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Interest-Free Loans to Affiliated Companies: The Transfer Pricing Risk Few Businesses Expect

Company A in Vietnam — a subsidiary of a foreign-invested group — signs a contract to lend VND 10 billion to Company B, a sister company in the same group, for a term of 24 months at 0% interest. The accounting team's logic is simple: "an intra-group loan, no interest charged, no income arising, so nothing to declare." That sounds reasonable — yet it is one of the transactions tax authorities scrutinize most closely in recent transfer pricing audits.

The problem: tax law does not see a 0% loan as a harmless intra-group favor. It sees a transaction between related parties that must satisfy the arm's-length principle. This article analyzes the real risks of this scenario under the legal framework in force as of September 27, 2026.

Many businesses assume that only transactions carrying interest, fees, or price differentials count as "transactions" that must be declared. This is the most common misunderstanding.

Under Article 5(2) of Decree 255/2026/ND-CP (Nghị định 255/2026/ND-CP) — the instrument currently governing tax administration of related-party transactions, effective July 1, 2026 and applicable from the 2026 corporate income tax (CIT) year — parties are treated as related in several cases, including: an enterprise directly or indirectly holding at least 25% of the owner's capital of another enterprise; two enterprises in which at least 25% of capital is held by the same third party; and where an enterprise guarantees or lends to another enterprise in any form, subject to the outstanding-debt ratio condition. The new decree also adds related-party relationships through asset borrowing and lending (mượn/cho mượn — the temporary use of assets, as distinct from money loans, vay/cho vay) — something Decree 132/2020/ND-CP (Nghị định 132/2020/ND-CP) did not cover.

The key point: the law determines related-party relationships based on ownership, control, management relationships and the substance of the transaction — not on whether the transaction bears interest. The 0% loan between Company A and Company B above remains a related-party transaction and falls within the scope of Decree 255/2026/ND-CP. "No interest charged" does not mean "nothing to declare."

Transition note: Decree 255/2026/ND-CP applies from the 2026 CIT year; CIT years 2025 and earlier remain governed by Decree 132/2020/ND-CP and Decree 20/2025/ND-CP (Nghị định 20/2025/ND-CP) pursuant to Article 23 of the new decree. Businesses with 0% loans arising before July 1, 2026 must review their obligations under the framework applicable to each tax year.

2. The Biggest Risk Sits with the Lender: Imputed Interest Income

This is the most serious risk — and the one businesses most often miss: the lender, not the borrower, faces the greatest exposure to reassessment.

The governing principle of related-party tax rules is the arm's-length principle: transactions between related parties must be priced as if they were between independent parties. In the market, no independent lender extends a VND 10 billion, 24-month loan at 0% interest without special conditions. When tax authorities audit and find the 0% loan does not reflect market pricing, the legal consequences can unfold in this sequence:

First, tax authorities may impose tax (ấn định thuế) on a taxpayer that fails to comply with declaration obligations, related-party pricing determination, or information provision — pursuant to Article 24(2)(i) of the Law on Tax Administration 108/2025/QH15 (Luật Quản lý thuế 108/2025/QH15), effective July 1, 2026. In other words, "not declaring because we thought nothing arose" is itself the ground for imposition.

Second, upon imposition, the tax authority redetermines the lender's income as if the loan had borne the market interest rate prevailing at the time of the transaction. The "forgone" interest income is added to the lender's taxable CIT income.

Third, the enterprise faces back tax on the imputed income — at the standard 20% CIT rate under Article 10 of the Law on Corporate Income Tax 67/2025/QH15 (Luật Thuế thu nhập doanh nghiệp 67/2025/QH15) (effective October 1, 2025) — plus penalties and late-payment interest. On penalties: underdeclaration resulting in a tax shortfall draws a penalty of 20% of the shortfall; tax evasion draws a penalty of 1 to 3 times the evaded tax, under Article 7 of Decree 125/2020/ND-CP (Nghị định 125/2020/ND-CP) as amended by Decree 310/2025/ND-CP (Nghị định 310/2025/ND-CP) (effective January 16, 2026).

To illustrate the scale, consider a hypothetical: a VND 10 billion loan, 24-month term, with the tax authority determining a comparable rate of 8% per year. Imputed interest income would be approximately VND 1.6 billion, corresponding to CIT back tax of about VND 320 million — before the 20% penalty (about VND 64 million if classified as underdeclaration) and per-diem late-payment interest. This is only an illustration using an assumed rate; the actual comparable rate is determined by the tax authority based on the data of each audit file, and this article asserts no fixed figure.

3. Is the Borrower Safe When It "Pays Not a Dong of Interest"?

On the other side, the borrower in a 0% loan incurs no interest expense, so there is nothing to deduct in computing CIT — and therefore no exposure to the interest-expense cap. Under Article 16(3) of Decree 255/2026/ND-CP, total interest expense (after deducting deposit interest and lending interest) deductible in determining taxable income may not exceed 30% of the sum of net operating profit for the period plus interest expense (after deducting deposit and lending interest) plus depreciation for the period; the excess may be carried forward to subsequent tax years for up to 5 years. This rule only "activates" when the enterprise actually incurs interest expense.

That said, the borrower is not entirely risk-free. Two points deserve attention. First, many businesses, upon discovering the risk, hastily "fix" it by inserting a nominal, abnormally low interest rate with no comparability basis — this does not cure the underlying arm's-length problem and may even create additional red flags in the file. Second, during an audit, tax authorities may examine the economic substance of the entire arrangement; if a "0% loan" stretches over many years with no clear repayment schedule and is in substance a regular capital support mechanism, the enterprise may face further questions on the nature of the transaction. This point is file-dependent, with no uniform application guidance yet — businesses should work with counsel before the tax authority starts asking.

4. Documentation Obligations: Declaring and Substantiating Market Pricing

Even at 0% interest, the full related-party documentation obligations apply under Article 18 of Decree 255/2026/ND-CP: taxpayers must declare information on related-party relationships and transactions, and prepare, retain, and provide transfer pricing documentation (Hồ sơ xác định giá giao dịch liên kết) when requested by tax authorities or when required to prepare it.

On exemptions, Article 20(2) of Decree 255/2026/ND-CP provides three cases: (a) revenue below VND 50 billion and total related-party transactions below VND 30 billion; (b) all related parties are in Vietnam, apply the same CIT rate, and none enjoys tax incentives; (c) no revenue or expense from exploitation or use of intangible assets, revenue below VND 500 billion, and a net profit margin (before interest expense and CIT) on net revenue at or above sector thresholds (distribution 5%, manufacturing 10%, processing 15%).

Two commonly misunderstood points. First, exemption from preparing transfer pricing documentation does not mean exemption from declaration — the enterprise must still declare related-party transactions under Appendix I. Second, Article 20(3) is explicit: even when exempt, the taxpayer must still apply the 30% interest-expense cap under Article 16(3). And in an audit, the burden of proving the transaction is arm's-length remains with the enterprise.

5. A Safe-Handling Checklist for 0% Intra-Group Loans

  1. Map related-party relationships before signing. Why: only a correct determination triggers the right declaration and documentation duties. How: check ownership structure, capital ratios, management/control relationships and the outstanding-debt condition against the cases in Article 5(2) of Decree 255/2026/ND-CP. Basis: Article 5 of Decree 255/2026/ND-CP.
  1. Sign a written loan agreement with complete terms. Why: the contract is the first evidence tax authorities review; a loan without a contract or with thin terms is hard to defend. How: state the amount, term, repayment schedule, interest rate (including 0%) and the basis on which the parties agreed that rate. Basis: the obligation to substantiate transactions under Article 18 of Decree 255/2026/ND-CP.
  1. Prepare a market-rate comparability analysis. Why: this is the primary shield when tax authorities question the arm's-length character of the 0% rate. How: collect commercial-bank lending rates or comparable independent transactions matching term, currency, and credit profile at the time of signing; archive them systematically. Basis: the arm's-length principle under Decree 255/2026/ND-CP.
  1. Fully declare the related-party transaction under Appendix I. Why: failure to declare is a direct ground for tax imposition. How: declare the 0% loan as a related-party transaction in the annual CIT finalization return, even when exempt from documentation. Basis: Article 18 and Article 24(2)(i) of the Law on Tax Administration 108/2025/QH15.
  1. Assess the transfer-pricing documentation obligation. Why: missing documentation when it was required is a heavy negative in audits. How: test revenue, total related-party transaction value and profit margins against the three exemptions in Article 20(2) of Decree 255/2026/ND-CP; prepare full documentation if not exempt. Basis: Articles 18 and 20 of Decree 255/2026/ND-CP.
  1. If the lender is offshore: register the loan with the State Bank of Vietnam. Why: medium- and long-term foreign loans must be registered; failure can draw foreign-exchange administrative penalties and block repayment transfers through the banking system. How: complete the foreign-loan registration procedure — the obligation attaches to the loan itself, not the interest rate. Basis: Article 11 of Circular 12/2022/TT-NHNN (Thông tư 12/2022/TT-NHNN).
  1. Review foreign contractor tax (FCT) obligations where a foreign element exists. Why: interest paid to foreign organizations is subject to FCT at a 5% CIT rate on the interest. How: determine the lender's status, actual interest cash flows, and the Vietnamese borrower's withholding, declaration and payment obligations. Basis: Article 12(3) of Decree 320/2025/ND-CP and Article 7 of Circular 20/2026/TT-BTC (Circular 103/2014/TT-BTC was repealed in full from 01/7/2026 by Article 99 of Circular 89/2026/TT-BTC; filing and payment-on-behalf procedures follow Circular 89/2026/TT-BTC). Note: a 0% loan with no actual interest paid triggers no withholding; where tax authorities impute interest income to a foreign lender, the withholding obligation on the imputed interest currently has no clear guidance — seek counsel for the specific file.
  1. Don't "patch" it with a baseless nominal rate. Why: inserting an abnormally low token rate without a comparability analysis does not make the transaction arm's-length and may raise further suspicion. How: every rate applied between related parties must be backed by a comparability analysis and commensurate documentation. Basis: the arm's-length principle under Decree 255/2026/ND-CP.

6. Frequently Asked Questions

Is lending to an affiliated company at 0% illegal?

Short answer: The 0% loan itself is not prohibited, but if the two parties are related, the transaction must comply with the rules on tax administration of related-party transactions.

Explanation: The law does not prohibit enterprises from lending to related parties at preferential or 0% rates. What the law requires is that the transaction be declared truthfully and priced in line with the arm's-length principle — the price independent parties would agree under similar conditions.

Legal basis: Article 5(2), Article 18 of Decree 255/2026/ND-CP; Article 24(2)(i) of the Law on Tax Administration 108/2025/QH15.

What to do: sign a complete contract, declare the related-party transaction, and prepare materials substantiating the agreed rate.

On what basis do tax authorities impute interest income?

Short answer: The tax authority redetermines the lender's income using the rate independent parties would apply to a similar transaction, based on comparability data gathered during the audit.

Explanation: Where the 0% rate is found not to reflect market pricing, the authority uses the transfer-pricing methods under Decree 255/2026/ND-CP — for example, benchmarking against commercial-bank lending rates or comparable independent transactions in term, currency, and credit conditions. The result is a deemed interest income for the lender, from which back tax is computed.

Legal basis: Decree 255/2026/ND-CP; Article 24(2)(i) of the Law on Tax Administration 108/2025/QH15.

What to do: build your own comparability analysis when the contract is signed, rather than scrambling for data after an audit begins — historical data is hard to reconstruct.

Must a 0% loan be covered by transfer pricing documentation?

Short answer: It may be exempt under one of the three cases in Article 20(2) of Decree 255/2026/ND-CP; if not exempt, documentation must be prepared.

Explanation: Declaration and documentation are two distinct obligations. A 0% loan must always be declared as a related-party transaction, but documentation is exempt where: revenue is below VND 50 billion and total related-party transactions below VND 30 billion; all related parties are in Vietnam, share the same tax rate, and enjoy no incentives; or revenue is below VND 500 billion with no intangible-asset revenue or expense and sector minimum margins are met.

Legal basis: Article 18, Article 20(2) and (3) of Decree 255/2026/ND-CP.

What to do: test the exemption conditions each fiscal year, as revenue and transaction mix change; even when exempt, declare fully.

What extra procedures apply when a foreign parent lends 0% to its Vietnamese subsidiary?

Short answer: Beyond transfer-pricing tax duties, the loan must be registered with the State Bank of Vietnam if it is a medium- or long-term foreign loan.

Explanation: Foreign-exchange rules require registration of medium- and long-term foreign loans — the duty attaches to the loan itself, regardless of whether the rate is 0% or higher. Non-registration can lead to administrative penalties and complications in remitting principal repayments through the banking system.

Legal basis: Article 11 of Circular 12/2022/TT-NHNN; Article 18 of Decree 255/2026/ND-CP.

What to do: register the loan before disbursement as planned; review FCT obligations if interest is later paid to the foreign lender.

How should a 0% loan signed before July 1, 2026 be handled?

Short answer: Apply the framework corresponding to each tax year: CIT years 2025 and earlier under Decrees 132/2020/ND-CP and 20/2025/ND-CP; from the 2026 tax year under Decree 255/2026/ND-CP.

Explanation: Decree 255/2026/ND-CP is effective July 1, 2026 and applies from the 2026 CIT year. A loan signed earlier but still outstanding and effective in 2026 remains a related-party transaction to be declared for the 2026 tax year under the new rules. A business cannot invoke "the contract predates the new decree" to skip current-year declaration duties.

Legal basis: Article 23 of Decree 255/2026/ND-CP.

What to do: review all outstanding intra-group loans, classify declaration and documentation duties by tax year, and supplement missing materials before finalization.

7. When to Work with Counsel

A 0% loan between related parties is a case of "small in form, large in tax consequences." Businesses should engage counsel when: preparing to sign a loan agreement with a related party, especially where one party is offshore; building a market-pricing analysis and transfer pricing documentation; facing a tax audit or inspection with questions on intra-group loans; or reviewing all related-party transactions ahead of the 2026 CIT finalization — the first tax year applying Decree 255/2026/ND-CP.

FLAT LAW FIRM advises comprehensively on related-party transactions and transfer pricing for FDI enterprises: mapping related-party relationships, building pricing documentation, registering foreign loans, and representing clients before tax authorities during audits and inspections. Contact our hotline at 0988424851 for advice on your company's specific situation.

References

  • Nghị định số 255/2026/ND-CP (Decree No. 255/2026/ND-CP) dated June 30, 2026 on tax administration of related-party transactions of enterprises with related-party relationships (effective July 1, 2026; applicable from the 2026 corporate income tax year)
  • Luật Quản lý thuế số 108/2025/QH15 (Law on Tax Administration No. 108/2025/QH15) (effective July 1, 2026)
  • Luật Thuế thu nhập doanh nghiệp số 67/2025/QH15 (Law on Corporate Income Tax No. 67/2025/QH15) (effective October 1, 2025; applicable from the 2025 tax year)
  • Nghị định số 132/2020/ND-CP (Decree No. 132/2020/ND-CP) dated November 5, 2020 (expired July 1, 2026) and Nghị định số 20/2025/ND-CP (Decree No. 20/2025/ND-CP) dated February 10, 2025 (expired July 1, 2026) — cited only for obligations of tax years 2025 and earlier
  • Decree No. 320/2025/ND-CP (Article 12(3): FCT on loan interest paid to foreign organizations, 5% CIT rate) and Circular No. 20/2026/TT-BTC (Article 7 guiding FCT); filing and payment-on-behalf procedures under Circular No. 89/2026/TT-BTC (Article 99 repealing Circular No. 103/2014/TT-BTC in full from 01/7/2026)
  • Thông tư số 12/2022/TT-NHNN (Circular No. 12/2022/TT-NHNN) dated September 30, 2022 guiding foreign-exchange administration of enterprises' offshore borrowing and debt repayment (effective November 15, 2022)
  • Nghị định số 125/2020/ND-CP (Decree No. 125/2020/ND-CP) dated October 19, 2020 on administrative penalties for tax and invoice violations (as amended by Nghị định số 310/2025/ND-CP (Decree No. 310/2025/ND-CP), effective January 16, 2026)

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