Zero-Interest Loans May Be Subject to Tax Assessment: Detailed Explanation

Reference: Official Letter No. 27296/CTHN-TTHT Dated May 10, 2024, from the Hanoi Tax Department

The Hanoi Tax Department has issued important guidance on tax policy for zero-interest or low-interest loans. Below is a detailed explanation of the content of the official letter:

1. Applicable Cases:

Related Party Transactions:

• When a parent company lends to a subsidiary at a 0% interest rate (zero interest), this is considered a related party transaction under the provisions of Decree No. 132/2020/ND-CP.

Non-Frequent Lending Activities:

• Companies (not financial institutions) that lend infrequently with interest rates lower than the normal market rates for similar terms and scales.

2. Consequences:

Price Adjustment and Profit Margins:

• In the case of related party transactions, the parent company must adjust the price and profit margin of the lending transaction according to the provisions of Clause 1, Article 8 of Decree No. 132/2020/ND-CP for the declaration and calculation of corporate income tax (CIT).

Tax Assessment:

• For infrequent lending activities with low interest rates, the tax authorities may apply tax assessment measures for CIT according to the provisions of Clause 1, Article 50 of the Tax Administration Law No. 38/2019/QH14.

3. Notes:

Capital Contribution Transfer:

• When loan interest is converted into capital contribution by the member of the company transferring their capital contribution, the individual/organization transferring must pay personal income tax (PIT) or CIT according to the provisions of Clause 4, Article 2 of Circular No. 111/2013/TT-BTC and Article 14 of Circular No. 78/2014/TT-BTC.

Conclusion:

Zero-interest or low-interest loans can lead to price adjustments, profit margin adjustments, and CIT assessment. Enterprises must pay close attention to these regulations to fulfill their tax obligations fully and accurately.

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