The scenario: a Hong Kong company as the brain, a Vietnamese factory as the hands
HarbourPeak Ltd, a Hong Kong parent, owns a factory in Long An that processes electronic components. The operating model: HarbourPeak holds the brand and production formulas, buys raw materials from global suppliers, consigns them to the Vietnamese factory for processing to order, then sells finished goods to customers across Asia. In return, the factory earns a processing fee and pays technology royalties and management service fees to the parent. These four related-party transaction streams each have a different economic character, and the CFO’s question is: how do we prove every price respects the arm’s length principle?
The arm’s length principle under Decree 255/2026
Decree 255/2026/ND-CP, issued 30 June 2026 and effective 1 July 2026, replacing Decree 132/2020/ND-CP and Decree 20/2025/ND-CP, keeps the arm’s length principle as the foundation: transactions between related parties must be priced as if conducted between independent parties under comparable conditions. The tax authority administers based on the economic substance of each transaction, the taxpayer’s risk profile and compliance level.
Before choosing a pricing method, the company must prepare a functional, asset and risk analysis: which party performs what functions, uses which assets and bears which risks. In the HarbourPeak model, the Hong Kong company bears market risk and owns the intangibles, while the Vietnamese factory performs routine manufacturing with limited risk. This analysis decides the pricing method for each transaction.
Choosing a method for each transaction stream
1. The Vietnamese factory’s processing fee: routine, low-risk manufacturing. Suitable methods are cost plus, i.e. production cost plus the gross margin of comparable independent processors, or the transactional net margin method based on comparable companies’ return on costs.
2. Finished goods sold by the parent to customers: where the Hong Kong company acts as distributor, the resale price method tests whether the distribution margin matches the sales functions actually performed.
3. Technology royalties: intangibles are highly specific and hard to benchmark. Companies may use the comparable uncontrolled price method if similar market licences exist, or profit split where both parties jointly create the intangible value.
4. Management service fees: apply cost plus together with a benefit test: does the service deliver real value to the recipient, and is the fee commensurate with cost plus a reasonable margin? Vague “general management” charges that cannot prove benefit risk being disallowed as deductible expenses.
Filing and documentation: do not wait for an audit
Decree 255/2026 carries forward the compliance framework: related-party transaction declarations filed with the corporate income tax finalisation, preparation and retention of the transfer pricing documentation file comprising the master file and local file, plus country-by-country reporting for groups above the threshold. Low-risk businesses get lighter documentation duties, but a brain-and-hands model with multiple transaction streams and intangibles sits in the high-risk group and needs full, timely documentation.
Another hot spot: the interest expense cap. If the Hong Kong parent lends to the Vietnamese factory, interest exceeding the regulatory threshold is non-deductible for corporate income tax, directly affecting the efficiency of the internal financing structure.
Conclusion and action plan
The arm’s length principle is not a single number but a process: functional analysis, a fitting method per transaction, and documented proof. HarbourPeak and similar groups should: (1) run a functional, asset and risk analysis for each entity; (2) choose and consistently apply a pricing method per transaction stream; (3) prepare transfer pricing documentation before finalisation season; (4) review internal service fees and intercompany interest.
Frequently asked questions
What does the arm’s length principle mean?
It is the independent-transaction principle: related-party transactions must be priced as if between independent parties under comparable conditions, per Decree 255/2026/ND-CP effective 1 July 2026.
Which pricing method suits a processing factory in Vietnam?
For routine manufacturing with limited risk, cost plus or the transactional net margin method fits: production cost plus the margin of comparable independent processors as the benchmark.
Are parent management fees charged to the Vietnamese factory always deductible?
No. The company must prove the service delivers real benefit to the recipient and that the fee matches cost plus a reasonable margin. Generic management charges without proven benefit risk disallowance.
When must transfer pricing documentation be prepared?
The transfer pricing documentation file, comprising master file and local file, must be prepared and retained under Decree 255/2026, with the related-party declaration filed alongside the corporate income tax finalisation. Multi-stream models with intangibles are high-risk and should prepare early.
FLAT Law Firm stands with investors
FLAT Law Firm advises on transfer pricing compliance for foreign-parent and Vietnamese-factory models: functional analysis, pricing method selection and transfer pricing documentation. Contact us to review your group’s internal pricing structure.
This article has been quality-reviewed by the FLAW AI Legal Council