In current corporate governance, it is common practice for directors or executives to lend money to the company to supplement working capital. However, from a legal and tax risk management perspective, especially under the strict regulations at Decree 132/2020/ND-CP, This type of transaction carries significant risks of tax assessment if the business does not correctly identify the nature of the related-party relationship when borrowing money from its director. This article will analyze in detail the conditions, consequences, and practical cases to help businesses comply with regulations in the 2026 tax year.
The legal nature of the affiliation when borrowing money from the director.
To understand the relationship between borrowing money from executives, it is first necessary to distinguish between two core concepts in modern tax management:
- Related parties: These are parties with a relationship falling under the cases stipulated in Article 5 of Decree 132/2020/ND-CP. This relationship may be formed through ownership of capital, management rights, or direct or indirect control over each other. In particular, the relationship when a director borrows money often falls under the category of affiliation through management rights and the debt-to-equity ratio.
- Related-party transactions: These are transactions arising between parties that have been identified as having a related-party relationship. When a related-party relationship arises, such as when borrowing money from a director, all borrowed or disbursed funds must be compared against market prices.
When a business incurs a loan from an individual leader, the tax authorities will not only look at whether or not there is interest. Instead, they will consider whether that individual has the right to manage and control the business, and whether the loan exceeds the capital contribution threshold to accurately determine the relationship when the director borrows money.
Conditions for determining the affiliation when borrowing money from a Director as stipulated by law.
Based on Point l, Clause 2, Article 5 of Decree 132/2020/ND-CP, a business and its managing individual (Director, General Director) are considered to have an affiliated relationship if they simultaneously satisfy two factors: the subject and the quantity of the loan. This is key to identifying an affiliated relationship when a director borrows money.
- Lender: The individual lender must be the operator or controller of the business (usually the legal representative or the person with the highest financial decision-making authority).
- Quantitative: The business borrows from this individual with a value at least equal to 10% of the owner's equity at the time the transaction occurs.
In-depth analysis of owner's equity in a joint venture when borrowing money from a director.
It is important to note that the owner's contributed capital here refers to the actual capital recorded on the balance sheet, not the "fictitious" registered capital stated on the business license. If a business has not contributed the full amount of capital but still incurs a loan, the risk of having all interest expenses disallowed due to insufficient capital contribution is very high, and it will still be considered an affiliated company when borrowing money from the director.
The timing for determining the affiliation when borrowing money from the director.
The relationship between the company and the director when borrowing money is determined at the time the transaction occurs. If, at any point during the year, the loan balance exceeds the 10% threshold of equity, the company officially enters into a related-party transaction. Reducing the outstanding debt to below 10% at the end of the year does not negate the nature of the related-party relationship that arose earlier in the period.
Specific cases of directors borrowing money and forming partnerships.
Below are typical scenarios that accountants and business owners need to pay special attention to in order to accurately declare the affiliated relationship when borrowing money from the director:
Case 1: The director owns more than 25% of contributed capital.
Suppose Mr. A is the Director and also owns 30% of the registered capital of Company X. In this case, a related-party relationship exists between Mr. A and the company based on their capital ownership ratio. Therefore, regardless of how much money Mr. A lends to the company (even if it's just a temporary loan of a few million dong), this is still considered a related-party relationship when borrowing money from the director.
Case 2: Loans from the hired director exceed the 10% capital contribution threshold.
This is the most controversial situation. Mr. B is a hired director (not a shareholder). The company's paid-up capital is 10 billion VND. During the year, due to an urgent need for cash to pay salaries, Mr. B lent the company 1.2 billion VND. At that time:
- The debt-to-equity ratio is 12%. By law, this constitutes a related-party relationship when the director borrows money. The company is required to comply with regulations regarding the declaration of related-party transaction prices.
Case 3: Relationship when borrowing money from a director through a relative.
Decree 132/2020/ND-CP expands the scope to include individuals with blood or marital relationships. If a company borrows money from the director's wife or son, and that loan meets the 10% equity threshold, the tax authorities will still determine it as an affiliated relationship when the director borrows money through an intermediary related party.
Cases where borrowing money from a director is not considered a related-party relationship.
To avoid misunderstandings and excessive pressure on businesses, it is necessary to clarify the cases that do not constitute a related-party relationship when a director borrows money:
Case 1: Low loan amount
Suppose the company's equity is VND 20 billion, and the director lends VND 1.5 billion (representing 7.51 TP3T). If this director holds less than 251 TP3T of shares, then this transaction is not quantitative enough to be considered an affiliated company when borrowing money from the director.
Case 2: Borrowing from individuals who do not have management rights.
A shareholder who lends money but does not hold a management position (Director, Chief Accountant, Board Member) and does not own more than 25% of capital typically does not have an affiliated relationship when borrowing money from a director.
Case 3: Borrow money and repay it on the same day.
In practice, tax inspectors often overlook extremely short-term temporary loans if they do not alter the fundamental financial nature of the business and do not create a long-term capital appropriation relationship when the director borrows money.
Tax implications and EBITDA 30% rules when dealing with related parties and borrowing from directors.
Identifying the correct financial relationship when borrowing money from a director is an extremely important step because it directly affects the company's finances through corporate income tax settlement.
Control interest costs
Once a related party relationship exists when borrowing money from the director, the total interest expense deductible for corporate income tax purposes will be capped at 30% EBITDA.
- Any interest expense exceeding the 30% limit resulting from related-party transactions when borrowing funds from the director will be excluded from deductible expenses in that same fiscal year.
- This causes significant damage to businesses that are in the investment phase, operating at a loss, or have low profit margins, but have formed affiliated relationships when borrowing money from directors at high interest rates.
Risks from borrowing interest-free money in a related-party relationship when borrowing from a director.
Many business owners mistakenly believe that borrowing money at interest rates is safe. However, if a related-party relationship is established when borrowing money from the director, the tax authorities have the right to determine the income of the individual lender based on market interest rates (usually using commercial bank lending rates as a benchmark). The consequence is:
- The Director was ordered to pay back personal income tax (5%) on the assessed profit.
- Businesses are not allowed to include this fixed interest rate as an expense (because it is not actually paid), but they are required to explain the affiliated relationship when borrowing money from an opaque director.
A practical example of a relationship when borrowing money from a director.
To illustrate the importance of identifying affiliated relationships when borrowing money from directors, consider the case of X Mechanical Company Limited:
- Actual contributed capital: 2,000,000,000 VND.
- Director: Mr. A (Owns 5% capital and is the direct manager).
- Loan from Mr. A: 500,000,000 VND (Interest rate 10%/year).
- Profit before tax: 100,000,000 VND.
- Depreciation: 50,000,000 VND.
Tax risk analysis:
- Determining the relationship: Loan ratio = 500 million / 2 billion = 25% (> 10%). This is precisely the relationship when borrowing money from the director.
- Interest accrued: 500 million * 10% = 50,000,000 VND.
- Calculate EBITDA: EBITDA = 100 million VND (Profit) + 50 million VND (Interest Expense) + 50 million VND (Depreciation) = 200,000,000 VND.
- Maximum interest deduction: 200 million * 30% = 60,000,000 VND.
In this case, the 50 million interest expense is still below the 60 million threshold and can therefore be fully deducted. However, if the company incurs losses (negative EBITDA), the entire 50 million interest expense from the related-party relationship when borrowing money from the director will be completely eliminated. Simultaneously, Company X must pay... Related Party Transaction Appendix, Otherwise, you will face very heavy penalties for late submission or incorrect documentation.
Documentation and procedures for declaring affiliated relationships when borrowing money from a director.
In 2026, tax authorities will apply AI technology to reconcile cash flows, therefore, preparing documentation for related-party transactions when borrowing money from directors requires extreme care. Due to the complexity of these types of documents, many businesses have sought professional assistance. related party transaction advisory unit Reputable to ensure legal compliance.
- Loan agreement: The purpose of the loan must be clearly specified (supplementing working capital, purchasing machinery, etc.) to demonstrate the legitimacy of the loan when the director borrows money from a related party.
- Bank documents: Bank transfers are absolutely recommended. Using cash for large loans in related-party transactions, such as borrowing money from a director, can easily be considered a fictitious transaction.
- Declare Appendix I according to Decree 132: This is a mandatory obligation. Omitting to declare related-party relationships when borrowing money from the director is often the first mistake that leads to a business being placed on the list of priority inspections.
- Transfer pricing documentation: If total revenue exceeds VND 50 billion, businesses should consult... related party transaction advisory services Professionals should protect the current interest rate.
Relationship risk management strategy when borrowing money from executives in 2026
From the perspective of tax consultants, MAN – Master Accountant Network offers the following recommendations to help businesses avoid being overwhelmed by the regulations on related-party relationships under Decree 132/2020/ND-CP.
- Regular review: Accountants need to check the balance of personal loans every quarter. If they see that the balance is approaching the 10% equity threshold, they need to report to management to adjust cash flow and avoid falling into the trap of affiliated relationships when borrowing money from directors.
- Prioritize capital contribution: Instead of maintaining a long-term, large-scale loan relationship with the director, proceed with increasing the registered capital. Increasing capital avoids the burden of interest expenses and helps improve the company's financial health.
- Establish a benchmark interest rate framework: Always reference the interest rates of at least three local commercial banks when signing loan agreements to have a basis for justifying that the interest rate in the inter-bank lending relationship is in line with market rates.
- Staff training: Ensure the accounting department is familiar with Decree 132. Mistakes in identifying related party relationships when borrowing money from directors often lead to long-term financial consequences. Businesses may consider... hire a consultant for related party transactions. To review all personal financial transactions for the year.
Optimization related party transaction advisory fees It's a worthwhile investment compared to the huge fines and back taxes that can result from errors in filing.
Conclude
Understanding and accurately applying regulations regarding related-party relationships when directors borrow money is a mandatory requirement for all businesses in the era of tax information transparency. Decree 132/2020/ND-CP does not aim to prohibit borrowing from executives, but it establishes fair rules to prevent transfer pricing and tax evasion. By proactively identifying signs of related-party relationships when directors borrow money, businesses will be more stable in their financial reporting periods and ensure sustainable development.
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Content is moderated by: Mr. Le Hoang Tuyen – Founder & CEO of Man, CPA Vietnam Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.