Deductibility of Interest Loan for Company With Related Party Transactions – What Should Be Aware?

In recent tax audits performed by tax authorities national wide, especially in big cities and provinces where the tax contribution accounting for large part of the state budget like Ho Chi Minh City, Hanoi, Hai Phong or Binh Duong, Ba ria-Vung Tau…, one of a typical issue of tax challenge is the deductibility of interest loan when a company falls in the position triggering related party transactions with a lender.

Vietnam does not have a thin capital rules in place except for certain business sectors and as normal practice, a lot of Vietnam companies operate with thin capital. They tend to use bank loans or shareholder loan or even non-bank third party loan for business, especially with real estate companies. For the past tax audit, interest paid for a bank loans are generally not scrutinized by tax authorities given the interest rate offered by a commercial bank are most considered as on market price but now those could be a material issue for a company as transacted with a commercial bank can be subject to related party limitations and cap deduction of interest loan for corporate income tax purpose.