The joint venture’s revenue grows steadily, yet after-tax profit is puzzlingly thin every year. Dig into the cost structure and a pattern appears: the main raw material is bought entirely from a trading company owned by the majority partner’s family, at prices 20 to 30 percent above independent supplier quotations, while finished products are sold cheaply into the same partner’s distribution network. The profit has not vanished; it has been moved out of the venture before the dividend stage. This is intra-JV transfer pricing, and unlike cross-border pricing between parent and subsidiary, here the winner and the loser sit at the same shareholders’ table.
How profit is siphoned through related-party transactions
Three channels recur: buying inputs at inflated prices from the majority’s affiliates; selling output at depressed prices to those affiliates; and charging “consulting, management or licence” fees for services with vague substance. All three are related-person transactions under Enterprise Law No. 59/2020/QH14: for a joint stock company, Article 167 requires specified transactions to be approved by the board or the General Meeting, with the interested party excluded from voting; for a limited liability company, Article 67 places the same requirement at the Members’ Council. When purchases from affiliates are reclassified as “ordinary recurring operations” that never need case-by-case approval, this control is disabled at the root.
At the tax layer, Vietnam applies the arm’s length principle to related-party transactions. From the 2026 corporate income tax period, the current framework is Decree No. 255/2026/ND-CP replacing Decree No. 132/2020/ND-CP, built on Tax Administration Law No. 108/2025/QH15, which replaced Law No. 38/2019 from 1 July 2026. The tax authority may re-price transactions, assess additional corporate income tax and charge late-payment interest where related-party prices depart from market value. The paradox is that the minority is hurt twice: profit is drained first, and the tax reassessment lands on the joint venture itself, not on the party that took the benefit.
Why minorities struggle to stop it despite approval rules
The first obstacle is information: input prices sit inside daily operational records the minority never touches, and only audited financial statements plus market benchmarking reveal the deviation. The second obstacle is thresholds: a single transaction may sit below the board-approval line, yet the annual aggregate is a major drain; current company law has no automatic aggregation mechanism for approval purposes, so the operator only needs to split transactions. The third obstacle is proof of the related link: the supplying company may be registered under names outside the family, so triggering Article 67 or Article 167 demands beneficial-ownership tracing work.
Minority levers: supervision, audit and re-pricing
Clause 2 of Article 115 of the Enterprise Law gives a shareholder or group holding 5 percent or more the right to inspect contracts and transactions that require board approval, and to require the Supervisory Board to examine specific management issues. This is the legal doorway for a minority to obtain the pricing file of related-party dealings without waiting for a general meeting. At the design layer, a joint venture should adopt its own related-party policy: annual aggregate approval for recurring transactions, a duty to obtain at least two independent quotations, and a right for any board member to trigger a special audit when price deviation exceeds an agreed threshold.
Red flags of transfer pricing inside a joint venture
- Persistently thin gross margin despite rising revenue and volume, while the main supplier is a majority affiliate.
- Input prices above same-period market quotations, with no competitive bidding file for supplier selection.
- Consulting or management fees to affiliates growing with revenue but producing no concrete deliverables.
- The majority’s affiliate growing abnormally fast during the same period the JV reports “thin profits”.
- Management refusing to hand over affiliate contracts when a minority shareholder requests them under Article 115.
Frequently Asked Questions
How do I detect a Vietnamese partner selling overpriced inputs to the JV?
Start with data: request the list of purchases from related parties over two to three years and benchmark unit prices against quotations from at least two independent suppliers of the same specification and period. A shareholder holding 5 percent or more may inspect contracts and transactions requiring board approval under Clause 2 of Article 115 of the Enterprise Law and require the Supervisory Board to investigate. A systematic, one-directional price deviation across many periods is the strongest signal of transfer pricing.
Can I sue over transfer pricing inside a joint venture?
Yes, along two tracks. On the corporate track, seek annulment or compensation for related-party transactions executed without proper approval under Article 67 or Article 167 of the Enterprise Law, and sue the managers under Article 161 for breach of the duty of honesty. The tax track belongs to the tax authority under Decree No. 255/2026/ND-CP, but a tax re-pricing decision often becomes key evidence in the civil case.
Will a normal audit detect transfer pricing?
An ordinary financial statement audit only opines on whether the figures are fairly presented under accounting standards; it has no duty to conclude whether related-party prices are arm’s length. Detecting transfer pricing requires a specially scoped audit or review: margin analysis by product line and price benchmarking against independent comparables, using the methods of Decree No. 255/2026/ND-CP. Minorities should agree a special-audit trigger right in the charter itself.
If the tax authority adjusts the pricing, who bears the back tax?
The tax liability arises at the joint venture itself: the authority re-determines the venture’s taxable income and assesses additional corporate income tax plus late-payment interest under Tax Administration Law No. 108/2025/QH15. All shareholders bear that loss in proportion to their stakes, including an innocent minority. Once an adjustment decision exists, however, the minority has solid ground to sue the majority side and the involved managers to compensate the company under Article 161 of the Enterprise Law.
This article has been quality-reviewed by the FLAW AI Legal Council