Decree 20/2025/ND-CP refines Vietnam’s related party framework by adding debt-based criteria to traditional ownership tests—a targeted amendment that creates immediate compliance implications for FDI entities with intercompany financing arrangements. The new regulation introduces a 25% equity ownership threshold combined with a 50% medium and long-term debt criterion for financial borrowings, expanding the scope beyond traditional ownership-based definitions.
For FDI entities, this means immediate review of existing related party classifications, updated Annex I disclosure templates, and reassessment of interest expense deductibility calculations. The decree became effective March 27, 2025, and applies to the 2024 tax period. Under Decree 20/2025/ND-CP, the State Bank of Vietnam (SBV) coordinates with tax authorities to provide specific information upon request, including data on related persons of credit institution board members, shareholders owning 1% or more of charter capital, and affiliated companies as per SBV’s management system.
Executive Key Takeaways
- Financial Impact: Decree 20/2025/ND-CP introduces new 25% equity + 50% medium/long-term debt thresholds for financial borrowings—directly affecting interest expense deductibility calculations for FDI entities.
- Legal Compliance: Annex I disclosure requirements have been updated; all 2024 disclosures must be reviewed immediately against the new template to avoid audit triggers.
- Timeline: Transitional provisions in Article 3 of Decree 20/2025/ND-CP permit eligible enterprises to allocate non-deductible interest expenses carried forward from pre-2024 periods (arising solely from loans with credit institutions now exempted as related parties) evenly over the remaining carryforward periods into 2024 and 2025, following the rules at Point b Clause 3 Article 16 of Decree 132/2020/ND-CP.
- Strategic Risk: Under Decree 20/2025/ND-CP, the State Bank of Vietnam (SBV) coordinates with tax authorities to provide specific information upon request, including data on related persons of credit institution board members, shareholders owning 1% or more of charter capital, and affiliated companies as per SBV’s management system. This enhances tax authorities’ ability to verify related party relationships within credit institutions.
- Documentation Gap: FDI-specific reporting thresholds and cross-border RPT documentation remain under-addressed in current guidance—proactive compliance recommended.
What Qualifies as Related Party Transactions Under Decree 20/2025
Decree 20/2025/ND-CP redefines related party relationships by combining equity ownership and debt-based criteria. Decree 20/2025/ND-CP redefines related party relationships for financial transactions by introducing specific criteria. A lender is considered a related party if the total balance of outstanding loans from that lender equals or exceeds 25% of the borrower’s equity AND 50% of the borrower’s total medium and long-term liabilities: obligations with repayment terms exceeding 12 months from balance sheet date, per Vietnamese Accounting Standards. Notably, credit institutions are excluded if they do not participate in the management, control, or investment of the borrower, or if both lender and borrower are under common control of a third party. Understanding these thresholds is critical for Vietnam corporate tax compliance 2025 and transfer pricing analysis.
Updated Definition of Related Parties
The 25% equity threshold applies to direct and indirect ownership structures. For financial borrowings, the 50% medium and long-term debt criterion measures the borrower’s total medium and long-term liabilities against amounts owed to the potential related party. Independent branches of foreign enterprises receive specific treatment—transactions between the branch and its head office qualify as related party transactions regardless of ownership percentages.
Credit institutions fall within scope when loan outstanding balances meet the debt threshold. The regulation explicitly includes financial borrowings in the related party definition, closing a gap that existed under Decree 132/2020/ND-CP. This expansion affects how FDI entities classify intercompany loans, shareholder advances, and third-party financing arrangements where ownership and debt relationships overlap. FDI entities should ensure their Vietnam Accounting Standards VAS implementations capture these debt relationships in financial statements.
Key Changes from Decree 132/2020
Decree 132/2020/ND-CP focused primarily on equity ownership percentages without explicit debt-based criteria for financial relationships. The key changes under Decree 20/2025/ND-CP include:
| Criterion | Decree 132/2020 | Decree 20/2025 |
|---|---|---|
| Equity Threshold | 25% ownership | 25% ownership (maintained from Decree 132) |
| Debt Criterion | Not explicitly defined | 50% of medium/long-term liabilities |
| Financial Borrowings | Implied coverage | Explicitly included |
| Credit Institutions | Limited scope | Expanded to loan balances |
The combined threshold approach means entities previously classified as unrelated may now qualify as related parties if debt relationships meet the 50% criterion. In practice, this affects interest expense deductibility calculations and transfer pricing documentation requirements. Organizations implementing circular 99/2025 Vietnam accounting regulations must align their financial reporting with these new definitions.
FDI-Specific Application Thresholds
FDI entities must evaluate both equity and debt relationships when determining related party status. The documentation threshold (ngưỡng lập hồ sơ) (Enterprises with annual revenue ≥ VND 50 billion AND related party transactions ≥ VND 30 billion must prepare full transfer pricing documentation files)—triggers filing obligations when transactions with a single related party exceed specific amounts during the tax period. While Decree 20/2025/ND-CP establishes the definitional framework, implementing circulars will detail exact filing thresholds for different transaction types.
For cross-border transactions, FDI entities face additional scrutiny. The General Department of Taxation examines whether intercompany financing arrangements meet arm’s length standards under transfer pricing rules. The key risk for FDI entities is that debt-based related party classifications now require reassessment of historical loan agreements and shareholder advances that were previously treated as unrelated party transactions. Establishing proper Vietnam accounting compliance requirements frameworks ensures accurate classification from the outset.
Related Party Transaction Compliance Requirements & Documentation Process
Annex I – Disclosure of Related Parties and Transactions serves as the primary reporting mechanism under Decree 20/2025/ND-CP. The updated template requires detailed information about equity ownership structures, medium and long-term debt relationships, and transaction values with each related party. All enterprises must submit Annex I with their annual corporate income tax returns, under the Law on Tax Administration 2019.
Annex I Disclosure Requirements
The updated Annex I disclosure template captures both traditional ownership relationships and the new debt-based criteria. Mandatory fields for FDI entities include:
- Related party identification: legal name, tax code, jurisdiction
- Relationship basis: equity percentage AND medium/long-term debt percentage
- Transaction categories: goods, services, financial borrowings, royalties
- Transaction values: total amounts by category for the tax period
- Independent branch transactions: separate disclosure of head office dealings
| ⚠️ COMPLIANCE ALERT: Review 2024 disclosures using new Annex I immediately. Enterprises that filed under the old template must verify whether debt-based relationships now trigger related party classification under the 50% medium/long-term liability criterion. |
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The General Department of Taxation cross-references Annex I submissions against other tax declarations and third-party data. Incomplete or inconsistent disclosures trigger audit selection. In practice, tax authorities scrutinize FDI entities with significant intercompany financing arrangements, particularly when interest expenses represent a material portion of deductible costs. Compliance with Circular 32/2025/TT-BTC compliance standards ensures proper documentation trails for audit defense.
Interest Expense Deductibility Rules
Non-deductible interest expenses arise when related party financial borrowings fail to meet arm’s length conditions or exceed regulatory debt-to-equity ratios. Decree 20/2025/ND-CP’s expanded related party definition means more financial arrangements now require transfer pricing analysis for interest deductibility.
Decree 20/2025/ND-CP provides transitional relief under Article 3: For enterprises with non-deductible interest expenses carried forward to end-2023 from loan transactions solely with credit institutions that qualified as related parties under Decree 132/2020 but no longer do under Decree 20/2025 (due to the new exemptions), such expenses may be evenly allocated for deduction over the remaining carryforward periods into 2024 and 2025, in line with Point b Clause 3 Article 16 of Decree 132/2020/ND-CP.
The calculation methodology requires:
- Identify total non-deductible interest from periods before 2024
- Determine allocation percentage based on current-period taxable income
- Apply allocated amount as deduction in 2024 or 2025 tax period
- Document allocation basis in transfer pricing file
| ⚠️ COMPLIANCE ALERT: Reassess pre-2024 non-deductible interest under transitional rules. Deadline-sensitive action required—allocation must occur within 2024-2025 tax periods or the relief opportunity expires. |
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State Bank of Vietnam’s New Role
Under Article 1 of Decree 20/2025/ND-CP, the State Bank of Vietnam coordinates with tax authorities to provide specific information upon request, including data but not limited to related persons of credit institution board members, shareholders owning 1% or more of charter capital, and affiliated companies as per SBV’s management system.
This data-sharing mechanism enables tax authorities to verify:
- Loan outstanding balances reported in Annex I
- Medium and long-term debt classifications
- Shareholder relationships between borrowers and lenders
- Credit institution lending to related party groups
The cross-referencing capability significantly increases audit exposure for enterprises that underreport related party relationships or misclassify debt arrangements. A common compliance gap we observe: FDI entities disclose equity-based related parties but omit debt-based relationships that meet the 50% threshold, assuming credit institution loans fall outside related party rules. Proper Circular 186/2010/TT-BTC procedures documentation helps establish audit defense for all cross-border transactions.
Documentation Filing Checklist
Enterprises meeting documentation thresholds must prepare and maintain transfer pricing files.
The filing process follows these steps:
- Relationship Assessment: Evaluate all counterparties against 25% equity + 50% debt criteria
- Transaction Identification: Catalog all dealings with identified related parties by category
- Annex I Preparation: Complete updated template with relationship basis and transaction values
- Transfer Pricing File: Prepare documentation for transactions exceeding thresholds (refer to Appendix II of Decree 132/2020/ND-CP for Local File checklist classifications)
- Annual Submission: File Annex I with corporate income tax return by deadline
- Record Retention: Maintain supporting documents for inspection period
Timeline requirements align with corporate income tax filing deadlines. Transfer pricing files must be available within 15 working days of tax authority request. If-then decision tree: IF total related party transactions exceed documentation threshold AND involve cross-border counterparties, THEN full transfer pricing documentation is mandatory.
Risks & Penalties
Non-compliance with related party transaction regulations creates multiple exposure points: incorrect tax declarations, incomplete Annex I submissions, and inadequate transfer pricing documentation. The General Department of Taxation prioritizes audits of FDI entities with significant intercompany transactions, particularly when interest expenses or royalty payments represent material deductions.
Common Violations & Audit Triggers
Incomplete Annex I submissions occur when enterprises fail to identify all related parties under the expanded definition. The key risk is omitting debt-based relationships that meet the 50% medium/long-term liability threshold.
Tax authorities typically scrutinize discrepancies between:
- Reported related party lists and shareholder registers
- Declared transaction values and financial statement amounts
- Interest expense deductions and loan documentation
- Cross-border payment declarations and Annex I categories
Misclassified related party relationships trigger reassessment when audits reveal undisclosed ownership or debt connections. In practice, the State Bank of Vietnam’s data sharing enables tax authorities to identify credit institution loans that meet related party criteria but were reported as third-party transactions. Understanding [Vietnam tax law updates](/Vietnam new VAT law 2025: Key changes and compliance) across all regulatory domains strengthens overall compliance posture.
Interest expense over-deduction results from applying unrelated party treatment to financial borrowings that qualify as related party transactions under the 50% debt threshold. A common compliance gap: enterprises calculate interest deductibility without considering whether the lender meets the combined equity and debt criteria.
Cross-border transaction documentation gaps arise when FDI entities maintain insufficient transfer pricing files for related party dealings. Specific figures will be detailed in implementing circulars, but documentation requirements apply when transaction values exceed regulatory thresholds.
Penalty Framework
| ⚠️ COMPLIANCE ALERT: Penalties for related party transaction violations are specified in related sanction decrees. Late filing, incorrect declarations, and inadequate documentation each carry separate penalty provisions under the Law on Tax Administration 2019. |
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Tax reassessment occurs when authorities determine that related party transactions failed to meet arm’s length standards.
The reassessment includes:
- Additional tax on undeclared income or disallowed deductions
- Late payment interest calculated from original due date
- Administrative penalties for incorrect declarations
- Potential criminal liability for serious violations.
Late filing penalties under Decree 125/2020/ND-CP: VND 8-15 million for failing to submit Annex I with annual CIT returns or fail to provide transfer pricing documentation within the 15-day response period. Incorrect declaration penalties: 20% of deficit tax amount under Decree 125/2020/ND-CP of related party relationships or transaction values.
Practical Audit Defense
What triggers General Department of Taxation scrutiny: high interest expense ratios, significant cross-border payments to related parties, and inconsistencies between Annex I disclosures and financial statements. Based on recent audit trends, tax authorities focus on FDI entities in sectors with complex intercompany structures—manufacturing, technology, and financial services.
Protective documentation includes contemporaneous transfer pricing files, loan agreements demonstrating arm’s length terms, and detailed Annex I submissions that proactively address the 50% debt threshold. Reality check: enforcement patterns in 2024-2025 show increased coordination between tax authorities and the State Bank of Vietnam, with auditors requesting loan data to verify related party classifications.
The key risk for FDI entities is that historical treatment of intercompany financing may no longer align with Decree 20/2025/ND-CP’s expanded definition. Proactive reassessment of all financial borrowings against the combined equity and debt criteria reduces audit exposure and enables use of transitional provisions for pre-2024 non-deductible amounts. Ensuring vat refund documentation requirements 2025 standards are met alongside RPT compliance strengthens overall FDI tax position.
Conclusion
Decree 20/2025/ND-CP expands related party definitions through combined equity and debt thresholds, requiring immediate review of all existing classifications. The 25% ownership plus 50% medium/long-term debt criteria capture financial borrowings that traditional tests miss, directly affecting interest expense deductibility and transfer pricing documentation obligations. Annex I updates require immediate 2024 disclosure review to ensure compliance with the new template and avoid audit triggers.
State Bank of Vietnam data sharing increases audit cross-referencing capability, enabling tax authorities to verify loan balances and shareholder relationships against enterprise disclosures. FDI entities must reassess intercompany financing arrangements, utilize transitional provisions for pre-2024 non-deductible interest, and maintain comprehensive transfer pricing files for cross-border related party transactions.
