ICL Advisory and Valuation Company Limited introduces to readers Official Dispatch 1716/CTBPH-TTHT of the Binh Phuoc Provincial Tax Department on Enterprises borrowing money from the Director during production and business activities.
Situation: Enterprises borrow money from the Director (who is the owner of the enterprise) during production and business activities.
1. Regarding the Company borrowing money from the Director (who is the owner of the enterprise)
Pursuant to the Law on Tax Administration No. 38/2019/QH14 dated June 13, 2019 of the National Assembly, it is stipulated that:
- Clause 2, Article 49 stipulates:
“Article 49. Principles of tax determination
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2. Tax authorities determine the amount of tax payable or determine each element and basis for calculating tax to determine the amount of tax payable.”
- Point d, Clause 1, Article 50 stipulates:
“Article 50. Tax assessment for taxpayers in case of tax law violations
1. Taxpayers are subject to tax assessment when they fall into one of the following cases of tax law violations:
…
d) Buying, selling, exchanging and accounting for the value of goods and services not according to the normal transaction value on the market;
…”
Pursuant to Decree 132/2020/ND-CP dated November 5, 2020 of the Government regulating tax management for enterprises with related-party transactions:
- Clause 2, Article 1 stipulates the scope of regulation:
“…
2. Related-party transactions within the scope of regulation of this Decree are transactions of buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning goods, providing services; borrowing, lending, financial services, financial guarantees and other financial instruments; buying, selling, exchanging, renting, leasing, borrowing, lending, transferring, assigning tangible assets, intangible assets and agreements on buying, selling, and using resources such as assets, capital, labor, and sharing costs between related parties, except for business transactions for goods and services subject to State price adjustment in accordance with the provisions of the law on prices.”
- Article 5 stipulates related parties:
“Article 5. Related parties
1. Related parties (hereinafter referred to as “related parties”) are parties whose relationship falls into one of the following cases:
a) One party directly or indirectly participates in the management, control, capital contribution or investment in the other party;
b) The parties are directly or indirectly under the management, control, capital contribution or investment of another party.
2. The related parties in Clause 1 of this Article are specifically regulated as follows:
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l) The enterprise has transactions to transfer or receive transfers of at least 25% of the capital contribution of the owner of the enterprise during the tax period; borrow or lend at least 10% of the capital contribution of the owner at the time of the transaction during the tax period with the individual operating or controlling the enterprise or with an individual in one of the relationships specified in Point g of this Clause.”
Based on the above quotes and as presented in Official Dispatch No. 01/CV-CT of the Company, the Binh Phuoc Provincial Tax Department has the following opinion:
In case the Company borrows money from the director who is the person operating and controlling the enterprise and the borrowed amount is at least 10% of the owner's capital contribution at the time of the transaction in the tax period, it is determined to have an affiliated relationship. In that case, the borrowing transaction between the Company and the individual operating and controlling the Company is an affiliated transaction according to the provisions of Point 1, Clause 2, Article 5 of Decree No. 132/2020/ND-CP dated November 5, 2020 of the Government.
If the Company borrows money from an individual without interest, the above borrowing activity is an exchange not at the normal transaction price on the market, so the individual is subject to tax assessment according to the provisions of Point d, Clause 1, Article 50 of the Law on Tax Administration No. 38/2019/QH14.
2. Regarding the tax rate
Pursuant to Article 10 of Circular 111/2013/TT-BTC dated August 15, 2013 of the Ministry of Finance guiding the implementation of the Law on Personal Income Tax, the Law amending and supplementing a number of articles of the Law on Personal Income Tax and Decree No. 65/2013/ND-CP of the Government stipulating the Law amending and supplementing a number of articles of the Law on Personal Income Tax:
“Article 10. Basis for calculating tax on income from capital investment
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1. Taxable income
Taxable income from capital investment is taxable income that individuals receive according to the guidance in Clause 3, Article 2 of this Circular.
2. Tax rate on income from capital investment is applied according to the Full Tax Schedule with a tax rate of 5%.
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4. Tax calculation
Personal income tax payable = Taxable income x Tax rate 5%”
Based on the above quote, if an individual lends money to a business and generates income in the cases specified in Circular 111/2013/TT-BTC mentioned above, the personal income tax rate according to the full tax schedule is 5%.
When inspecting or examining, the tax authority will determine the amount of tax payable or determine each element and basis for calculating tax to determine the amount of tax payable.