In practice, interest-free loans are often used by businesses as a flexible tool to support internal cash flow, support personnel, or provide relief to partners. However, from a tax management perspective, this is one of the most scrutinized transactions due to violations of the Arm's Length Principle.
Without proper documentation, interest-free loans may be subject to financial revenue assessment by the tax authorities, expense adjustments, and tax collection with significant penalties. This risk is further exacerbated by related parties under Decree 132/2020/ND-CP.
The legal nature of interest-free loans
Interest-free lending is a voluntary right between parties according to the 2015 Civil Code. However, from a tax management perspective, this is a completely different issue.
Independent Trading Principle
In accordance with international practice and domestic law in Vietnam. Decree 132/2020/ND-CP, All transactions between related parties (and also between independent parties from a tax management perspective) must adhere to the Governance Principle. This means that the price or interest rate in the transaction must be equivalent to the rate agreed upon by independent parties under similar conditions. A zero-interest loan inherently violates this principle because, in the capital market, no financial institution provides resources without expecting a profit.
The authority to determine taxes
Based on Clause 1, Article 50 of Tax Administration Law No. 38/2019/QH14, The tax authorities have the right to determine the amount of tax payable in cases where taxpayers conduct transactions at non-market prices. For interest-free loans, the tax authorities will take the following steps:
- Determining the conduct: This should be considered transfer pricing or profit concealment (if between related parties) or an unreasonable reduction in taxable income.
- Interest rate fixing: Applying the prevailing lending interest rate of commercial banks at the time to recalculate the financial revenue for the lender.
Decree 132/2020/ND-CP on related-party transactions
When discussing interest-free loans, it's impossible to ignore Decree 132/2020/ND-CP, a crucial legal document that forms the core of regulations governing related-party transactions in Vietnam today.
Identifying stakeholders
Businesses should pay particular attention to the following cases, which often result in interest-free loans and fall under the purview of Decree 132:
- The parent company lends capital to the subsidiary to implement the project.
- Companies within the same group support each other's cash flow.
- Individuals in leadership positions (Directors, Chairmen) lend money to the company, or vice versa.
If a business falls under the scope of Decree 132, the occurrence of interest-free loans will trigger a series of declaration obligations, such as Form No. 01 (Information on related party relationships and related party transactions).
Risk of deductible interest expense (Ceiling 30% EBITDA)
A crucial point is that Article 15 of Decree 132/2020/ND-CP stipulates that the total deductible interest expense when determining corporate income tax shall not exceed the total net profit from business operations plus interest expense and depreciation expense (EBITDA).
When a company borrows money from a bank (with interest) but then lends that money to another entity for interest-free purposes, the risk is doubled.
- Lenders are subject to revenue assessment (increasing their taxable income).
- The lender is exempt from the corresponding bank interest expense (because the borrowed capital does not serve the business operations of the enterprise itself).
See details: How to calculate interest expense according to Decree 132.
Financial consequences of implementing interest-free loans.
Granting interest-free loans is not simply an accounting entry; it has ripple effects on the balance sheet and tax obligations.
Collection of back taxes on corporate income tax.
Suppose company A lends company B 10 billion VND as an interest-free loan. If the average market interest rate is 6%/year, the tax authorities will determine the financial revenue to be 600 million VND. With a corporate income tax rate of 20%, company A will have to pay an additional 120 million VND in tax, not including late payment penalties of 0.03%/day.
Impact on Value Added Tax (VAT)
According to Circular 219/2013/TT-BTC, lending activities are exempt from Value Added Tax (VAT). However, if a business does not declare revenue from interest-free loans (even if it is a fixed revenue), the allocation of input VAT used for both taxable and non-taxable activities will be incorrect. This can lead to the collection of additional input VAT that was incorrectly deducted.
Risks related to Personal Income Tax (PIT)
In cases where a business provides interest-free loans to employees or managers, the tax authorities may consider this a monetary benefit in the nature of salary or wages. The difference between the actual interest rate (0%) and the market interest rate may be converted into taxable personal income for that individual.
Solutions for preparing a justification document when facing tax assessment.
To protect interest-free loans, chief accountants and business owners need to build a solid legal dossier based on the following arguments:
Accountability based on benefits and talent retention.
This is the optimal approach when lending money to employees. Instead of presenting it as a purely financial transaction, turn the interest-free loan into part of a compensation system.
The required documents include:
- Employment contracts and collective bargaining agreements must include a clause stating that the company has a welfare fund to assist employees with loans for purchasing homes, cars, or medical expenses.
- Internal financial regulations: Clearly define eligible borrowers (those with over 5 years of service and outstanding performance), loan limits, and repayment periods.
- Employee loan applications must clearly state the reason for financial hardship or the legitimate purpose for which the funds are needed.
With all the necessary documentation, the interest-free loan is considered an operating expense (retaining key personnel), thereby minimizing the possibility of being subject to tax assessment.
Explanation based on the objective of preserving the supply chain.
In parent-subsidiary or strategic partnership relationships, granting interest-free loans can be interpreted as an emergency solution to avoid supply chain collapse.
Arguments to prepare:
- Proof that the borrower is in a state of temporary insolvency (Financial statements showing losses, notice of bad debt from the bank).
- Demonstrate that if the borrower goes bankrupt, the lending business will suffer greater losses (loss of raw materials, loss of market).
- Draw up an agreement on providing short-term, interest-free support to help restore production.
Explanation of borrowing money from the Director/Owner
This is the most common borrowing situation. As analyzed, this case poses the least risk to the company in terms of corporate income tax. However, the following still needs to be ensured:
- The loan agreement clearly states: "To supplement working capital to cover salary and supplier payments due to the inability to access bank financing.".
- Bank documents: Money must be transferred from the Director's personal account to the company account.
- Minutes of the Board of Directors/Members Meeting approving the borrowing of personal funds to salvage the financial situation.
See details: Declare related-party transactions involving loans to directors according to Decree 132.
Interest-free loans and related-party transactions under Decree 132
The connection between interest-free loans and Decree 132/2020/ND-CP is extremely close. Businesses need to clearly understand the control thresholds to avoid falling into tax traps.
When is a relationship considered an affiliation?
According to Article 5 of Decree 132, a business that lends capital to another business equivalent to at least 25% of the owner's equity and accounts for over 50% of the total value of the borrowing business's medium and long-term debts is considered to have an affiliated relationship.
In this case, the interest-free loan would certainly be subject to extremely close scrutiny. The tax authorities would use the Independent Transaction Price Comparison method to determine the appropriate interest rate.
Transfer pricing determination dossier
If a business is required to prepare a Transfer Pricing Documentation, it must clearly explain why it has an interest-free loan. Without a reasonable economic justification, the fixed interest income will be included in its taxable corporate income and will not be eligible for any tax deductions.
List of documents subject to periodic review and inspection for businesses.
To prepare for future tax settlements, the accounting department needs to periodically review non-interest-bearing loans according to the following list:
| File Type | Request for review | Note |
| Loan contract | The loan must be fully signed, stamped, and the purpose clearly stated. | Do not use generic templates. |
| Money transfer documents | 100% must go through a bank (for transactions between legal entities). | Absolutely no cash will be used. |
| Financial regulations | There should be a specific chapter on interest-free loans. | Issued before the transaction occurs. |
| Capital utilization report | Borrowers must submit periodic reports on whether the funds have been used for their intended purpose. | Increase the perceived reliability of the transaction. |
| Borrower's profile | Demonstrate that the borrower would face financial difficulties if they did not collect interest. | For use in partner relief efforts. |
| Minutes of the approval meeting | The management board's decision to grant an interest-free loan. | Collective and objective evidence. |
| Interest Rate Comparison Table | Statistics on interest rates of banks at the time of issuance. | The basis for calculating precautionary tax risk. |
| Linked tax records | Related party transaction declarations (if applicable). | Strictly comply with Decree 132/2020/ND-CP. |
To minimize the risk of tax assessment and enhance the ability to explain matters during audits, businesses need to standardize all documentation related to interest-free loans, ensuring it is complete, consistent, and based on factual evidence. The review should not only focus on superficial documents but also ensure logical consistency between the purpose of capital use, internal policies, and current legal regulations, especially Decree 132/2020/ND-CP.
Advice from MAN – Master Accountant Network
Managing interest-free loans requires finesse and a deep understanding of tax law. At MAN, we always emphasize that: “Every interest-free transaction must have a legitimate business purpose behind it.”
Change the format if possible.
If the loan-to-value ratio extends for too long, businesses should consider converting interest-free loans into additional equity or joint venture capital. This helps legitimize the capital on the balance sheet and avoids the risk of fixed interest rates.
Take advantage of internal audits.
Businesses should conduct a tax review every six months to identify outstanding interest-free loans that are overdue. Timely settlement or adjusting interest rates to a minimum (e.g., the interest rate on demand deposits) is sometimes a safer option than allowing interest rates to remain high.
The role of professional consultants
Use related party transaction advisory services The services of reputable tax consulting firms like MAN – Master Accountant Network will help businesses:
- Standard contract templates and regulations are provided, closely adhering to Decree 132/2020/ND-CP.
- Authorized to represent the taxpayer in explaining the legitimacy of interest-free loans.
- Optimize corporate income tax payments through smart financial structuring.
Conclude
Interest-free loans are a useful financial tool, but they are fraught with risks from a regulatory perspective. Misunderstandings or a lack of proper documentation can lead to massive tax penalties, eroding business profits.
The key to security lies in transparency and consistency of records. Ensure that every interest-free loan has a sound financial story and is supported by a robust system of legal documentation. Don't let a good cash flow support initiative become a financial burden due to tax management errors.
Contact MAN – Master Accountant Network For free support and advice on everything related to affiliate trading!
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 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.