In the context of Vietnam’s increasingly integrated economy, transactions between enterprises within the same corporate group or with related parties (related-party or inter-company transactions) no longer constitute mere business operations – they also give rise to substantial legal and tax risks if a company adopts a complacent approach. With the amendments and supplements introduced by Decree 20/2025/NĐ‑CP (applicable for fiscal years beginning in 2024), enterprises must assume a more proactive stance. In this article, DNP Viet Nam Law Firm analyses five common risks associated with related-party transactions and proposes effective preventive measures.
Risk 1: Being subject to reassessment of price, profit, and tax due to failure to declare or prepare documentation for related-party transactions.
Pursuant to Paragraph 3 and Paragraph 4, Article 18 of Decree 132/2020/NĐ-CP: an enterprise engaged in related-party transactions has the obligation to declare information on related-party relationships and related-party transactions (pursuant to Appendix I/II/III) and to retain transfer-pricing documentation (local file, global file, etc.) so that it can be produced upon request by tax authorities. If the enterprise fails to declare, fails to maintain such documentation, or provides incomplete documentation – the tax authority may re-determine the price of the related-party transaction, revenue, expenses, profit and, consequently, adjust the amount of tax payable.
In such circumstances, the consequences may include: the enterprise may be subject to tax reassessment if prices or costs are adjusted in accordance with “arm’s-length” (independent-party) standards. In addition, administrative fines may be imposed. This may directly affect the enterprise’s profit, cash flow, and its reputation with the tax authorities.
Risk 2: Loan interest expenses or internal costs from related-party transactions being capped or disallowed as deductible expenses
Under Point a, Paragraph 3 of Article 16, Decree 132/2020, interest expenses arising from related-party borrowing are deductible only if they satisfy certain conditions; amounts exceeding the threshold or expenses failing to meet requirements may be denied deduction. Even when the enterprise qualifies for exemption from preparing the transfer-pricing file (under conditions in Article 19 of Decree 132), the limitation on interest expense deduction remains applicable.
If violated, excessive interest or unreasonable internal costs may be excluded from deductible expenses → increasing taxable profit → increasing corporate income tax due. This adversely affects after-tax profit, financial planning, cash flow, and reinvestment capacity.
Risk 3: Expanded definition of “related-party” (e.g. credit institutions, branches, guarantees…) – enterprises may be “surprised” upon inspection
Risk 4: Violation of declaration and documentation procedures → administrative sanctions and loss of deduction right
The obligation to declare related-party transactions lies in Article 18 of Decree 132/2020: enterprises with RPTs must submit Schedules I/II/III together with the corporate income tax finalization return. Failure to submit schedules or incorrect declaration entitles the tax authority to treat such acts as violations – including penalties, tax adjustments, and disallowance of certain expenses or interest deductions.
Consequences go beyond tax adjustments – the enterprise may face administrative fines, lose deduction rights for costs/interest, thereby directly affecting net profit, and undermining credibility with tax authorities, investors, and business partners.
Risk 5: Financial, cost and internal-governance risks: loss of control and increased susceptibility to tax audits
Pursuant to Paragraph 4 of Article 18, Decree 132/2020, an enterprise must retain the transfer-pricing documentation, including transaction information, pricing methodology, comparable data, supporting documents, contracts, market analysis, and related materials. Upon request by the tax authority, the enterprise must furnish the file within the prescribed timeframe; failure or incomplete documentation may trigger re-assessment of tax liabilities.
If not properly executed, the enterprise loses its ability to defend its pricing and expense positions against tax reassessment, leading to financial loss, reputational damage, governance issues – and making it difficult for partners or investors to assess compliance and risk management capabilities.
Illustrative Example
Suppose Company A (the parent company) has a subsidiary B. Company A purchases components from B for product assembly. They set the transaction price at a level lower than the market price (for example, 80% of the market price), with the purpose of reducing internal costs – thereby lowering internal profit and reducing corporate income tax liability.
- Because A and B are related parties (by virtue of a capital-contribution / control relationship under Clause 2, Article 5 of Decree 132/2020/NĐ-CP).
- Under Article 3 of Decree 132/2020/NĐ-CP, the price in a related-party transaction must comply with the “arm’s-length principle.” Preferential pricing offered between related parties – if it cannot be demonstrated to be equivalent to a price obtainable between independent third parties under comparable conditions – may be disregarded by the tax authorities.
- If an enterprise fails to prepare the transfer-pricing documentation required under Article 18 of Decree 132/2020/NĐ-CP when subjected to audit or inspection, the tax authority is entitled to re-determine the purchase/sale price of the related-party transaction – thereby increasing the internal cost base, raising taxable profit, and consequently imposing tax reassessment plus penalties.
If, after audit, the interest expense on loans borrowed from a related party exceeds the allowable limit under Article 16 of Decree 132/2020/NĐ‑CP, the excess portion of that interest expense shall not be deductible – which may materially affect post-tax profit, liquidity, and the company’s financial planning.
Conclusion
Related-party transactions – when properly governed – can serve as an effective instrument in a company’s business strategy. However, if left unmanaged, they can turn into a “black hole” of risks: tax liability, legal exposure, and internal-governance issues.
Therefore, DNP Viet Nam Law Firm recommends: you should proactively conduct a review starting today, and establish a comprehensive set of documentation, internal policies and procedures to prevent such risks.
DNP VIET NAM LAW FIRM
🏢Address: 5th Floor, 52 Nguyen Thi Nhung Street, Van Phuc Estate, Hiep Binh Ward, Ho Chi Minh City, Viet Nam.
📞 Hotline: 0987 290 273 (Đinh Văn Tuấn Lawyer).
📩 Email: info@dnp-law.com.
Website: https://www.dnp-law.com/
