WHAT IS TAX IMPOSITION - TAX  IMPOSITION  IN LOAN TRANSACTIONS

Currently, besides borrowing from commercial banks, we also see lending and borrowing transactions happening between two enterprises, or between enterprises and individuals.

In addition to interest-bearing borrowing and lending transactions, there are interest-free borrowing and lending transactions, commonly known as 0% interest.

So are these interest-free borrowing and lending transactions regarded as “normal” or not? Is there a tax risk? Let's keep in mind the following contents with AS:

• Firstly, Loans with 0% interest rates will be regarded as transactions "not according to market prices", as stated in the Law on  Tax Administration, No. 38/ 2019/QH14, and shall be imposed on interest rates for collecting tax arrears by tax authorities.
• Second, imposing the interest rate will generate interest income for the lender, and interest expense for the borrower. Accordingly, the lender has the tax risk with the income, whereas the borrower bears the tax risk with the expenses, specifically as follows:

TAX RISK WITH THE INCOME

The lender has the tax risk with the income, and the borrower bears the tax risk with the expenses, specifically as follows:

• For interest income: the tax arrears is determined by the identity of the lender. Additionally, you should note that if the tax authority does not directly collect tax from the obligor, the tax authority will collect the tax directly from the other, in the following cases:

- In case the company borrows from foreign enterprises or individuals: arrears Foreign Contractor Tax from loan interest income;

- In case the company borrows from domestic enterprises: arrears Corporate Income Tax from financial income;

- In case the company borrows from individuals: arrears Personal Income Tax from capital investment income;

• For interest expenses be imposed by tax authorities, there is no agreement in the loan contract or other relevant documents, so these expenses are not deductible.

• Third, the interest rate shall be imposed on the loan.

- If at the same time as lending and borrowing without interest, your Company has interest-bearing lending and borrowing contracts with other independent parties, “the interest" for tax purposes will be determined at the interest rate that reflects the highest level of comparability to the lending or borrowing that the Company is making.

- If at the same time as lending and borrowing without interest, your company does not have interest-bearing lending and borrowing contracts with other independent parties, then will prefer the interest rate of the commercial bank where the Company opens accounts, and choose an interest rate that reflects the highest level of comparability.