Detailed Analysis of Decree 132 and Its Strategic Impacts on the Financial Policies of FDI Enterprises

As Vietnam accelerates its economic integration and increasingly adopts OECD principles on Base Erosion and Profit Shifting (BEPS), Decree 132/2020/ND-CP on tax administration for related-party transactions (Transfer Pricing – TP) has become one of the most influential legal frameworks impacting the operations and financial strategies of foreign-invested enterprises (FDI).

Decree 132 is not merely a replacement for the old Decree 20. It establishes a stronger and more comprehensive legal foundation that requires FDI companies to restructure their financial strategies. Below are the three most critical impacts that business leaders must pay close attention to.

I. Major Impact 1: Interest Expense Limitation – Reshaping Capital Structure

The regulation in Clause 3, Article 16 of Decree 132, which caps deductible interest expenses, has the most direct and significant impact on the financial policies of FDI enterprises.

1. New Limitation and Scope of Application

Decree 132 stipulates that total net interest expense (interest expense minus interest income) deductible for corporate income tax (CIT) purposes must not exceed 30% of EBITDA.

EBITDA is defined as: Net profit from business activities plus Interest expenses plus Depreciation expenses.

• Improvement: The new 30% cap is substantially higher than the previous 20% under Decree 20. This provides more flexibility for enterprises with high debt ratios or those in the investment phase requiring large borrowing.
• Scope: A key point: the 30% cap applies to all interest expenses, regardless of whether they arise from related-party loans or independent lenders. This differs from many international TP rules, which often target only related-party financing.

2. Carryforward Mechanism for Nondeductible Interest

A progressive measure introduced in Decree 132: nondeductible interest exceeding the 30% EBITDA cap may be carried forward for up to 5 years.

Strategic implication: FDI enterprises must reassess their capital structure (Debt-to-Equity ratio). Companies heavily dependent on loans from parent entities may need to:

• increase equity capital, or
• convert part of their loans into equity

to reduce the risk of interest being non-deductible.

II. Major Impact 2: Expanded Criteria for Defining Related Parties

Decree 132 broadens and clarifies the criteria for identifying related parties to address increasingly complex tax avoidance structures. Key expansions include:

• Family Relationships: Family ties (spouses, parents, children, siblings) involved in management or control now constitute related-party relationships.

• Guarantee Arrangements: Loans obtained from independent parties but guaranteed by an associated entity are now considered related-party transactions.

• Ownership Threshold Reduced: The direct/indirect ownership threshold is reduced from 20% to 10%. Additionally, loans from third parties representing over 25% of the borrower’s equity may also create a related-party relationship.

Impact on FDI: FDI companies must thoroughly review their corporate structure, financing arrangements, and internal group agreements—especially guarantees and capital support. Overlooking a related party may lead to incomplete TP documentation and administrative penalties.

III. Major Impact 3: Criteria for TP Documentation Exemptions

Decree 132 maintains the exemption criteria for preparing Master File and Local File but clarifies conditions for simplified cases.

1. Common Exemption Cases

Enterprises may be exempt from preparing TP documentation (other than the RPT disclosure form) if they meet one of the following:

• Revenue < VND 50 billion and total related-party transactions < VND 30 billion.

• Perform simple functions without significant risks and achieve minimum net profit margins:

  • Distribution: ≥5%

  • Manufacturing: ≥6%

  • Toll processing: ≥15%

2. Challenge of Proving Eligibility

FDI companies, especially processing firms, must provide documentation to prove they perform only simple functions, and bear no significant risks (e.g., no inventory risk, no market risk). Failure to prove this may disqualify them from exemption.

Impact on FDI: If not exempt, enterprises must prepare detailed TP documentation—especially the Functional Analysis (FA)—to prove arm’s-length pricing.

Decree 132 is not a barrier but a framework for transparent and responsible business practices. To adapt and ensure sustainable operation, FDI enterprises should:

• Proactively Manage Interest Expense Risk : Monitor the interest expense/EBITDA ratio. Plan for carrying forward disallowed interest within the 5-year limit.

• Ensure Consistency Across All Documents: TP documentation must be consistent with: legal contracts; audited financial statements; internal management reports.

Strengthen TP Documentation Quality: A well-prepared TP file is essential to defend against tax inspections.

Viet Australia
Viet Australia Auditing Company is an independent auditing organization licensed and established in 2007 in the Socialist Republic of Vietnam.