If a husband and wife are directors of two companies that conduct business with each other, are they considered affiliated companies?

Whether a husband and wife who are directors of two companies involved in transactions are considered related parties under the law is a question of concern for many businesses and accountants when transactions involving the purchase and sale of goods, provision of services, or financial transactions occur between the two companies. In practice, many believe that only when there is a capital contribution or direct control relationship does a related party relationship arise. However, Decree 132/2020/ND-CP The regulations have specifically defined many cases for determining affiliated parties, including relationships between individuals managing businesses.

The article below will provide a full analysis of the legal basis according to Enterprise Law 2020 and Decree 132/2020/ND-CP, while clarifying the conditions for identifying related parties, regulations on deductible expenses, and obligations. declaration of related party transactions and cases where preparation is waived Affiliate Transaction Profile, This helps businesses comply with regulations and mitigate tax risks.  

If a husband and wife are directors of two companies and engage in transactions, are they considered related parties?

To determine whether a married couple who are directors of two companies have related-party transactions, it is first necessary to refer to the provisions of Article 5 of Decree 132/2020/ND-CP regarding cases that are identified as related parties. 

• One party is directly or indirectly involved in the management, control, capital contribution, or investment in the other party;
• The parties are directly or indirectly subject to the management, control, capital contribution, or investment of another party.

However, to elaborate on this principle, Clause 2 of Article 5 details the cases considered as affiliated parties. Specifically, point g of Clause 2 of Article 5 stipulates:

Two businesses are managed or controlled in terms of personnel, finance, and business operations by individuals who are related to one of the following: spouse; biological parents, adoptive parents, stepfather, stepmother, parents-in-law; biological children, adopted children, stepchildren of the spouse, daughter-in-law, son-in-law; siblings with the same parents, half-siblings, half-siblings; brother-in-law, sister-in-law, daughter-in-law, son-in-law of a person with the same parents or half-siblings; paternal grandparents; grandchildren; aunts, uncles, and nieces/nephews.

Therefore, in the case where a husband and wife are directors of two companies with transactions, if the two businesses are managed or controlled by two individuals who are husband and wife, this is the legal basis for determining the affiliated relationship according to point g, clause 2, Article 5 of Decree 132/2020/ND-CP.

Learn more: Transactions between businesses and household businesses.

Is it necessary for the two businesses to directly control each other?

This is one of the areas that often causes confusion when businesses assess affiliate relationships.

Many businesses believe that an affiliated company only exists when one company owns capital in the other or has controlling power over its business operations. However, Decree 132/2020/ND-CP stipulates various cases for determining affiliated parties, with point g, clause 2, Article 5 being a separate case.

According to this regulation, the law considers the fact that businesses are managed or controlled by individuals who are husband and wife. Therefore, the fact that two businesses do not directly control each other or do not have a capital ownership relationship is not the sole basis for excluding the affiliated relationship.

In other words, when considering the case of a husband and wife being directors of two companies involved in transactions, businesses need to fully compare all criteria stipulated in Article 5 of Decree 132/2020/ND-CP instead of focusing solely on ownership or voting rights.

Conditions for service fees between two companies to be considered deductible expenses.

After determining that two businesses are related according to the provisions of Decree 132/2020/ND-CP, businesses need to pay special attention to the conditions for recognizing service fees incurred between related parties.

Point a, Clause 2, Article 16 of Decree 132/2020/ND-CP stipulates that taxpayers may include service fees as deductible expenses when determining taxable corporate income if they fully meet the prescribed conditions.

Services must have commercial, financial, and economic value.

One of the primary conditions is that the service provided must have commercial, financial, and economic value. This means the service must provide a real benefit to the business using the service, and not be a transaction designed solely to manipulate profits or transfer profits between related parties. Businesses need to provide evidence demonstrating that the service was provided and delivered real value to their operations.

Services must directly support production and business activities. 

In addition to having commercial value, services must also directly support the production and business activities of the taxpayer.

For example, a business may incur expenses for management consulting, information technology, marketing, logistics, training, or technical support services if these services directly support its business operations.

Conversely, businesses need to refer to the regulations in Article 16 of Decree 132/2020/ND-CP to identify expenses that do not meet the conditions or fall under the cases where they cannot be included as deductible expenses.

Service fees must be determined according to the arm's length principle.

Another important requirement is that service fees must be determined on the basis of the arm's-length principle. According to Decree 132/2020/ND-CP, service fees or methods for allocating service costs among affiliated parties must be applied uniformly throughout the group for services of a similar nature.

The arm's-length principle is applied to ensure that prices between related parties do not distort tax obligations compared to transactions between independent parties under similar conditions.

Documents and records that businesses need to prepare.

To prove that service fees are deductible, taxpayers need to maintain complete records as required. The documents to prepare include:

• Service agreement.
• Invoices and payment documents as required.
• Documentation proving that the service was actually provided.
• Information regarding the service fee calculation method.
• Criteria for cost allocation (if any).
• A pricing policy or cost allocation policy that applies uniformly to similar services.

In cases involving transactions related to centers performing specialized functions or synergistic value-added functions of the group, the enterprise must also determine the total value generated from these functions and the appropriate profit allocation based on the value contribution of each affiliated party, in accordance with the provisions of Article 16 of Decree 132/2020/ND-CP.

If a husband and wife are directors of two companies and have transactions, are they required to declare these related-party transactions?

After determining that a married couple, acting as directors of two companies, have related-party transactions as defined by Decree 132/2020/ND-CP, the enterprise needs to further determine its declaration obligations and prepare a Transfer Pricing Documentation file.

This is a common misconception in practice, especially for small businesses or those with relatively small related-party transactions. Many businesses believe that being exempt from preparing a Transfer Pricing Documentation means they are not required to declare related-party transactions. However, current regulations do not define it that way.

Reference: Declaration of related-party transactions involving loans to the director.

Businesses that have related-party transactions must file a tax return.

Decree 132/2020/ND-CP stipulates that taxpayers with related-party transactions must declare information on these transactions according to the appendices issued with the Decree when settling corporate income tax.

The purpose of this declaration is to provide tax authorities with a basis for monitoring, evaluating, and managing transactions between related parties in accordance with tax management laws.

Therefore, when a husband and wife are directors of two companies with transactions and the business falls under the category of related-party transactions as defined in Article 5 of Decree 132/2020/ND-CP, they need to fully review their tax declaration obligations and corporate income tax settlement documents.

In which cases is it waived to prepare a Transfer Pricing Documentation File? 

Point a, Clause 2, Article 19 of Decree 132/2020/ND-CP stipulates that taxpayers are still required to declare and determine transfer pricing according to Appendix I, but are exempt from preparing a Transfer Pricing Documentation File if they simultaneously meet the following conditions:

• Total revenue generated during the tax period is less than 50 billion VND.
• The total value of all related-party transactions arising during the tax period is less than VND 30 billion.

As can be seen, the law stipulates two conditions simultaneously: revenue and the value of related-party transactions. These are two mandatory conditions that must be met at the same time to be exempt from preparing a Transfer Pricing Documentation.

See also: No related-party transaction documentation is required.

A real-life example of a husband and wife who are directors of two companies with business dealings.

To help visualize the practical application of Decree 132/2020/ND-CP, here are some common scenarios. 

Case 1: Two companies buy and sell goods.

Company A is managed by the wife as Director, and Company B is managed by the husband as Director. Both companies engage in transactions involving the purchase and sale of raw materials for their production activities.

In this case, the business needs to refer to the provisions of point g, clause 2, Article 5 of Decree 132/2020/ND-CP to determine the related-party relationship and fulfill the relevant obligations as prescribed.

Case 2: Two companies enter into a service provision transaction.

Company A provides management consulting services to Company B. If the service fee fully meets the conditions stipulated in point a, clause 2, Article 16 of Decree 132/2020/ND-CP, the enterprise may consider including it as a deductible expense when determining taxable corporate income.

At the same time, businesses need to keep complete records of contracts, documents, invoices, and other materials proving the provision of services as required by regulations.

Case 3: Leasing of assets between two businesses

The wife's company leases office space to the husband's company. Since this is a transaction between related businesses as defined by regulations, the businesses must determine the transaction price according to the arm's length principle and fulfill their declaration obligations as per current regulations.

Common business mistakes

During the process of advising on and preparing related-party transaction documents, MAN – Master Accountant Network has observed that many businesses make mistakes due to a lack of full understanding of the regulations in Decree 132/2020/ND-CP. Some common mistakes include: 

• Without a capital contribution relationship, it is not considered an affiliated party.
• If two companies do not directly control each other, no related-party transactions arise.
• Failure to review the relationships between business managers.
• Failure to declare related-party transactions when transactions occur.
• The misconception is that being exempt from preparing a Transfer Pricing Documentation is synonymous with being exempt from declaring the transaction.
• Failure to retain complete contracts, invoices, and documents proving service transactions.
• The conditions for determining transaction prices according to the arm's length principle were not reviewed.

What should businesses be aware of when a husband and wife are directors of two companies that have business dealings?

When a husband and wife are directors of two companies that have transactions, the business should proactively review these transactions from the moment they occur, rather than waiting until the tax settlement period. Specifically, the following steps should be taken:

• Correctly identify the affiliation relationship according to Article 5 of Decree 132/2020/ND-CP.
• A thorough assessment of the obligation to disclose related-party transactions.
• Compare the conditions for exemption from preparing Transfer Pricing Documentation under Article 19.
• Determine the transaction price according to the independent trading principle.
• Prepare all necessary contracts, invoices, receipts, and documents to prove the transaction.
• Regularly review all transactions that occur during the year to ensure accurate reporting.

Preparing the necessary documents from the outset will save businesses time, minimize errors, and make it easier to explain matters to the tax authorities. 

Conclude

In cases where a husband and wife are directors of two companies and have transactions, the business needs to review the matter based on the regulations in the 2020 Enterprise Law and Decree 132/2020/ND-CP to correctly determine the related-party relationship and tax obligations. Besides assessing the related-party relationship, the business should also ensure full compliance with declaration obligations, verify eligibility for exemption from preparing transfer pricing documentation, and prepare complete documentation for transactions arising between related parties.

Strict compliance from the outset not only helps businesses minimize risks during tax audits and inspections but also lays the foundation for transparent and effective tax management. If businesses are still struggling with identifying related-party relationships, declaring related-party transactions, or preparing related-party transaction pricing documents, they should consult relevant resources. related party transaction advisory services Seek guidance from specialized and experienced consulting firms like MAN – Master Accountant Network to receive advice tailored to your specific situation.

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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.

Frequently Asked Questions about a married couple who are directors of two companies with business dealings.