Official Dispatch 6684/CT-TTHT 2020 Hanoi regarding related-party transactions

To: Thai Binh An Giang Trading and Service Company Limited

(Address: No. 48, Quoc Bao Area, Van Dien Township, Thanh Tri District, Ha Noi City, Tax identification number: 0102006674)

In response to the Official Dispatch received on January 20, 2020, from Thai Binh An Giang Trading and Service Company Limited, regarding related-party transactions, Hanoi Tax Department gives the following information:

- Pursuant to the Government’s Decree No. 20/2017/ND-CP dated February 24, 2017, prescribing tax administration of enterprises having transactions with related parties

+ Clause 3, Article 4 - Definition:

“Article 4. Definition

...3. “Related-party transaction” means a transaction arising between related parties in the course of production or business, including purchase, sale, exchange, lease, rent, free-of-charge borrowing and lending, delivery and transfer of machinery, equipment and goods and provision of services; borrowing, lending, financial service, financial security, and other financial instruments; purchase, sale, exchange, lease and rent, free-of-charge borrowing and lending, delivery and transfer of tangible assets, intangible assets and agreement on common use of resources such as synergy and cooperation on the use of employees and sharing of costs between related parties.”

+ Article 5 defines related parties as follows:

“Article 5. Related parties

1. Related parties are parties having relationships in any of the following cases:

a) A party participates directly or indirectly in the management, control, contribution of capital to or investment in the other;

b) The parties are directly or indirectly subject to the management or control by or have capital contributed by or investment from a third party.

2. Related parties defined in Clause 1 of this Article are specified as follows:

...i) One or more than one enterprise is/are under the control of an individual who either contributes his/her capital to such enterprise(s) or personally participates in managing such enterprise(s); etc.”

+ Clause 3, Article 8 - Determination of costs for tax calculation in some specific cases for enterprises having special related-party transactions:

“Article 8. Determination of costs for tax calculation in some specific cases for enterprises having special related-party transactions

...3. The taxpayer’s total loan interest cost arising in a period eligible to be deducted from income subject to enterprise income tax must not exceed 20% of total net profit generated from business activities plus loan interest cost and depreciation cost arising in that period.

This provision does not apply to taxpayers that are subjects of application of the Law on Credit Institutions and Law on Insurance Business.

Taxpayers shall declare the rate of loan interest cost arising in a period according to Form No. 01 in the Appendix to this Decree.”

Pursuant to the above-mentioned provisions, Hanoi Tax Department notifies as follows:

In case where Thai Binh An Giang Trading and Service Company Limited (hereinafter referred to as the Company) borrows money from individuals being members of the Members’ Council who participate in managing the Company (even if excluding the loan interest), then the Company has transactions with related parties in accordance with Article 4 of Decree No. 20/2017/ND-CP Therefore, the Company shall have to determine deductible loan interest upon the determination of incomes subject to enterprise income tax under Clause 3, Article 8 of the Government's Decree No. 20/2017/ND-CP dated February 24, 2017.

Currently, the Ministry of Finance and the General Department of Taxation are receiving and summarizing difficulties and complaints arising in the course of implementation of Decree No. 20/2017/ND-CP, including the provisions of Clause 3, Article 8 of Decree No. 20/2017/ND-CP, to report the Government to promulgate the Decree amending and supplementing Decree No. 20/2017/ND-CP. Any instructions different from the above-mentioned guidelines shall be introduced to the Company by Hanoi Tax Department.

Hanoi Tax Department hereby informs Thai Binh An Giang Trading and Service Company Limited for implementation./.