How related party transactions affect corporate income tax is becoming a hot issue for FDI enterprises in Vietnam. According to Decree 132/2020/ND-CP (amended and supplemented at Decree 20/2025/ND-CP). Each decision on pricing, buying, selling or transferring between affiliated units not only directly affects taxable profits but also determines the risk when tax authorities inspect. Mastering this mechanism helps optimize taxes, avoid penalties and improve financial reputation.
Introducing related party transactions affecting corporate income tax
Affiliate transactions The impact on corporate income tax is an important issue for FDI (foreign invested) enterprises operating in Vietnam. Related party transactions (FDI) are understood as economic transactions taking place between related parties, including parent companies - subsidiaries, branches, or units under direct or indirect control. These transactions may include the purchase and sale of goods, provision of services, transfer of assets or loans between related parties.
The importance of related party transactions affecting corporate income tax
In global business, a small mistake in related party transactions can also cause FDI enterprises to affect corporate income tax, incur heavy tax collection and fines or adjust profits. This shows the importance of related party transactions affecting corporate income tax, specifically as follows:
- For FDI enterprises, related-party transactions are not simply internal business activities but also have a direct impact on corporate income tax profits, because the transaction value and costs arising in related-party transactions will be used by tax authorities to calculate taxable income. If the transaction valuation is not in accordance with the market principle (arm's length principle) according to OECD guidelines, enterprises may be subject to tax collection, penalties or adjustments to taxable profits.
- Corporate income tax (CIT) plays a key role in the financial strategy of FDI companies. Understanding how related-party transactions affect CIT helps businesses accurately forecast tax obligations, plan cash flows effectively and ensure legal compliance. At the same time, good management of related-party transactions also enhances the reputation of businesses in the eyes of tax authorities and international investors, limiting legal and financial risks.
Understanding the impact of related-party transactions on corporate income tax is a fundamental step, but to effectively manage taxes, FDI enterprises need to grasp the specific mechanism of the impact of related-party transactions on corporate income tax. A detailed analysis of this mechanism helps identify risk points, determine reasonable costs, and apply legal regulations correctly, thereby optimizing corporate income tax obligations in a transparent and effective manner. Next, we will delve into each factor, from direct to indirect impacts, to clearly see how related-party transactions affect corporate income tax.
Related transaction mechanism affects corporate income tax
FDI enterprises need to analyze in detail the related-party transactions affecting corporate income tax and the impact of each transaction on taxable profits. This includes both direct impacts through revenue and expenses, and indirect impacts through audit and collection risks and impacts on financial statements. Analyzing this mechanism helps enterprises make accurate tax plans, comply with the law and minimize financial risks..
Direct impact
Related party transactions affect corporate income tax primarily through changes in the taxable revenue and expenses of FDI enterprises. When the transaction price between related parties is too high or too low compared to the market price, taxable profits will be adjusted, leading to changes in the amount of corporate income tax payable.
In addition, costs arising from related-party transactions also play an important role. Reasonable costs that are proven to be for the right business purpose will be included in deductible costs when determining taxable profits. Conversely, unreasonable costs or costs without complete records will be excluded by the tax authority, increasing the taxable profits and corporate income tax obligations of the enterprise.
Indirect effects
In addition to the direct impact on profits and corporate income tax, related-party transactions affecting corporate income tax are also reflected through indirect risks. One of them is the risk of inspection and examination by tax authorities. Non-transparent related-party transactions, false price declaration or incomplete transfer pricing records can cause FDI enterprises to be inspected by tax authorities, have their taxable income adjusted and be fined for violations.
In addition, incorrect declaration or late payment of tax can lead to fines for collection and late payment of corporate income tax, increasing unexpected costs and affecting the cash flow of the business. Finally, errors in related-party transactions also affect the financial statements and valuation of the company, affecting its reputation and ability to raise capital from investors.
Example: If an FDI enterprise sells products to its subsidiary at a price lower than the market price, taxable revenue decreases, profits decrease and the tax authority may request an adjustment to collect additional taxes.
After understanding the impact mechanism, FDI enterprises need to identify potential risks from related-party transactions affecting corporate income tax. This is especially important because related-party transactions affect corporate income tax not only through revenue and expenses but also through legal risks such as inspection, tax collection and late payment penalties. Early identification of these risks helps enterprises plan for control, ensure compliance with the law and minimize negative impacts on taxable profits.
Related transaction risks affect corporate income tax
Related party transactions affect corporate income tax not only through revenue and expenses, but also through legal risks if the business does not comply with regulations. Some common risks include:
Transfer pricing
When transactions between related parties do not comply with the arm's length principle, taxable profits may be adjusted by the tax authorities. For example, if an FDI enterprise sells products to a subsidiary at a price lower than the market price, taxable revenue will decrease, leading to the collection of corporate income tax and possible penalties.
Failure to make declarations as required (CbCR, Master file, Local file)
According to Decree 132/2020/ND-CP, FDI enterprises are required to prepare a complete declaration of related-party transactions. Missing or inaccurate declaration of CbCR (Country-by-Country Report), Master file or Local file will increase the risk of inspection, tax collection and fines, directly affecting corporate income tax obligations.
See details here: Guidance on preparing CbCR reports in related party transactions 2025
Actual risks in Vietnam
Many FDI enterprises in Vietnam have encountered situations where the tax authorities have adjusted their profits due to inappropriate transfer pricing or incomplete declarations. These cases often lead to corporate income tax arrears, late payment penalties, and affect the reputation of the enterprise in its relations with investors and management agencies. The rates for calculating late payment and the time for calculating late payment of corporate income tax are regulated as follows:
- The late payment fee is 0.03%/day calculated on the amount of late tax payment;
- The time for calculating late payment interest is calculated continuously from the day following the last day of the tax payment deadline, tax payment extension deadline, the deadline stated in the tax authority's tax assessment notice or decision or handling decision to the day immediately preceding the tax debt amount.
Risk management and solutions for FDI enterprises
Related party transactions can become a “tax time bomb” if businesses do not proactively manage risks. Understanding the signs of irregularities and applying preventive measures is extremely important to minimize the negative impact of related party transactions on corporate income tax of FDI enterprises.
Signs of identifying risks of related-party transactions affecting corporate income tax
To check compliance with regulations on related-party transactions, tax authorities often use data analysis tools, focusing on the following unusual signs:
- Continuous losses for many years: A business that operates but continuously reports losses over a long period of time may be a sign of transfer pricing. Tax authorities will suspect that the business has transferred costs to Vietnam to reduce taxable profits.
- Lower than industry average profit margins: If your profit margins are significantly lower than those of independent businesses in the same industry, tax authorities may question inappropriate transfer pricing.
- Unreasonably high service or royalty fees: Payments to parent companies or affiliates for management fees, royalties, or interest that are unreasonably high will be subject to scrutiny.
- Interest-free or low-interest loans: Borrowing from an affiliated company with low interest rates or 0% can help reduce interest expenses and increase profits in other countries, thereby reducing corporate income tax payable in Vietnam.
Solution to manage risks of related-party transactions affecting corporate income tax
To proactively control risks and avoid legal consequences, FDI enterprises need to implement the following solutions:
- Internal control and transparent pricing policy: Enterprises should develop a clear internal transaction pricing policy that complies with the arm's length principle. Each transaction must have a reasonable basis for explaining the price and conditions, ensuring that there is no significant difference compared to transactions between independent parties.
- Prepare a complete and accurate transfer pricing dossier: This is the “shield” that protects the enterprise from inspections. This dossier must prove that the related transactions are conducted on a market basis. A complete dossier includes Local File, Master File and CbCR.
Refer to details on how to prepare a CbCR report: Here
By proactively applying the above solutions, FDI enterprises can effectively manage tax risks, ensure legal compliance and sustainable business operations in Vietnam, and minimize the negative impact of related-party transactions on corporate income tax.
Conclude
Related party transactions affecting corporate income tax are a key issue that every FDI enterprise has to face. Failure to comply with regulations on pricing not only poses risks of tax collection and penalties, but also affects the sustainability of the enterprise.
Proactively managing risk from the start by establishing transparent pricing policies and documenting complete pricing is key to protecting your business. It is not only a legal obligation but also a smart investment in long-term growth.
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