According to the law, is it possible to borrow capital from a foreign parent company at 0% interest?

1. Is it possible to borrow capital from a foreign parent company at 0% interest?

Pursuant to Article 6 of Decree 132/2020/ND-CP stipulates as follows:

– Analysis and comparison of related-party transactions are carried out according to the principle of the nature of activities and transactions that determine tax obligations to determine the nature of related-party transactions. link:

+ The nature of the transaction is compared between the legal contract or document, transaction agreement of the parties and the actual implementation of the parties. In case a taxpayer has an affiliated transaction without a written agreement or the agreement is not in accordance with the principle of independent transactions or the actual implementation is inconsistent with the principle of independent transactions between parties that have no affiliated relationship, the affiliated transaction must be determined according to the true nature of the business between the independent parties, specifically: The affiliated party receiving revenue and profit from the affiliated transaction with the taxpayer must have the right to own and control business risks for the assets, goods, services, resources, rights to bring economic benefits and rights to generate income from shares, stocks and other financial instruments and taxpayers incurring costs from transactions with related parties must receive benefits, direct economic value or contribute to generating revenue, added value for the taxpayer’s production and business activities in accordance with the principle of independent transactions;

+ The nature of the transaction is determined by the collection method information, evidence, data on transactions and risks of affiliated parties in practical production and business activities.

– Analyze and compare affiliated transactions with independent transactions:

+ The basis for comparing contracts, documents, agreements and economic, commercial and financial relationships in taxpayers’ related transactions is data and actual transactions between related parties to compare with business decisions that can be approved by independent parties under similar conditions. The principle of comparison applied in analysis and comparison attaches more importance to the nature and business practices and risks borne by associated parties than written agreements;

+ Analysis and comparison must ensure similarity between enterprises conducting independent transactions with enterprises having affiliated transactions or independent transactions with affiliated transactions, with no different factors that materially affect the price; profit margin or profit allocation ratio between parties. In case there are different factors that materially affect the price; profit ratio or profit distribution ratio, must analyze, determine and make adjustments to eliminate that material difference through comparing the factors specified in Article 7, Article 10 of this Decree and in accordance with each method of determining the price of associated transactions specified in Article 13, Article 14, Article 15 of this Decree.

2. Regulations on selecting independent comparison objects

Pursuant to Article 7 of Decree 132/2020/ND-CP as follows:

– Choosing an independent internal comparison object is the selection of a taxpayer’s own transaction with a non-affiliated party, ensuring similarities without material differences affecting the price; profit margin or profit allocation ratio between parties. In case there is no similar independent internal comparison object, select the comparison object according to Points b and c, Clause 3, Article 17 of this Decree. The comparison between affiliated transactions and independent transactions is made on a transaction-by-transaction basis for each similar product. In cases where it is not possible to compare transactions by product, the aggregation of transactions must ensure compliance with the nature and business practices and the application of the method of determining the price of associated transactions is carried out in accordance with the provisions of Article 12, Article 13, Article 14, Article 15 of this Decree.

– Financial and business data of comparable objects must ensure reliability for use for tax declaration and calculation purposes, in accordance with accounting, statistical and tax regulations. The time the transactions of independent comparables arise must be at the same time as the related transaction or have the same fiscal year as the taxpayer’s, except in special cases where it is necessary to extend the comparison time as prescribed in Article 9 of this Decree. The data format must ensure that prices can be compared and calculated at the time of the transaction or in the same tax period; Comparative data on profit margins or profit distribution ratios must ensure at least three consecutive tax periods. For rate and relative rate values, taxpayers round the number to the second digit after the decimal point. In case the relative numbers are taken from published data without accompanying absolute numbers and this rounding principle is not used, the published data will be taken with reference to the source.

– The minimum number of independent comparison objects selected after analysis, comparison and adjustment of material differences is selected as follows: 01 object in case of related party transactions or taxpayers performing related party transactions and not independent comparison objects. there is a difference; 03 subjects in cases where independent comparables have differences but have enough information and data as a basis to eliminate all material differences and 05 subjects in cases where there is only information and data as a basis for eliminating most material differences of independent comparables.

Thus, according to the above regulations, tax management for enterprises with associated transactions is the same as for loan transactions between companies. in Vietnam and the parent company abroad can negotiate the interest rate themselves. However, this agreement must also be consistent with market interest rates.

3. Regarding the issue of contractor tax on foreign loans?

Pursuant to Clause 3, Article 7, Circular 103/2014/TT-BTC as follows:

“3. Income arising in Vietnam of Foreign Contractors, Foreign Subcontractors is income received in any form on the basis of contractor contracts, subcontractor contracts (except for the cases specified in Article 2 Chapter I), regardless of the location of business activities of the Foreign Contractor, Foreign Subcontractors. Taxable income of Foreign Contractors, Foreign Subcontractors in some specific cases can be as follows:

…

– Income from Loan Interest: is the Lender’s income from loans of any kind, whether or not the loan is secured by mortgage, whether or not the lender is entitled to income from the borrower; income from deposit interest (except interest on deposits of foreign individuals and deposit interest arising from deposit accounts to maintain operations in Vietnam of diplomatic missions and agencies). representatives of international organizations and non-governmental organizations in Vietnam), including bonuses associated with deposit interest (if any); income from deferred interest according to the provisions of contracts; income from bond interest, bond price discounts (except tax-exempt bonds), treasury bills; income from deposit certificate interest.”

Thus, according to the above analysis, the 0% interest rate when borrowing capital from a foreign parent company must be in accordance with market conditions.

Pursuant to Clause 1, Article 50 of the Law on Tax Administration 2019 as follows:

– Taxpayers are subject to tax assessment when falling into one of the following tax law violations:

+ Failure to register tax, failure to declare tax, failure to submit additional tax records as requested by the agency tax or tax declaration is not complete, truthful, or accurate in terms of tax calculation basis;

+ Does not reflect or does not reflect fully, honestly, or accurately data in accounting books to determine tax obligations;

+ Does not present accounting books, invoices, vouchers, and necessary documents related to determining the amount of tax payable within the prescribed time limit regulations;

+ Failure to comply with tax inspection and tax audit decisions according to regulations;

+ Buying, selling, exchanging and accounting for the value of goods and services not according to the normal transaction value on the market;

+ Buying or exchanging goods using illegal invoices, illegal use of invoices where the goods are real as determined by competent authorities and have been declared as taxable revenue;

+ There are signs of absconding or dispersing assets to not fulfill tax obligations;

+ Carrying out transactions inconsistent with economic nature, not actually arising for the purpose of reducing the taxpayer’s tax liability;

+ Failure to comply with regulations on the obligation to declare and determine associated transaction prices or failure to provide information according to regulations on tax management for enterprises with associated transactions.