Borrowing and lending is common in businesses, depending on the purpose of using cash flow, the owner will decide the finance in the business.

Today, we will not discuss about financial management in using loans and borrowing, but in this topic, we will only consider the tax risk of lending and borrowing.

We would like to summarize some risks which often occur in practice are recognized as follows:

There are three key issues:

The first, the issue is interest expense when determining taxable income:

Interest expenses that are not deductible when calculating corporate income tax are prescribed in Circular 96 in 2015 as follows:

• The expenditure on payment of interest on production and business loans of objects that do not credit institutions or economic organizations in excess of 150% of the basic interest rate announced by the State Bank of Vietnam at the time of borrowing.
• Payments of interests on loans corresponding to insufficient charted capital registered under the capital contribution progress stated in the charter of enterprises, including the case the enterprises have come into operation and business.
• Payments of interest on loans are already recorded in the value of assets or constructions invested.
• Interest expenses advanced by term and cycle but to the end of the term or cycle, these expenses have not been spent or not spent all.
• Interest expenses advanced in the wrong period because it is recognized at the time of actual payment.
• Interest expenses are not reasonable, for example: having enough money, using loans for lending again, no interest, or this loan does not contribute to revenue and income in the period.
• The loan documents are not incomplete. For example, when borrowing and repaying loans between two companies, there must be non-cash payment documents and a contract with a clearly defined term and interest rate. In case of personal loans, there is a declaration of personal income tax from capital investment, which is 5% of the loan interest payable.

The second, the issue is interest expense in enterprises having related-party transactions regarding to the provisions in Decree 132 in 2020:

• Total loan interest cost arising after deducting deposit interests and lending interests within a specific taxable period which is deducted during the process of determination of income subject to the corporate income tax is not 30% EBITDA.
• Interest expense with the rate in excess of the market interest rate is also not deductible when calculating corporate income tax.

The third, other cases:

• Enterprises borrow from non-resident individuals and organizations with 0% interest rate: This is considered a non-parity transaction according to the provisions of the tax administration law, and may be defined the interest rate for the purpose of calculating contractor tax.
• Enterprise lend with 0% interest rate: This case is considered a non-parity transaction according to the provisions of the tax administration law and may be defined the interest rate for the purpose of calculating corporate income tax.
• Cases that are considered as loans and loan interest is calculated into taxable income such as: advance to employee but not refund for a long time, or advance to suppliers but no delivery goods, no contract, and not refund for a long time.

In summary, the tax risks of borrowing or lending needs to identify in order to avoid tax arrears and penalties.