Question:
We are a company that acts as a distributor for domestic car manufacturers. Due to business needs and the policies of the car manufacturers, each legal entity is only allowed to act as a distributor for one car manufacturer. Therefore, in 2019, our company invested in establishing a subsidiary to distribute vehicles from Thaco (with a 55% ownership stake). The parent company and the subsidiary are two completely independent companies, both subject to corporate income tax (CIT) in Vietnam, applying the same tax rates, and neither company enjoys CIT incentives for the tax period. Based on Decree No. 20/2017/NĐ-CP dated February 24, 2017, and Decree No. 68/2020/NĐ-CP dated June 24, 2020, of the Government regarding tax management for related-party enterprises, our company has the following questions:
• Due to the nature of the car trading industry, the parent company and the subsidiary have incurred loans from different credit institutions and loans from individuals outside the group. The loan approval processes are entirely independent, and the sources of revenue (repaying debts, loan interest) are also independent. Does this lending activity of our company qualify as a related-party transaction? And does it have to comply with the interest expense cap of 30% of EBITDA?
• During its operations, Cong Ty Dong Do Thanh sells vehicles and spare parts at the market price (according to the manufacturer’s price list) to the subsidiary, which then sells them to customers. This buying and selling activity does not affect the net profit of the parent company. Is this buying/selling activity considered a related-party transaction? Could you please provide guidance and clarification on the provisions in Section 3, Article 8, Chapter 2 of Decree No. 20/2017/NĐ-CP? As per our understanding, this Decree does not cover our independent transactions.
Answer:
Based on Decree No. 132/2020/NĐ-CP dated November 5, 2020, of the Government regarding tax management for related-party enterprises (effective for the 2020 corporate income tax period), if during the corporate income tax (CIT) period, your company engages in the purchase and sale of goods and services with related parties as defined in Article 5 of Decree No. 132/2020/NĐ-CP, then all interest expenses paid to credit institutions, including loans from related parties and loans from individuals during the period, are deductible for tax purposes unless the income tax incentive provisions of Article 3 of Decree No. 68/2020/NĐ-CP of the Government apply.
The total interest expense after deducting deposit interest and interest on loans incurred during the period of your company is deductible for tax purposes, provided that the tax-deductible corporate income does not exceed 30% of the total net profit from business activities during the period plus the interest expense incurred during the period of your company. Question: I am a legal representative and owner of Company A, an LLC, and I also have invested capital in another LLC, Company B, with a 30% ownership stake in the registered capital. In Company A, I have taken out loans from a bank to support its production and business activities (unrelated to Company B) and have incurred loan interest every month. Is this interest expense valid, and is it subject to the restrictions of Decree No. 68/2020/NĐ-CP?
Answer:
Based on Article 5 of Decree No. 20/2017/NĐ-CP dated February 24, 2017, which regulates tax management for related-party enterprises, and Article 1 of Decree No. 68/2020/NĐ-CP dated June 24, 2020, of the Government amending and supplementing Article 3 of Decree No. 20/2017/NĐ-CP dated February 24, 2017, on tax management for related-party enterprises.
According to the above regulations:
• In the case that Company A, during the CIT period, has transactions with related parties as defined in Article 5 of Decree No. 20/2017/NĐ-CP, the company falls under the adjustment scope of Decree No. 68/2020/NĐ-CP. Therefore, the interest expenses paid during the period are deductible for tax purposes only if they meet the conditions specified in Article 3, Clause 8, Chapter 2 of Decree No. 20/2017/NĐ-CP (as amended and supplemented by Article 1 of Decree No. 68/2020/NĐ-CP).
• In the case that Company A does not have related-party transactions with the related parties as defined in Article 5 of Decree No. 20/2017/NĐ-CP, the interest expenses incurred by Company A are not subject to the restrictions set forth in Decree No. 68/2020/NĐ-CP of the Government.
