Decree 20/2025/NĐ-CP (“Decree 20”) amends and supplements several provisions of Decree 132/2020/NĐ-CP dated November 5, 2020, of the Government (“Decree 132”). It continues to adjust and update key regulations on related-party transactions between enterprises and tax administration of such transactions. Below are some notable changes in Decree 20 as updated by ATA Legal Services:
1. Changes in the Basis for Determining Related Parties in the Case of Guarantees and Loans Between Enterprises
Decree 132 defined related parties in the case of guarantees and loans between enterprises based on the loan amount. Meanwhile, Decree 20 determines related-party transactions in this case based on the total outstanding loan balance. Accordingly, if an enterprise signs a loan contract with a high loan value but does not fully disburse it, and the total outstanding balance of that contract remains below 25% of the borrower's owner’s contributed capital and does not exceed 50% of the borrower's total medium- and long-term debt, the enterprises involved in the transaction will not be considered related parties.
This new regulation is considered more favorable for businesses and aligns with practical business operations. As a result, certain transactions previously classified as related-party transactions will now be excluded from this category, meaning they will no longer be subject to the deductible interest expense cap when determining taxable income. This regulation benefits businesses by increasing deductible expenses, thereby enhancing profitability.
2. Allowing the Retrospective Application of Decree 20 to Determine Non-Deductible Interest Expenses for the Tax Years 2020, 2021, 2022, and 2023, and Permitting the Allocation of Such Expenses to Subsequent Tax Periods from 2024
Under the regulations, total interest expenses (after deducting deposit interest and lending interest earned during the tax period) that are deductible when determining corporate income tax liability shall not exceed 30% of the total net profit from business activities in the period plus interest expenses (after deducting deposit interest and lending interest earned) and depreciation expenses incurred during the period.
Decree 20 allows for the retrospective application of interest expense deduction calculations based on the revised criteria for identifying related-party transactions under the new decree for prior years—2020, 2021, 2022, and 2023. As a result, the total interest expenses "eligible for deduction but not yet deducted" in these tax periods will increase.
Decree 20 also allows enterprises to allocate non-deductible interest expenses from tax periods before 2024 to subsequent tax periods. Specifically, from the 2024 tax period, the allocation will be carried out as follows:
i. For enterprises without related-party relationships and transactions: Non-deductible interest expenses from prior years that were not carried forward to future tax periods by the end of the 2023 tax period shall be evenly allocated to subsequent tax periods, for a maximum of five consecutive years from the year following the incurrence of non-deductible interest expenses.
ii. For enterprises with related-party relationships and transactions: Previously non-deductible interest expenses may continue to be carried forward to subsequent tax periods (for a maximum of five consecutive years from the year following the incurrence of non-deductible interest expenses). However, the deductible interest expenses in any given period shall not exceed 30% of the total net profit from business activities plus interest expenses (after deducting deposit and lending interest) plus depreciation expenses incurred during the period.
3. Additional Entities Classified as Related Parties
3.1. Independent-Accounting Branches as Related Parties of Enterprises
Decree 20 clarifies that independent-accounting branches that declare and pay corporate income tax when transacting with their parent enterprises will still be classified as related-party transactions. This clarification is reasonable, as independent-accounting branches remain subsidiaries under the management and control of their parent enterprises.
3.2. Additional Criteria for Identifying Related Entities of Credit Institutions
Decree 20 introduces a new regulation classifying certain entities as related parties of credit institutions: "Subsidiaries, controlling companies, and affiliated companies of credit institutions as defined under the Law on Credit Institutions and its amendments, supplements, or replacements (if any)."
Decree 20 takes effect on March 27, 2025, and applies from the 2024 corporate income tax period.
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