Vietnam is one of Southeast Asia’s most active destinations for foreign investment. Many multinational manufacturers and regional operating centers have integrated their Vietnam subsidiaries into global supply chains. Funding flows between an offshore parent company and a Vietnam subsidiary – including cross-border loans, management fee payments, royalty settlements, and payments for goods purchases – are part of the day-to-day operations of almost every foreign-invested enterprise.
At the same time, Vietnam’s tax authorities continue to strengthen transfer pricing enforcement, and companies with related-party transactions remain a key focus of tax audits. Funding movements are not inherently non-compliant. However, cash allocations, charging mechanisms, or profit allocations that fall outside a defensible compliance framework may trigger tax adjustments and penalties. This article reviews the key points at which funding flows between an offshore parent company and a Vietnam subsidiary may give rise to transfer pricing risks.
If the enterprise is still designing the functional allocation among an offshore parent company, a regional holding platform, and a Vietnam entity, it may also review Vietnam company structure design – how offshore parent companies, regional holding platforms, and Vietnam entities should allocate functions – to further clarify entity functions and responsibility boundaries.
1. Compliance Starting Point: Clarifying the Legal Boundary Between “Related Parties” and “Related-Party Transactions”
1.1 Related-Party Identification: When Does a “Related Relationship” Arise?
Decree No. 132/2020/ND-CP (Decree 132) was issued on 5 November 2020, took effect on 20 December 2020, and applies to corporate income tax periods from 2020 onward. It establishes the core framework for tax administration of related-party transactions in Vietnam. Decree 132 defines related parties as entities where one party directly or indirectly owns at least 25% of the ownership interest in the other party. For a cross-border parent-subsidiary structure, a parent company holding more than 25% of the equity in a Vietnam subsidiary is the most typical related-party scenario. Once a related-party relationship exists, all transactions between the parties, including funding flows, must comply with transfer pricing rules.
On 10 February 2025, the Government of Vietnam issued Decree No. 20/2025/ND-CP (Decree 20), which amends and supplements Decree 132. Decree 20 took effect on 27 March 2025 and applies from the 2024 corporate income tax period. Its key amendments include:
- Adjustment to the definition of related parties for loan and guarantee arrangements. Under Decree 132, an entity that provides a guarantee or loan to an enterprise may be treated as a related party if the outstanding loan balance reaches at least 25% of the borrower’s owner’s equity and accounts for more than 50% of the borrower’s total medium- and long-term debt. Decree 20 excludes lenders or guarantors operating under the Law on Credit Institutions (Luật Các tổ chức tín dụng) from this definition, provided that such institution does not directly or indirectly participate in the borrower’s management, control, capital contribution, or investment.
- Supplementation of related-party categories. Decree 20 also supplements the rules for identifying related parties in certain cases involving financial institutions, independently accounted branches, and other arrangements. Because these rules involve specific definitions under the Law on Credit Institutions, companies should assess related-party status by reviewing Decree 20, the status of the credit institution, shareholding relationships, and actual control relationships item by item.
| Related-Party Identification Standard | Details |
|---|---|
| Equity control | One party directly or indirectly owns at least 25% of the ownership interest in the other party |
| Loan or guarantee - general rule | The outstanding loan balance reaches at least 25% of the borrower's owner's equity and accounts for more than 50% of the borrower's total medium- and long-term debt |
| Loan or guarantee - exception | A credit institution acting as lender and not participating in the borrower's management, control, capital contribution, or investment is not treated as a related party |
| New or supplemented categories of related parties | Certain entities related to financial institutions, independently accounted branches, and similar cases require further assessment under Decree 20 |
1.2 What Funding Flows Constitute “Related-Party Transactions”?
Once an offshore parent company and a Vietnam subsidiary are identified as related parties, the following funding flows between them constitute related-party transactions:
- Cross-border loans and interest payments
- Management fee and service fee payments
- Royalty payments
- Cross-border settlements for goods purchases or sales
- Other forms of cross-border fund transfers
Enterprises with related-party transactions must disclose those transactions and the pricing methods used in their annual corporate income tax filing.
Different types of funding flows raise different transfer pricing considerations. Companies may first assess them along the following lines:
| Type of Funding Flow | Key Focus Areas | Documents or Checks to Prepare |
|---|---|---|
| Cross-border loans and interest | Related-party identification, interest deductibility cap, and reasonableness of loan terms | Loan agreement, basis for interest rate, repayment schedule, interest calculation schedule |
| Management fees and service fees | Whether services were actually provided and whether they created measurable benefits for the Vietnam subsidiary | Service agreement, service records, cost allocation basis, benefit analysis |
| Royalties | Ownership of rights, scope of license, and whether the royalty rate complies with the arm's length principle | License agreement, proof of rights, fee calculation basis, comparable data |
| Goods purchases or sales | Price comparability, profit level, and consistency between customs documents and tax records | Purchase or sales contracts, invoices, customs declarations, comparable pricing data |
2. Circumstances That May Trigger Transfer Pricing Risks
2.1 Related-Party Transactions Occur
Once the parties are identified as related parties, all funding flows between them are related-party transactions. Purchases of raw materials by a Vietnam subsidiary from its offshore parent, loans from the parent company, and regional management fee payments are all subject to transfer pricing rules. Companies should disclose related-party transaction information in their annual corporate income tax filing.
2.2 Transfer Pricing Documentation Obligations
Companies with cross-border related-party transactions generally need to assess whether transfer pricing documentation is required. Decree 132 establishes a three-tier transfer pricing documentation framework consisting of the Master File, the Local File, and the Country-by-Country Report (CbCR). Its transfer pricing methodology is aligned with OECD guidance.
For cross-border parent-subsidiary transactions, companies typically need to consider transaction scale, group structure, revenue thresholds, and applicable exemptions to determine whether a Local File, Master File, or CbCR is required. CbCR does not apply to every company with cross-border related-party transactions. It generally applies only where the multinational enterprise group meets the relevant revenue threshold or falls within Vietnam’s reporting or exchange rules.
Transfer pricing documentation should be completed before the annual corporate income tax filing and retained for inspection. The documents are usually kept internally. During a tax inspection or transfer pricing audit, the enterprise must provide them within 30 working days after receiving a written request from the tax authority. If a company waits until the tax authority requests the documents before preparing them, the documentation may be considered non-contemporaneous, increasing the risk of tax adjustment or administrative penalties.
The OECD has established an automatic exchange mechanism for CbCR. Relevant exchange relationships generally become effective only after signatories complete notifications and list each other. When assessing whether Vietnamese tax authorities can obtain group CbCR information, companies should refer to the OECD automatic exchange relationship list and the latest information from Vietnamese competent authorities. For multinational enterprises, this means that group-level distributions of profits, revenue, employees, assets, and tax burden are increasingly available for high-level risk screening, and transfer pricing compliance is becoming more transparent.
2.3 Excessive Interest Expense
Decree 132 provides that deductible interest expense is capped at 30% of EBITDA. Non-deductible interest may be carried forward for five years and deducted in subsequent years if the ratio of net interest expense to EBITDA falls below 30% and the relevant deduction conditions are satisfied.
If interest expenses arising from cross-border loans between an offshore parent company and a Vietnam subsidiary exceed this cap, the excess portion is not deductible for corporate income tax purposes. In addition, under the transitional rules in Decree 20, for companies that were treated as related parties during 2020 to 2023 solely because of credit loans, if they cease to be related parties from 2024 under Decree 20’s exemption rules and have no other related-party transactions, the interest not yet deducted as of the end of 2023 may be allocated evenly over the remaining carry-forward period. If the company has other related-party transactions, the undeducted interest continues to be handled under Decree 132.
2.4 Mismatch Between Functions and Risks
The core of transfer pricing is the arm’s length principle: the price of a related-party transaction should be consistent with the price that independent enterprises would agree under the same or comparable conditions. Decree 132 narrows the acceptable arm’s length range from the 25th to 75th percentile to the 35th to 75th percentile. This means companies must demonstrate the reasonableness of related-party pricing or profit levels within a stricter comparable range.
Tax authorities typically focus on the following areas during audits:
(1) Compliance of transfer pricing documentation.
(2) Reliability of the comparability analysis. If the enterprise has not selected an appropriate transfer pricing method, cannot demonstrate the reliability of benchmark data, or cannot prove that the related-party price or profit margin complies with the arm’s length principle, the risk of transfer pricing adjustment is materially higher.
(3) Substance of intragroup service fees and royalties. Tax authorities increasingly require companies to prove that services were actually provided, generated measurable benefits, and were charged on an arm’s length basis.
| Audit Focus | Questions Tax Authorities May Raise | Recommended Supporting Materials |
|---|---|---|
| Transfer pricing documentation | Has the company prepared, retained, and provided documentation within the required time limit? | Local File, Master File, CbCR applicability analysis, related-party transaction disclosure forms |
| Comparability analysis | Is the selected method reasonable, and can the benchmark data and profit margins support the pricing? | Comparable company or transaction screening records, data source notes, functional and risk analysis |
| Intragroup service fees and royalties | Do the services or rights actually exist, and do they generate measurable benefits for the Vietnam subsidiary? | Contracts, delivery records, email or meeting records, fee calculation schedules, benefit analysis |
A mismatch between functions and risks – for example, where a Vietnam subsidiary performs significant manufacturing, sales, or R&D functions but earns only a very low profit while most profits are extracted by the offshore parent company through “management fees,” “service fees,” or “royalties” – is an important basis for tax authorities to adjust pricing.
Based on public enforcement trends, transfer pricing audits play a significant role in the enforcement activities of Vietnam’s tax authorities, and targeted audits of enterprises with related-party transactions continue to be carried out.
2.5 FCT Withholding Obligations
Cross-border payments also require attention to Foreign Contractor Tax (FCT). FCT is a withholding tax mechanism imposed by Vietnam on income derived in Vietnam by foreign entities, typically involving value-added tax and corporate income tax components. FCT applies to many types of transactions involving cross-border payments, including service fees, royalties, interest, construction and installation contracts, and equipment leasing. Where cross-border payments between an offshore parent company and a Vietnam subsidiary fall within these categories, the company should determine the applicable tax components, tax rates, and withholding obligations based on the nature of the payment; otherwise, compliance risks may arise.
3. How Companies Can Build a Vietnam Transfer Pricing Compliance Management Mechanism
3.1 Accurate Identification: Establish a Dynamic Related-Party List
Companies should regularly review equity, loan, and guarantee relationships with offshore parent companies and assess related-party status under the latest definitions in Decree 132 and Decree 20. In particular, Decree 20’s adjustment to the related-party definition for loan and guarantee arrangements – excluding qualifying credit institutions from the related-party definition – may change the related-party status of some companies. At the same time, companies should continue monitoring amendments to the Law on Tax Administration (Luật Quản lý thuế) and related implementing rules to avoid compliance disruption caused by changes in filing, record retention, or tax inspection procedures.
3.2 Reasonable Pricing: Use the Arm's Length Principle as the Benchmark
Companies should select an appropriate transfer pricing method and ensure that test results or profit levels fall within the acceptable arm’s length range from the 35th to 75th percentile. Functional and risk analysis should be the core basis for pricing. Companies need to identify the value-creating factors of each related party and determine a profit level consistent with the arm’s length principle.
3.3 Documentation for Inspection: Complete and Retain Transfer Pricing Files on Time
Transfer pricing documentation should be finalized before the annual corporate income tax filing and retained for inspection. The documents are kept internally and should be provided within 30 working days upon request during a tax inspection or audit. If a company prepares the documentation only after the tax authority makes a request, it may be regarded as failing to satisfy the contemporaneous documentation requirement, increasing the risk of tax adjustment or administrative penalties.
3.4 Advance Pricing Agreements (APA): Managing Material Related-Party Risks in Advance
An Advance Pricing Agreement (APA) is an agreement reached in advance between an enterprise and the tax authority on transfer pricing methodology. Decree No. 122/2025/ND-CP was issued on 11 June 2025 and took effect on 1 July 2025. It grants the Minister of Finance authority to approve bilateral and multilateral APAs, removing the need for approval by the Prime Minister. An APA can help companies proactively manage transfer pricing risks, improve tax certainty, and reduce the likelihood of future audit disputes.
| Compliance Level | Core Action | Key Basis |
|---|---|---|
| Accurate identification | Regularly review related-party relationships and monitor regulatory changes | Article 5 of Decree 132 and amendments under Decree 20 |
| Reasonable pricing | Select an appropriate transfer pricing method and ensure that test results or profit levels fall within the acceptable range | Arm's length principle |
| Documentation for inspection | Complete applicable transfer pricing documentation before filing and be able to provide it within 30 working days | Documentation requirements under Decree 132 |
| Proactive defense | Assess APA applicability and move forward with application where appropriate | Decree No. 122/2025/ND-CP |
4. How Vanzbon Supports Companies in Vietnam Transfer Pricing Compliance
Vietnam transfer pricing compliance involves identifying related-party relationships, classifying transaction types, selecting pricing methods, testing profit levels, and responding to subsequent tax audits. For companies that have established entities in Vietnam and have purchases, sales, service fees, management fees, financing, intellectual property licensing, or similar transactions with offshore parent companies or group entities, it is advisable to assess transfer pricing risks in advance rather than supplementing materials only when the tax authority requests an explanation. Vanzbon can support companies in the following areas:
- Related-party relationship and compliance obligation assessment: assisting companies in identifying related-party relationships between the Vietnam entity and the offshore parent company, related sales companies, procurement platforms, or holding entities, and assessing whether Vietnam transfer pricing filing and documentation obligations are triggered.
- Transfer pricing documentation support: assessing whether a Local File, Master File, and CbCR-related materials are required based on transaction scale, group structure, and filing requirements, and guiding companies in organizing contracts, invoices, financial data, transaction descriptions, and group background documents.
- Reasonableness analysis for related-party pricing: assessing whether pricing policies for common transactions such as purchase prices, sales prices, service fees, management fees, interest, and royalties comply with the arm’s length principle, and providing adjustment recommendations based on comparable companies, profit ranges, and functional and risk analysis.
- APA applicability assessment: for companies with large transaction values, stable business models, and long-term intragroup transactions, assessing whether an APA application is suitable and supporting preparation of transaction descriptions, financial analyses, and tax communication materials before application.
- Regulatory updates and ongoing risk alerts: monitoring changes in Vietnam transfer pricing regulations and supporting rules, including Decree 20, Decree 122, and the tax authority’s enforcement approach, to help companies adjust related-party transaction arrangements and documentation timelines in a timely manner.
Through upfront assessment and continuous maintenance, companies can explain more clearly the profit sources, transaction logic, and pricing basis of their Vietnam entities, thereby reducing tax risks arising from insufficient related-party transaction materials, abnormal profit levels, or unclear intragroup charging arrangements.
5. Frequently Asked Questions (FAQ)
Under Decree No. 132/2020/ND-CP and the amendments under Decree No. 20/2025/ND-CP, the outstanding loan balance between a borrowing enterprise and a lending or guaranteeing enterprise must reach at least 25% of the borrower’s owner’s equity and exceed 50% of the borrower’s total outstanding medium- and long-term debt for the parties to be treated as related parties. If the lender is a credit institution operating under the Law on Credit Institutions and does not participate in the borrower’s management, control, capital contribution, or investment, the parties are not treated as related parties. Therefore, where an offshore parent company provides a loan to a Vietnam subsidiary, the parties will be treated as related parties if the above quantitative thresholds are met and the parent company does not fall within the credit institution exception.
Companies with cross-border related-party transactions generally need to assess whether a Local File and a Master File are required. CbCR generally applies to large multinational enterprise groups that meet the consolidated group revenue threshold, or where Vietnam reporting or exchange rules apply. Companies should consider transaction scale, group revenue, reporting entity status, and exemption conditions to determine their specific documentation obligations. The relevant documents should be completed before the annual corporate income tax filing and retained for inspection.
Based on audit practice in Vietnam, the key focus areas are: (1) compliance of transfer pricing documentation – failure to provide complete documentation within the required time limit may trigger the tax authority’s adjustment power; (2) comparability analysis – if the enterprise fails to select an appropriate transfer pricing method, cannot prove the reliability of benchmark data, or cannot demonstrate that related-party prices or profit margins comply with the arm’s length principle, the risk of transfer pricing adjustment is higher; and (3) substance of intragroup service fees and royalties – tax authorities increasingly require companies to prove that services actually occurred, generated measurable benefits, and were charged on an arm’s length basis.
Non-compliant companies may face reassessment of taxable income, collection of additional tax, administrative penalties, and late payment interest. If a company is found to have violated transfer pricing rules, the tax authority may adjust related-party transaction prices based on the arm’s length principle and increase taxable income accordingly. In addition, if the company prepares transfer pricing documentation only after receiving a request from the tax authority, it may be regarded as failing to satisfy contemporaneous documentation requirements, increasing administrative penalty risk.
The key is to demonstrate that the fees comply with the arm’s length principle. Based on Vietnamese tax audit trends: (1) the services must actually occur – the Vietnam subsidiary must have genuinely received the relevant management or services; (2) the services must provide measurable benefits – a formal service agreement alone is not sufficient; (3) the fee amount must be reasonable – comparable to what independent third parties would charge under similar conditions and within the arm’s length range; (4) complete supporting documents must be retained, including service contracts, service records, and fee calculation bases; and (5) filings must be made on time, and the company should determine whether FCT withholding is required based on the nature of the payment. If the company cannot prove the substance of the services and the reasonableness of the fees, the expense may be treated as a profit-shifting mechanism and denied deduction.
Decree 132 provides that deductible interest expense is capped at 30% of EBITDA. Non-deductible interest may be carried forward for five years and deducted in subsequent years if the ratio of net interest expense to EBITDA falls below 30% and the relevant deduction conditions are met. Decree 20 provides transitional guidance for undeducted interest generated during 2020 to 2023.
An APA is an agreement reached in advance between an enterprise and the tax authority on transfer pricing methodology. Decree No. 122/2025/ND-CP took effect on 1 July 2025 and grants the Minister of Finance authority to approve bilateral and multilateral APAs, removing the need for approval by the Prime Minister. This change helps reduce approval layers and improve the practical operability of the APA mechanism in transfer pricing risk management.
The OECD has established an automatic exchange mechanism for CbCR. Whether Vietnamese tax authorities can obtain a specific group’s CbCR information depends on whether the exchange relationship between Vietnam and the relevant jurisdiction is effective and whether the group’s jurisdiction has fulfilled its reporting obligations. For multinational enterprises, this means that group-level distributions of profits, revenue, employees, assets, and tax burden are more likely to be used in high-level risk screening, and transfer pricing compliance transparency continues to increase.
Continuous losses combined with ongoing payments of management fees, royalties, or service fees to the offshore parent company, where the profit level does not match the functions and risks undertaken, is a high-risk signal for tax authorities. The tax authority may consider that the company is shifting profits through related-party transactions and may adjust related-party transaction prices based on the arm’s length principle, increasing taxable income.
Transfer pricing documentation should be completed before the annual corporate income tax filing and retained for inspection. The documents are kept internally, and during a tax inspection or transfer pricing audit the company must provide them within 30 working days after receiving a written request from the tax authority. Companies should not wait until the tax authority requests the documentation to prepare it. If documents are prepared only after the fact, the company may be considered to have failed to satisfy contemporaneous documentation requirements, increasing the risk of tax adjustment or penalties.
6. Conclusion: A Compliance Path for Cross-Border Funding Flows
Funding flows between an offshore parent company and a Vietnam subsidiary are not unlawful in themselves. The key question is whether they operate within a defensible compliance framework. The 2025-2026 period is one in which Vietnam’s transfer pricing regulatory rules continue to be adjusted and refined. Decree 20 took effect on 27 March 2025 and made important amendments to core rules on related-party identification and interest expense treatment. Decree 122 simplified the APA approval process and took effect on 1 July 2025. Under the OECD automatic exchange mechanism for CbCR, tax transparency at the multinational enterprise group level also continues to increase.
Against this background, multinational enterprises should upgrade transfer pricing compliance from “after-the-fact remediation” to “upfront planning.” They should accurately identify related-party relationships, use the arm’s length principle as the pricing benchmark, prepare applicable contemporaneous documentation, and actively evaluate whether proactive management tools such as APAs are appropriate. Only by embedding compliance into every stage of cross-border funding arrangements can companies manage risks effectively in an increasingly stringent regulatory environment.
