#5 - Type of relationship

When a loan from a commercial bank becomes a related party transaction

One of the most surprising and frequently asked questions I receive is:

“Why is it that when my company borrows only from commercial banks, it is still considered a related-party transaction?”

At first glance, it does seem illogical. A company securing a loan from a commercial bank - a standard financial practice - shouldn’t automatically be subject to transfer pricing (TP) rules, right?

1. The historical context and regulatory challenges

The origins of the issue

To understand why Vietnam’s tax authorities classify these transactions as related-party dealings, it is essential to examine past practices. Historically, tax regulators observed that corporate groups strategically structured loans through commercial banks acting as intermediaries. This approach was often used to circumvent transfer pricing regulations, facilitating the cross-border shifting of profits and enabling businesses to exploit financing mechanisms to minimize tax liabilities. By channeling transactions through third-party financial institutions, these groups created the appearance of independent dealings while maintaining control over the economic substance of the arrangements. This practice raised concerns among tax authorities, prompting stricter scrutiny and regulatory responses to ensure compliance and prevent tax base erosion.

For example, consider a multinational enterprise (MNE) with a parent company in Country A and a subsidiary in Vietnam. Instead of directly providing a loan to its subsidiary - an arrangement that would be subject to transfer pricing rules - the parent company deposits funds into a commercial bank in a third country. The bank then issues a loan to the Vietnamese subsidiary under terms that may appear to be at arm’s length.

In this scenario, the Vietnamese subsidiary technically borrows from an independent financial institution rather than directly from its parent company. However, in substance, the bank is merely an intermediary, and the economic benefit of the loan arrangement still flows within the corporate group. This setup allows the MNE to manipulate interest rates, shift profits across borders, and reduce taxable income in Vietnam while maintaining compliance on paper.

Recognizing such structures, Vietnam’s tax authorities have tightened their scrutiny, treating these loan amount equals at least 25% of equity of the borrowing enterprise and account for more than 50% of total medium and long term debts of the borrowing enterprise as related-party transactions.

The burden on businesses

This broad classification placed a significant compliance burden on businesses, especially those seeking legitimate financing for operations and expansion. Key challenges included:

📌 Automatic related-party classification – Vietnam’s tax authorities took a stricter stance on loan transactions, presuming that borrowings from banks could be part of intra-group financing structures if the loan is significant and meet the threshold as stated in the regulation.

📌 Extensive documentation requirements – Even when a company secured a loan through a commercial bank on purely commercial terms, but if it meets the threshold to be considered as related party, the taxpayer was still required to prepare full transfer pricing (TP) documentation. This requirement significantly increased the compliance burden for businesses, as they had to prove that their financing arrangements were independent and aligned with arm’s-length principles. The extensive documentation included market interest rate benchmarking, financial justifications, and detailed explanations to demonstrate that the loan terms were not influenced by any related-party arrangements.

📌 EBITDA interest deduction cap – Vietnam introduced a 30% cap on interest expense deductions based on a company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). While this measure aimed to prevent excessive interest deductions and limit profit shifting, it had unintended consequences for capital-intensive industries and startups. These businesses often rely heavily on debt financing in their early stages and may have lower EBITDA margins. As a result, their ability to deduct legitimate interest expenses was severely restricted.

📌 Severe tax adjustments in case of loss – The regulation became even more punitive for companies reporting a negative EBITDA. In such cases, the entire interest expense was disallowed for tax purposes, meaning that businesses with temporary financial struggles faced a disproportionately high tax burden. This policy posed significant financial distress for companies navigating economic downturns, investment-heavy phases, or industries with long payback periods. Instead of allowing flexibility for businesses to recover, the strict disallowance of interest deductions further strained their financial stability.

2. A turning point: Decree 20/2025/ND-CP emphasizing substance over form

On February 10, 2025, the Vietnamese government issued Decree 20/2025/ND-CP, bringing relief to businesses and aligning tax policies with economic realities.

Under this new decree, large-value loans and guarantees with commercial banks will no longer be classified as related-party transactions, provided that:

• No capital or management control exists – The enterprise and the bank must be independent entities with no common capital or management ownership.
• No third-party influence – A third-party entity should not hold interests in both the company and the bank.

This regulatory shift is a significant step towards enhancing transparency and practicality in TP compliance.

✅ Substance over form: A more practical approach to Transfer Pricing

Vietnam’s updated TP framework marks a significant shift towards economic substance rather than rigid legal definitions. One notable change is the exclusion of large commercial bank loans from related-party relationships, ensuring that genuine third-party financing is not unfairly scrutinized under transfer pricing rules.

✅ Better support for businesses in growth and investment phases

Vietnam’s dynamic business landscape is fueled by a surge of young enterprises, many of which are in capital-intensive sectors and require significant external financing to scale. The removal of the related-party relationship classification for certain financing arrangements is a welcome step, reducing the documentation burden for these growing businesses. This ensures that startups and expanding companies can focus on operations rather than complex compliance procedures.

Furthermore, eliminating the interest expense cap aligns with the realities of high-growth industries that rely on debt financing to sustain their early-stage development. By allowing a more business-friendly approach, Vietnam enhances access to capital while maintaining a fair and transparent tax environment. This policy shift not only supports entrepreneurship but also strengthens the country’s long-term economic resilience by encouraging investment and innovation.

✅Future considerations: striking the right balance

While this policy shift is a welcome change, continued monitoring and refinement will be essential. Tax authorities will need to ensure that businesses do not exploit relaxed classifications for unintended tax advantages while maintaining a pro-business, investment-friendly environment. Striking this balance will be crucial in fostering economic growth, transparency, and fair taxation.

Conclusion: A step in the right direction

With Decree 20/2025, Vietnam’s TP rules take a meaningful step towards economic realism, eliminating unnecessary barriers to legitimate financing. This change reflects a broader commitment to balancing tax enforcement with a business-friendly environment.

As businesses adapt to these new regulations, it remains essential to stay informed and maintain compliance with evolving tax policies. The landscape of TP in Vietnam is transforming, and companies that proactively adjust their strategies will be best positioned for success.

This reform is not just about tax compliance - it’s about enabling businesses to thrive in a fairer and more transparent regulatory framework. 🚀