business or direct involvement in its management.
- Other control relationships. Other cases in which one enterprise is subject to the management, control, and actual decision-making power over the production and business operations of the other enterprise.
- The business has transactions. The business has transactions involving the transfer or acquisition of at least 25% of owner's equity during the tax period; and borrowing or lending at least 10% of owner's equity at the time of the transaction during the tax period with individuals managing or controlling the business or with individuals belonging to one of the family relationships.
Analyzing the risks associated with related-party transactions.
Once a business is determined to be related, the tax rules change completely.
Tax rate risk: From 17% to 20%
This is a problem that most businesses face. According to regulations... Resolution 198/2025/QH15 Support for small and medium-sized enterprises (SMEs) and tax incentives do not apply to businesses that are affiliated with other businesses not eligible for incentives.
For example: Company A has revenue of 30 billion VND (eligible for tax under category 17%). However, Company A is a subsidiary of Group B (revenue of 500 billion VND). Because Company A has an affiliated relationship with Group B (subject to tax under category 20%), Company A is obligated to pay tax at the rate of 20%.
Controlling interest expense (30% EBITDA)
This is a major concern for businesses using high financial leverage. When related-party transactions occur, the total interest expense (after deducting interest on deposits and loans) deductible as a deductible expense must not exceed 30% of the total net profit from business operations plus 30%. interest expense, depreciation expense (EBITDA).
The portion of interest expense exceeding the 30% limit will be excluded from deductible expenses when calculating corporate income tax. This leads to a situation where the business incurs actual (accounting) losses but still has to pay corporate income tax (because the taxable profit is inflated due to the exclusion of interest expense).
See details: Control interest costs and optimize capital.
Obligation to comply with the Transfer Pricing Documentation
Transfer Pricing Documentation is a set of documents prepared by a company to demonstrate that transactions with related parties are conducted according to the Arm's Length Principle, meaning that the price and terms of the transaction are equivalent to those of independent transactions in the market.
According to Decree 132/2020/ND-CP, this document is used to explain to the tax authorities that the enterprise has not engaged in profit shifting or transfer pricing between related parties to reduce its tax obligations.
According to current regulations, a complete set of valuation documents includes three layers (three-tiered documentation):
- Local File: Focus on specific transactions of taxpayers in Vietnam, analyzing their functions, assets, risks, and valuation methods.
- Master File: This provides an overview of the group's global business operations, including its organizational structure, intangible asset strategy, and internal financial policies.
- Country-by-Country Profit Reporting (Country-by-Country Report – CbCR): The report details the allocation of income, taxes, and economic performance indicators of the corporation across each country where the corporation operates.
Note: This documentation is mandatory for businesses with related-party transactions, unless they meet specific exemption conditions. If a business is not eligible for exemption and fails to prepare this documentation, the tax authorities have the right to determine the purchase and sale prices and the amount of tax payable.
Real-world case study: Lessons learned from forgetting to vet link providers
To better understand the seriousness of corporate income tax for related parties, let's consider a real-world scenario to better understand the corporate income tax rate for related parties:
The context is that Company X Production Co., Ltd. has revenue of 45 billion VND in 2025. Pre-tax profit is 5 billion VND. Based on revenue < 50 billion VND, the accountant confidently applies the preferential tax rate 17%. The expected corporate income tax payable is: $5,000,000,000 / 17% = 850,000,000 VND.
A mistake occurred: The director of company X has a younger brother who is the director of a company Y that supplies raw materials (company Y has a revenue of 200 billion VND). During the year, company X purchased raw materials from company Y worth 10 billion VND.
Tax audit results:
- The tax authorities determined that X and Y are related parties due to their blood relationship and management (According to Points g and h, Clause 2, Article 5 of Decree 132/2020/ND-CP).
- Because Y is a large enterprise (revenue > 50 billion), company X is stripped of its right to preferential treatment under Article 17% and must apply the tax rate under Article 20%.
- Corporate income tax arrears: 5,000,000,000 x (20% – 17%) = 150,000,000 VND.
- Penalty for false declaration 20%: 150,000,000 x 20% = 30,000,000 VND.
Total losses: Nearly 200 million VND, all because of a family relationship that the accountant failed to verify, leading to an unnecessary penalty.
Analyze and review subjects to avoid tax collection and assess taxes.
To avoid regrettable mistakes, businesses need to adhere to strict declaration procedures.
The 4-step process for determining tax liability:
- Step 1: Identify by reviewing the cases determined to have a related party relationship according to Article 5 of Decree 132/2020/ND-CP.
- Step 2: Classification. If a related party relationship is identified, preferential tax rates will not apply; instead, the standard corporate income tax rate (20%) will be applied.
- Step 3: Calculate EBITDA. Before finalizing interest expense, calculate the company's EBITDA. If actual interest expense > EBITDA, an upward adjustment to taxable income is required on the tax return (Form 03/TNDN).
- Step 4: Complete the Appendix by accurately filling out the forms as specified in Decree 132/2020/ND-CP. Pay particular attention to Appendix I regarding purchase, sale, borrowing, and lending transactions.
Reference: How to calculate interest costs according to Decree 132
Optimizing corporate income tax with related parties for SMEs
With increasingly stringent regulations on related-party transactions, optimizing tax obligations is no longer simply about reducing the amount of tax payable, but more importantly, about managing tax risks legally and sustainably. For small and medium-sized enterprises (SMEs), once related-party transactions are established, any decision regarding capital structure, transaction pricing policies, or interest expense management can directly affect the applicable tax rate and the amount of corporate income tax payable. Therefore, businesses need to develop appropriate strategies to ensure compliance with legal regulations while minimizing the risk of tax arrears or adjustments during audits. Below are some practical strategies that businesses can apply.
Restructuring capital sources
Instead of borrowing from affiliated companies (which leads to the 30% EBITDA restriction), businesses can consider increasing their charter capital. Increasing capital does not incur interest expenses, and therefore these expenses are not disallowed when calculating corporate income tax. Contact MAN – Master Accountant Network for more information. Transfer pricing consulting services.
Develop market-based pricing policies.
If you must deal with an affiliated party, ensure that the price is equivalent to the price you would charge independent customers. Keep records of contracts and quotations from other entities as benchmarking evidence for future tax purposes.
Take advantage of the provisions on carrying forward interest expense.
Decree 132/2020/ND-CP allows the portion of non-deductible interest expense (exceeding the 30% threshold) to be carried forward to the next tax period if the total interest expense for that year has not exceeded the threshold. The carry-forward period cannot exceed 5 years. Accountants need to closely monitor this amount in their tax records to avoid missing out on this benefit.
Conclusion of correctly understanding corporate income tax for related parties.
The issue of corporate income tax with related parties is no longer just a concern for multinational corporations. In 2026, it will be a critical issue for all Vietnamese SMEs. Misunderstanding or overlooking related parties during tax settlement can lead to serious financial consequences, eroding profits and damaging the company's reputation. To ensure legal safety, businesses should consult relevant experts. transfer pricing services Reliable all-inclusive package.
Contact information MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- Email: man@man.net.vn
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.
Answering questions about corporate income tax for related parties.
If a company borrows money from its director (without charging interest), would that be considered a related-party transaction?
Yes. According to regulations, borrowing money (even at interest rates of 0%) between a business and its managing individual is still considered a related-party transaction. Furthermore, lending without interest carries the risk of the tax authorities setting the lending interest rate based on market rates for corporate income tax purposes.
Assuming both company A and its affiliated party are SMEs, are both parties eligible for the 17% tax rate?
Yes. If all parties in the related-party relationship qualify as SMEs, your business will still be eligible for the preferential tax rate of 17%.
What is the deadline for submitting transfer pricing documentation?
Businesses must prepare the necessary documents before filing their corporate income tax return and keep them on file. You only need to submit them to the tax authorities when requested for an audit or information (usually within 15 working days of receiving the document).