During the course of business operations, enterprises often engage in transactions with parent companies, subsidiaries, major shareholders, individual managers, or organizations with controlling or investment relationships with each other. These transactions may fall within the scope of regulations on related-party transactions if the parties meet the conditions to be considered related parties.
To determine whether a business has an affiliated relationship, refer to Article 5. Decree 132 on related-party transactions This is one of the important legal bases. This regulation sets out specific criteria regarding ownership of capital, control, management, financial relations, and other relationships between the parties.
Understanding the regulations at Article 5 of Decree 132 This helps businesses proactively review transactions, correctly identify their obligations to declare related-party transactions, prepare necessary documentation, and mitigate tax-related risks.
Article 5 of Decree 132 stipulates the nature of related parties.
According to Article 5 of Decree 132, related parties (hereinafter referred to as affiliated parties) are parties that have a relationship falling under one of the cases related to management, control, capital contribution, or investment.
Specifically, a relationship is defined when:
- One party is directly or indirectly involved in the management, control, capital contribution, or investment in the other party.
- The parties are jointly managed, controlled, or invested in by a third party.
Thus, an affiliated relationship is not only defined by one enterprise owning capital in another, but can also arise through control over operations, the right to make financial policy decisions, or influence over management personnel.
Understanding Article 5 of Decree 132 helps businesses proactively review their transactions, correctly identify their obligations to declare related-party transactions, prepare necessary documentation, and mitigate tax-related risks. This is also a crucial step in the compliance process. regulations on related-party transactions, This is especially true for businesses that frequently engage in transactions with related parties.
Cases for determining affiliation relationships according to Article 5 of Decree 132.
Clause 2 of Article 5 of Decree 132 specifies the cases in which enterprises are considered to have related-party relationships. These cases include relationships related to capital contributions, finance, management, operation, personal relationships, and actual control.
Article 5 of Decree 132 stipulates that enterprises owning 25% or more of contributed capital are considered affiliated parties.
One of the most common cases stipulated in point a, clause 2, Article 5 of Decree 132 is:
An enterprise directly or indirectly holds at least 25% of the equity of the owner of the other enterprise.
This means that when company A owns 25% or more of the capital contribution in company B, the two companies are considered to be related.
For example: Company A contributed 30% of charter capital to Company B. Therefore, Company A and Company B belong to the group of related parties as stipulated in Article 5 of Decree 132.
In addition, a business relationship is also defined as one where two companies both have at least 25% of owner's equity held directly or indirectly by a third party.
For example: Company C owns 30% capital in Company A and simultaneously owns 30% capital in Company B. In this case, Company A and Company B can be considered related parties.
In the case where the largest shareholder owns at least 10% shares according to Article 5 of Decree 132
According to point c, clause 2, Article 5 of Decree 132, an enterprise is considered an affiliated party when:
- As the largest shareholder in terms of owner's equity.
- Simultaneously, directly or indirectly hold at least 10% of the total remaining shares of the enterprise.
This regulation aims to identify instances where a business has the potential to significantly impact the operations of another business through its shareholding.
Therefore, when evaluating related-party relationships, businesses need to examine not only common capital contribution ratios such as 25% but also consider cases where the largest shareholder has the power to influence business operations.
Relationships formed through guarantees or loans.
Not limited to ownership relationships, Article 5 of Decree 132 also stipulates cases of linkage through financial transactions.
According to point d, clause 2, Article 5, an enterprise may be considered an affiliated party when:
- A business that guarantees or lends capital to another business in any form.
- The loan amount must be at least equal to 25% of the owner's equity contribution.
- Simultaneously, it accounts for over 50% of the total value of medium and long-term debt of the borrowing enterprise.
This regulation helps identify cases where businesses have a significant financial dependence on another party.
For example: If company A lends company B a large sum of money, representing a significant proportion of company B's long-term debt structure and meeting the conditions stipulated by regulations, then A and B can be identified as related parties.
Article 5 of Decree 132 defines the relationship of affiliation through the power to appoint and control the leadership board.
Another case stipulated in points d and e of Clause 2, Article 5 of Decree 132 is the relationship of affiliation through control over managerial personnel.
Specifically, a business is considered an affiliated party when:
- Appointing a member of the executive board to manage or control another business.
- The number of appointed members accounts for more than 50% of the total number of members on the board of directors of that enterprise.
- Alternatively, a designated member may have the authority to decide on financial policy and business operations.
Additionally, two businesses may also be considered affiliated if:
- Along with 50%, there are also board members appointed by a third party.
- Alternatively, there could be a single leader with the authority to decide on financial and business policies, appointed by a third party.
This point shows that Article 5 of Decree 132 focuses not only on capital ownership but also considers the actual control within the enterprise.
Business connections formed through family relationships.
According to point g, clause 2, Article 5 of Decree 132, two businesses can be considered to be affiliated if they are controlled in terms of personnel, finance, and business operations by individuals with family ties.
The relationships include:
- Couple.
- Biological parents, adoptive parents, stepfather, stepmother.
- Parents-in-law.
- Biological children, adopted children, and children from a previous marriage of either spouse.
- Siblings with the same parents, or with the same father but different mothers, or with the same mother but different fathers.
- Grandparents on both sides of the family.
- Grandchildren, great-grandchildren.
- Aunts, uncles, and nieces/nephews.
The purpose of this regulation is to identify cases where businesses have general control through individuals with close family ties.
Article 5 of Decree 132 on the relationship between the head office and the permanent establishment.
According to point h, clause 2, Article 5, the following cases are considered to have an affiliated relationship:
- The two businesses have a relationship between their head office and their permanent residence.
- Both businesses are permanent residences of foreign organizations or individuals.
This regulation typically applies to businesses with cross-border operations or foreign elements.
Businesses are controlled by individuals through capital contributions or management.
Point i, Clause 2, Article 5 of Decree 132 stipulates:
Businesses are controlled by an individual through:
- That individual's capital contribution to the business.
- Individuals directly involved in managing the business.
This case broadens the scope of defining affiliated relationships, especially for businesses directly invested in and managed by individuals.
Other cases of actual control as per Article 5 of Decree 132.
In addition to the specific cases mentioned above, point k, clause 2, Article 5 of Decree 132 stipulates:
An enterprise is considered an affiliated party if it is subject to the actual management, control, or decision-making power over the business operations of another enterprise.
This means that regulators can consider the actual nature of control rather than relying solely on paper ownership documents.
Capital transactions, borrowing and lending with related individuals during the tax period.
According to point l, clause 2, Article 5 of Decree 132, enterprises may establish related-party relationships in the following cases:
- There were transactions involving the transfer or acquisition of at least 25% of owner's capital contributions during the tax period.
- There are loan and lending transactions involving at least 10% of owner's equity at the time the transaction occurs during the tax period.
- Transactions with individuals who manage or control businesses, or individuals with family ties, fall under the provisions of point g.
These are the types of situations businesses need to pay special attention to when dealing with related individuals.
The significance of defining the relationship of association according to Article 5 of Decree 132.
Accurately identifying related-party relationships helps businesses fulfill their obligations related to related-party transactions. In cases where businesses encounter difficulties in assessing related-party criteria, determining the scope of transactions, or preparing relevant documentation, consulting a professional is recommended. related party transaction advisory services This can help businesses control risks and ensure compliance with regulations.
Specifically, businesses can:
- Determine whether the transaction is subject to declaration requirements.
- Proactively prepare documentation for determining transfer pricing.
- Reduce the risk of being subject to tax arrears or penalties due to incorrect declarations.
Specifically, businesses need to comprehensively assess factors such as capital contributions, control, financial transactions, and personal relationships, rather than just examining ownership percentages.
What should businesses keep in mind when applying Article 5 of Decree 132?
To accurately identify business relationships, companies should regularly review:
Examine ownership relationships
Include:
- Direct equity contribution ratio.
- Indirect capital contribution ratio.
- Share ownership rights.
Review financial transactions
Businesses need to check:
- The loan.
- The loan.
- Guarantee activities.
- Capital transactions with related individuals.
Assessing actual control
In addition to legal documents, the following should be considered:
- Who has the authority to decide on business operations?
- Who controls fiscal policy?
- Who has the authority to appoint management personnel?
Frequently Asked Questions about Article 5 of Decree 132
Article 5 of Decree 132 stipulates the cases for determining the relationship between related parties in related-party transactions.
According to Article 5 of Decree 132, a common case is when a business directly or indirectly holds at least 25% of the capital contribution of the other business owner.
No. Related relationships can also arise through executive power, control, personnel management, financial relationships, or actual control.
Yes. If the loan fully meets the conditions stipulated in point d, clause 2, Article 5 of Decree 132.
Yes. When a transaction occurs with an organization or individual that may be an affiliated party, the enterprise needs to review it according to Article 5 of Decree 132 to determine whether it falls under the category of an affiliated transaction. The occurrence of only one transaction does not mean the enterprise is exempt from the obligation to consider the affiliated relationship.What does Article 5 of Decree 132 regulate?
At what percentage of equity ownership is a business considered an affiliated party?
Does a business relationship necessarily have to be based on ownership of capital?
Can lending businesses become related parties?
Does a business that only has one transaction with a related party need to consider Article 5 of Decree 132?
Conclude
Article 5 of Decree 132 is an important basis for businesses to determine the related parties in related-party transactions. This regulation covers many cases, from capital ownership, financial control, management rights to personal relationships.
Understanding and correctly applying the regulations in Article 5 of Decree 132 helps businesses proactively comply with tax obligations, minimize risks during inspections and audits, and manage related-party transactions.
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Responsible for production and professional content review by: Mr. Le Hoang Tuyen – Founder & CEO of MAN – Master Accountant Network. He is a CPA Vietnam auditor with over 30 years of in-depth experience in accounting, auditing, taxation, and corporate legal consulting.