With increasingly stringent tax regulations in place by 2026, the declaration of related-party transactions involving loans to directors is no longer a simple internal task that can be overlooked. Failure to properly identify and declare these transactions is crucial. Decree 132/2020/ND-CP and Decision No. 1047/QD-BTC Businesses face the risk of being subject to extremely strict personal income tax assessments, interest expense deductions, and late payment penalties. This article, from the perspective of a tax consultant specializing in related-party transactions, will provide detailed guidance on how to identify related-party relationships, calculation methods, and the process of optimizing documentation.
Is a loan from a director considered a related-party transaction?
In the practical operation of businesses in Vietnam, temporary working capital shortages are often quickly resolved by borrowing money from the owner or operator. However, from a tax management perspective, determining whether borrowing money from the director (or operator) constitutes an related-party transaction requires a clear distinction between its civil and economic nature, as stipulated in international regulations. Join MAN – Master Accountant Network in exploring and analyzing whether borrowing money from the director constitutes a related-party transaction and how to properly declare it according to the law on related-party transactions.
The confusion between "Borrowing" and "Taxing" in accounting.
According to the Civil Code, contracts for borrowing property are usually interest-free, and the borrower must return the exact property. However, with regard to currency, a consumable asset with time value, any transfer of the right to use money is considered a loan transaction. Decree 132/2020/ND-CP does not focus on the term "borrowing" or "lending" in the contract, but rather on the nature of the flow of capital between parties involved in management and the formation of relationships. relationship To maintain control, require transparent disclosure of related-party transactions involving loans from directors.
Why are the tax authorities paying special attention to this transaction?
Tax audits for the period 2025-2030 show that tax authorities are strongly applying Big Data to review unusual cash flows in corporate bank accounts. Inaccurate or intentionally omitted declarations of related-party transactions involving loans from directors are often suspected as a form of profit shifting or evasion of personal income tax obligations by directors through receiving hidden interest or using funds from unclear sources to finance the business.
The "Arm's Length Principle"
This is a guiding principle throughout global transfer pricing management. An independent business in the market would never lend a large sum of money to another legal entity without charging interest. Therefore, if a business borrows money from its director at an interest rate of 0%, the tax authorities have the right to determine an equivalent market interest rate to calculate taxable income, requiring the business to declare the transfer transaction of borrowing money from the director at the correct market value.
Determining the relationship between the director and the borrower when borrowing money according to Decree 132/2020/ND-CP.
To properly declare related-party transactions involving loans from directors, the first step is for businesses to identify the relationship between the parties based on qualitative and quantitative criteria as stipulated in Article 5 of Decree 132/2020/ND-CP.
Criteria for individual management and control (Point g, Clause 2, Article 5)
If an individual directly or indirectly manages or controls a business, that individual and the business are considered related parties. Directors, CEOs, or Chairmen of the Board of Directors—those holding the highest decision-making power regarding finance and operations—automatically fall into this category. When cash flows occur, the obligation to declare related-party transactions, such as loans to directors, arises immediately if additional quantitative conditions are met.
Quantitative threshold for capital contribution 10% (Point l, Clause 2, Article 5)
The regulations state that businesses are considered to be related if:
“"Borrowing or lending at least 10% of the owner's equity at the time the transaction occurs during the tax period to the individual managing or controlling the company.".
The formula is then determined:
(Loan balance at the time of transaction / Paid-up charter capital) * 100% |
Points to note regarding timing: Decree 132/2020/ND-CP uses the phrase "at the time the transaction occurs". This means that if, at any point in the year, the amount of money lent by the director reaches the threshold of 10% contributed capital, the enterprise officially enters the scope of having to declare related-party transactions involving loans from the director.
For example: Company X has a registered capital of 5 billion VND. On March 1, 2026, to pay for goods urgently, the Director lent the company 600 million VND.
- Loan-to-equity ratio: 600 million / 5 billion is 12%
If the loan ratio exceeds the 10% limit stipulated in the Decree, the loan is considered a related-party transaction and constitutes a related-party relationship. Even if the company has repaid all its debt by December 31, 2026, when settling taxes for 2026, the accountant must still fully declare the related-party loan transaction of the director on Appendix I attached to Form 03/TNDN.
Economic consequences: Controlling interest expense (EBITDA 30%)
The biggest consequence of declaring related-party transactions involving loans to directors is the impact of Article 16 of Decree 132 regarding the total deductible interest expense when determining corporate income tax.
Total interest expense is capped.
A common misconception is that businesses assume only interest expense from directors is subject to limitations. In reality, once a business has incurred any related-party transactions (in this case, director loans), the total interest expense incurred during the period (including bank interest, interest from other credit institutions, and interest from other individuals) will be limited to the 30% EBITDA ratio. This is why controlling the disclosure of director loans is extremely important for businesses that are using high financial leverage from banks.
How to accurately determine EBITDA
EBITDA used to calculate the interest expense limit in the declaration of related-party transactions and director's loan is calculated using the following formula:
EBITDA = Net profit from business operations + Interest expense + Depreciation |
Rules for carrying forward interest expense to subsequent years.
The portion of interest expense exceeding the 30% EBITDA threshold after declaring the related-party loan transaction is not completely lost. The enterprise has the right to carry forward this expense to the next tax period for offsetting, with a continuous carry-forward period of no more than 5 years from the year following the year in which the non-deductible interest expense was incurred.
Personal income tax risks for the Director
If the declared interest rate for a related-party transaction involving a loan from the director shows 0%, the tax authorities may exercise their right to assess the tax. They will determine a profit revenue figure for the director (usually using bank deposit interest rates as a reference) and collect 5% personal income tax on the capital investment. Simultaneously, the business may not be able to deduct this assessed interest as an expense if the documentation is not thorough.
Cases exempt from preparing documentation for determining transfer pricing.
Decree 132/2020/ND-CP stipulates exemption thresholds to support small businesses or simple transactions. However, experts note that exemption from filing does not mean exemption from declaration. Businesses must still declare related-party transactions involving loans from directors in Appendix I.
Below are four cases exempt from preparing a Pricing Documentation (including the National Document, the Global Document, and the Country-by-Country Report) according to Article 19:
Revenue threshold and total value of related-party transactions
Businesses are exempt from filing documents if they meet both of the following conditions:
- Total revenue for the tax year is less than 50 billion VND.
- The total value of all related-party transactions (including the declared value of related-party transactions involving loans from the director) is less than 30 billion VND.
Signing a Pre-Agreement on Pricing Methods (APA)
Businesses must enter into an Advance Pricing Agreement (APA) and submit annual reports in accordance with APA regulations.
Simple trading with standard profit margins.
Businesses are exempt from filing documents if they simultaneously meet the following criteria:
- Revenue is below 200 billion VND.
- They perform simple functions and do not possess intangible assets.
Achieve the following net profit margin (before deducting interest expenses and corporate income tax – EBIT) on net revenue for each sector:
- Distribution area: From 5% onwards.
- Manufacturing sector: From 10% onwards.
- Processing field: From 15% onwards.
Related party transactions arising with domestic parties (Clause 1, Article 19)
A business only conducts transactions with related parties that are subject to corporate income tax in Vietnam, and simultaneously satisfies the following conditions:
- Both sides apply the same corporate income tax rate.
- Neither party is currently eligible for corporate income tax incentives during the tax period.
Note: In the case of declaring related-party transactions involving loans, the director is usually not subject to this category because the director is an individual (paying personal income tax), not a legal entity paying corporate income tax at the same tax rate.
Instructions for declaring related-party transactions involving loans from the director.
In 2026, the filing of related-party transaction declarations will be fully digitized. The process for declaring related-party transactions involving loans from directors requires the following specific steps:
Step 1: Declare information about affiliated parties in Section I.
In Appendix I attached to Decree 132, accountants need to fill in:
- Affiliate name: Full name of the lending director.
- Tax identification number: Must be a valid personal tax identification number.
- Relationship: Select code “L” (related to a minimum lending/borrowing threshold of 10% equity). This is fundamental information for the tax authorities to determine the scope of declaring related-party transactions involving loans from directors.
Step 2: Declare the transaction value in Section III
In the summary table of related-party transactions, find the line "Loans/Lending":
- Transaction value: Enter the total amount borrowed during the year (not the year-end balance).
- Pricing method: Businesses often choose the method of comparing prices of independent transactions. However, if borrowing without interest, documentation proving equivalence is required, or the company must accept declaring the price at a fixed rate for legal safety when declaring related-party transactions involving loans from the director.
Step 3: Determine the deductible interest expense in Section IV.
This is the most difficult part of filing a related-party transaction for a director's loan. The business must calculate it itself:
- Indicator (1): Total interest expense incurred during the period.
- Indicator (2): Deductible interest (total bank interest + controlled linked interest).
- Indicator (3): Interest expense that is not deductible carried forward from the previous year (if any).
See details: Declare related party transactions on HTKK
Develop Transfer Pricing Documentation (TP Documentation).
Simply submitting a statement declaring related-party transactions involving loans from directors is insufficient for businesses that are not exempt. To defend interest expenses against audits, businesses need to build a comprehensive set of supporting documentation.
Local File
This document focuses on analyzing the feasibility of borrowing money. It should include the following content:
- Purpose of borrowing: Clearly explain why the business needs funds from the director (e.g., to supplement working capital to purchase raw materials for export orders).
- Functional and risk analysis: The director bears the capital risk when lending money to the company without collateral. This is the basis for justifying low interest rates or 0% interest rates in special situations when filing for related-party transactions involving the director's borrowing.
Cash flow documentation requirements
In 2026, cash vouchers will no longer be accepted for large-value transactions between related parties. For a related-party transaction involving a director's loan to be recognized, the cash flow must:
- Transfer funds from the director's personal account to the company account.
- The transfer details should clearly state: “Business loan under Contract No….”.
- There are complete receipts/payment vouchers and periodic debt reconciliation statements.
Solutions for optimizing tax management of related-party transactions.
To ensure that the process of declaring related-party transactions involving loans from directors does not create financial risks, businesses need to take thorough preparatory steps:
- Proactively increasing charter capital: Instead of maintaining long-term loans exceeding the 10% threshold, businesses should consider increasing their charter capital. This not only enhances financial credibility but also allows the business to legally "break free" from affiliated relationships.
- Consult a professional: Due to the complexity of Decree 132, finding a professional is crucial. transfer pricing services Credibility is absolutely essential. Related party transaction experts will help businesses review their entire documentation system, optimize EBITDA levels, and ensure that the declaration of related party loans from directors remains within safe tax limits.
- Establishing an internal interest rate policy: Instead of borrowing at interest rates, businesses should reference the average interbank interest rate to build a suitable interest rate framework, minimizing the risk of being subject to personal income tax assessments for directors.
Reference: Transfer pricing service price list
Conclude
Declaring related-party transactions involving loans from directors is not merely a tax administrative procedure, but a test of financial management capabilities. In 2026, with the support of modern control tools, tax authorities will increasingly tighten audits of related-party transaction pricing. Businesses need to clearly understand the nature of cases exempt from filing in order to proactively declare these transactions, thereby maximizing their economic interests and reputation in the market.
Hopefully, this detailed guide on declaring related-party transactions involving loans from directors has provided your business with a comprehensive overview and specific steps to manage tax risks most effectively.
Contact MAN – Master Accountant Network for timely advice and support!
Contact information MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
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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.
References and legal basis:
- Decree 132/2020/ND-CP: Regulations on tax management for enterprises with related-party transactions.
- Decision No. 1047/QD-BTC: Procedures for managing taxes on related-party transactions.
- Law on Enterprises 2020: Regulations on managers and executives of enterprises.
- Circular 80/2021/TT-BTC: Guiding the implementation of some provisions of the Law on Tax Administration.