Businesses may not be subject to the 30% cost ceiling when borrowing from banks.

The Ministry of Finance proposed to amend Decree 132 in the direction that enterprises with related-party transactions may not be subject to regulations controlling loan interest ceilings when accessing bank capital.

The above content is stated in the draft report to the Government by the Ministry of Finance on the necessity of amending Decree 132/2020 on tax management for enterprises with related-party transactions.

Decree 132 stipulates that in cases where a bank lends to an enterprise more than 25% of the owner's equity and accounts for more than 50% of the total medium- and long-term debts of the borrowing enterprise, the enterprise and the bank are determined to be related parties. In that case, the interest expense for the enterprise with related transactions - the basis for determining income subject to corporate income tax - must not exceed 30% of the total net profit from business activities in the period...

Transactions at a bank based in Hanoi. Photo: Thanh Tung — Transaction at a bank based in Hanoi . Photo: *Thanh Tung*

According to the Ministry of Finance, enterprises borrow capital from banks, financial institutions, and credit institutions, but these units do not operate, control, contribute capital, or make decisions with the borrowing enterprise, so in essence, they are not affiliated parties.

Therefore, the Ministry reports to the Government to amend Decree 132 to exclude the determination of affiliated relationship in cases where a bank guarantees or lends capital to an enterprise. Here, the bank is determined not to participate in the management, control, capital contribution or investment in the borrowing enterprise. Loans including loans from third parties are guaranteed from the financial resources of the affiliated party.

If the proposal of the Ministry of Finance is approved, when borrowing from banks, enterprises will not have to determine the affiliated relationship even if the loan exceeds 25% of equity and accounts for over 50% of the total value of medium and long-term debts.

If the proposal of the Ministry of Finance is approved, when borrowing from banks, enterprises will not have to identify related relationships even if the loan exceeds 25% of equity and accounts for more than 50% of the total value of medium and long-term debts. Because there is no need to identify related relationships, it means that enterprises will not be subject to the regulation controlling the 30% interest rate ceiling when borrowing according to the current regulations applied to enterprises with related transactions.

This regulation controlling the ceiling on interest expenses, according to the reflection of many enterprises to the Ministry of Finance, is "unreasonable" and the Government is proposed to amend it. According to them, borrowing capital from banks to serve production and business is a common activity of enterprises in Vietnam. Providing credit is also a normal business activity of banks.

Meanwhile, enterprises and banks are completely independent of each other, there is no control, management, or capital contribution by the bank to the production and business activities of the enterprise. The interest expense of enterprises is the actual cost serving production and business activities. Especially BOT enterprises often borrow up to 80% of capital from banks, so when the interest expense is controlled, it will affect the financial plan to recover capital that the enterprise has approved.

It is expected that the Ministry of Finance will seek comments on the draft Decree in the first quarter of 2024 to submit to the Government for promulgation of amendments and supplements to the Decree in the third quarter thereafter.

Previously, the Ho Chi Minh City Real Estate Association (HoREA) also proposed that the Ministry of Finance remove the ceiling on interest expenses, because it is considered unnecessary and inappropriate. At present, according to the Association, this ceiling on interest expenses should only be controlled for foreign enterprises with related-party transactions and not subject to global minimum tax.

After 3 years of implementing Decree 132, the number of enterprises declaring related-party relations has increased gradually over the years, from 11,811 in 2021 to 12,418 in 2022. Of which, foreign-invested enterprises account for about 68%. Enterprises with related-party transactions declared and paid corporate income tax in 2021 and 2022 of VND 103,717 billion and VND 121,532 billion, respectively. Through inspections of enterprises with related-party transactions from 2020 to present, the amount of tax processed is more than VND 96,987 billion.

Phuong Dung

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