Can a company borrow money from the Director to operate when lacking capital? If so, is this an affiliate transaction?

1. Can a company borrow money from the Director to operate when it lacks capital?

Currently, the 2015 Civil Code, 2020 Enterprise Law and related guiding documents do not have a regulation prohibiting a company from borrowing money from the Director of that company, and in reality it is completely possible.

However, also from a practical perspective, in the same situation In a loan contract, it is impossible for one person to be both the lender and the borrower.

Therefore, in this case, there is a solution as follows:

– If the Director is in the name of the lender, then on the company’s side, the representative must be someone other than the Director (for example, a legal representative).

– If the Director signs the contract on behalf of the lender. company, the lender must be someone else, such as father, mother, wife, child,…

2. Is a company borrowing money from a Director an affiliated transaction?

A company borrowing money from a company’s Director can be an affiliated transaction, depending on each specific case.

According to point l, Clause 2, Article 5 Decree 132/2020/ND-CP, the enterprise has transactions of transferring or receiving the transfer of capital contribution of at least 25% capital contributed by the owner of the enterprise 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 an enterprise or with an individual in one of the relationships as prescribed in Point g of this Clause.

Comparing with Clause 24, Article 4 of the Law on Enterprises 2020, enterprise managers are private enterprise managers and company managers, including private enterprise owners, general partner, Chairman of the Board of Members, member of the Board of Members, President of the company, Chairman of the Board of Directors, member of the Board of Directors, Director or General Director and individuals holding other management positions as prescribed in the company’s Charter.

Therefore, in case a company borrows money from the CEO and controls the company with a loan of at least 10% of the owner’s capital contribution, it is determined to have an affiliated relationship and the loan transaction between the company and the Director is an affiliated transaction.

Thus, borrowing money from the Director is considered an associated transaction when two conditions are simultaneously met:

– Director is the person who operates and controls the enterprise;

– Borrow at least 10% of the owner’s capital from the Director.

If these conditions are not met, the loan transaction between the company and the Director will not be determined as an affiliated transaction.

3. What is the total deductible interest expense when determining corporate income taxable income for businesses with associated transactions?

Total deductible interest expenses when determining income subject to corporate income tax for enterprises with associated transactions include the amounts specified in Clause 3, Article 16 of Decree 132/2020/ND-CP as follows:

– The total loan interest expense after deducting deposit interest and loan interest arising in the taxpayer’s period is deductible when determining taxable income of corporate income tax does not exceed 30% of the total net profit from business activities in the period plus loan interest expense after deducting deposit interest and loan interest arising in the period plus depreciation expenses arising in the taxpayer’s period;

– The portion of loan interest expenses that are not deductible according to the provisions of Point a of this Clause shall be carried over to the next tax period when determining the total deductible loan interest expenses in case the total deductible arising loan interest expenses of the next tax period is lower than the level specified in Point a of this Clause. The period of transfer of loan interest expenses shall be calculated continuously for no more than 05 years from the year following the year in which non-deductible loan interest expenses arise;

– The provisions in point a of this clause do not apply to loans from taxpayers who are credit institutions under the Law on Credit Institutions; organize insurance business according to the Law on Insurance Business; Official development assistance (ODA) loans and preferential loans from the Government are carried out in the form of the Government borrowing from foreign countries and on-lending to businesses; loans to implement national target programs (new rural programs and sustainable poverty reduction); Loans for investment in programs and projects implementing the State’s social welfare policies (resettlement housing, worker and student housing, social housing and other public welfare projects).