During business operations, enterprises need to pay close attention to affiliate transactions, clearly define their rights and obligations, especially in declaring and paying taxes with competent tax authorities to avoid legal risks arising.
To avoid tax evasion, conducting transactions for profiteering, tax evasion, and dominating market activities, the Vietnamese State pays special attention to the management of affiliate transactions that take place during enterprise business activities.
1. What is an affiliate transaction?
- Decree No. 132/2020/ND-CP defines affiliated transactions as transactions arising between parties that have a relationship in the production and business process, also known as affiliated parties. Accordingly, an affiliated party is a party in one of the following two cases:
- One party directly or indirectly participates in the management, control, capital contribution, or investment in the other party;
- The parties are directly or indirectly under the management, control, capital contribution, or investment of another party.
- Decree No. 132/2020/ND-CP also specifies affiliated parties in the two cases mentioned above, including:
- When an enterprise directly or indirectly holds at least 25% of the capital contributed by the owner of the remaining enterprise;
- When both businesses have at least 25% of the owner’s capital contribution held directly or indirectly by a third party;
- An enterprise is the largest shareholder in terms of owner’s capital contribution and holds directly or indirectly at least 10% of the total shares of the other enterprise;
- A business guarantees or lends capital to another business in any form, provided that the loan capital is at least equal to 25% of the capital contributed by the owner of the borrowing business and accounts for more than 50% of the total value. medium and long-term debts of the borrowing enterprise;
- An enterprise appoints members of the executive management board or takes control of another enterprise, provided that the number of members appointed by the first enterprise accounts for more than 50% of the total number of executive management board members operate or take control of a second enterprise, or a member appointed by the first enterprise has the right to decide on the financial policies or business operations of the second enterprise;
- When two enterprises have more than 50% of the members of the board of directors or one member of the board of directors has the right to decide on financial policies or business operations appointed by a third party;
- Two businesses are operated or controlled in terms of personnel, finance, and business operations by individuals belonging to one of the family relationships such as spouses, biological parents, adoptive parents, stepfathers, stepmother, parents-in-law, parents-in-law, and others;
- When two business establishments have a head office and permanent establishment relationship or are both permanent establishments of foreign organizations and individuals;
- Enterprises that are controlled by an individual through this individual’s capital contribution to that enterprise or direct participation in operating the enterprise;
- Other cases in which an enterprise is subject to actual management, control, and decisions regarding the production and business activities of the other enterprise;
- The enterprise has transactions in which it transfers or receives capital contribution of at least 25% of the enterprise’s owner’s capital contribution during the tax period; Borrow or lend at least 10% of the owner’s capital contribution at the time of the transaction in the tax period with an individual who operates or controls the enterprise or with an individual in a prescribed relationship.
- From the perspective of state management, affiliated transactions are defined as specific transactions of affiliated parties, including:
- Transactions of buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, transferring goods, providing services or other tangible and intangible assets;
- Loan transactions, financial services, financial guarantees and other financial instruments;
- Agreement to buy, sell, and use common resources such as assets, capital, labour, and to share costs between related parties.
2. Notes when declaring and paying taxes for affiliate transactions
When an affiliate transaction arises, the tax authority will carry out:
- Determine the nature of the related transaction based on the comparison between the contract and agreement related to the transaction and the practices performed by the parties; and
- Determine the price, profit ratio, and profit distribution ratio of taxpayers based on the principle of comparison and analysis.
Therefore, when carrying out an affiliate transaction, the affiliated parties must ensure objectivity, fairness, and determine the correct value of the affiliate transaction by conducting their own analysis, comparison, and valuation, to avoid corporate income tax profiteering based on reducing transaction value. In addition, the affiliated parties must comply with tax declaration and payment on time and provide information according to regulations on tax management for businesses that have affiliated transactions.
In case the affiliated parties (as taxpayers) violate the law, enterprises must make additional payments and may be subject to tax inspection.
In conclusion, for affiliated transactions, enterprises need to ensure compliance with tax declarations and payments, determine the correct transaction value, and be accurate about the appropriate corporate income tax liability to avoid being subjected to tax authority assessments or any other legal risks that may arise. Aiming for a healthy business environment by complying with the Law is a condition for businesses to develop safely.