What is a related-party transaction? What are the cases considered to have a related-party? How to determine a related-party according to legal regulation? This article will analyze the above issues.

1. What is a related-party transaction?

Pursuant to Clause 22, Article 3 of the Law on Tax Administration 2019, a related-party transaction is a transaction between parties with a related-party relationship.

Regarding how to determine related parties, Clause 1, Article 5 of Decree 132/2020/ND-CP stipulates as follows:

(i) One party directly or indirectly participates in the management, control, capital contribution or investment in the other party.

(ii) The parties are directly or indirectly under the management, control, capital contribution or investment of another party.

Accordingly, an affiliated transaction is a transaction between a party participating in the control, management, capital contribution of the controlled / managed / capital contributing party or between parties under the management / control / capital contribution / investment of another party.

2. How to identify related-party transactions

To identify related-party transactions, it is necessary to determine based on 02 factors: the transaction content and the subject performing the transaction.

2.1. Content of related-party transactions

According to Clause 2, Article 1 of Decree 132/2020/ND-CP, related party transactions are transactions with the following contents:

- Transactions of buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning goods, providing services.

- Borrowing, lending, financial services, financial guarantees and other financial instruments.

- Purchase, sale, exchange, rent, lease, borrow, lend, transfer, assign tangible assets, intangible assets and agreements to purchase, sell, and use resources such as assets, capital, labor, and share costs between related parties, except for business transactions on goods and services subject to State price adjustment, which are implemented in accordance with the provisions of the law on prices.

2.2. Subjects performing related party transactions

As mentioned, transactions that satisfy the content prescribed in Clause 2, Article 1 and are performed by parties with related parties are considered related-party transaction.

Clause 2, Article 5 of Decree 132/2020/ND-CP specifically stipulates parties with related parties as follows:

(i) One enterprise directly or indirectly holds at least 25% of the owner's capital contribution of the other enterprise.

(ii) Both enterprises have at least 25% of the owner's capital contribution held directly or indirectly by a third party.

(iii) One enterprise is the largest shareholder in terms of the owner's capital contribution and directly or indirectly holds at least 10% of the total shares of the other enterprise.

(iv) An enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties secured by related party financial resources and financial transactions of a similar nature) provided that the loan amount is at least 25% of the equity capital of the borrowing enterprise and accounts for more than 50% of the total value of medium- and long-term debts of the borrowing enterprise.

(v) An enterprise appoints members of the executive management board or holds 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 members of the executive management board or holds control of the second enterprise; or a member appointed by the first enterprise has the right to decide on the financial policies or business activities of the second enterprise.

(vi) Two enterprises have more than 50% of the members of the board of directors or have one member of the board of directors who has the right to decide on financial policies or business operations appointed by a third party.

(vii) Two enterprises are operated or controlled in terms of personnel, finance and business operations by individuals in one of the following relationships:

- Husband, wife.

- Biological parents, adoptive parents, stepfathers, stepmothers, parents-in-law, parents-in-law.

- Biological children, adopted children, stepchildren of the wife or husband, daughter-in-law, son-in-law.

- Full siblings, half siblings, half siblings, brothers-in-law, sisters-in-law of the same parents or half siblings.

- Paternal grandparents, maternal grandparents.

- Grandchildren, grandchildren.

- Aunts, uncles, paternal uncles and nieces.

(viii) Two business establishments have a relationship of head office and permanent establishment or are both permanent establishments of foreign organizations or individuals.

(ix) Enterprises under the control of an individual through the capital contribution of this individual to that enterprise or directly participating in the operation of the enterprise.

(x) Other cases in which the enterprise is actually managed, controlled, and decided on the production and business activities of the other enterprise.

(xi) The enterprise has the following transactions:

- Transferring or receiving the transfer of at least 25% of the capital contribution of the owner of the enterprise during the tax period.

- Borrowing or lending at least 10% of the capital contribution of the owner at the time of the transaction during the tax period to the individual operating or controlling the enterprise or to an individual in one of the relationships specified in Clause (vii) of this Section.

This article is for reference only and is not intended to be used as advice. If you need advice, please contact us via email: info@barrso.com