Enterprises with related-party transactions that incur interest expense during the period must check the 30% EBITDA cap before finalising corporate income tax. Above this cap, the excess interest expense is not deductible when determining taxable income, even where the loan is fully supported by contracts and documents. Understanding the formula and the carry-forward mechanism correctly helps enterprises retain deductible expense across future periods rather than losing it altogether.
The rule capping deductible interest expense
- Applies to enterprises with related-party transactions, regardless of whether the loan is from a related party or an independent party, provided the enterprise falls within the scope of Decree 132/2020/ND-CP
- Total net interest expense, after deducting deposit interest and lending interest earned, deductible when determining taxable income for corporate income tax purposes must not exceed 30% of EBITDA for the period
- Certain specific entities are excluded from this cap: credit institutions and insurance business organisations; loans funded by official development assistance (ODA) or government concessional loans on-lent by the Government from foreign borrowings to enterprises; loans implementing national target programmes; and loans financing programmes or projects implementing the State's social welfare policies
- The 30% EBITDA cap replaces the lower cap applied under the predecessor regulation — enterprises need to check which regulation was in effect for the specific tax period under review
How to determine net interest expense and EBITDA
Net interest expense for the period is determined as total interest expense incurred less deposit interest and lending interest earned during the same period.
EBITDA used in the cap formula is determined as total net profit from business operations during the period, plus net interest expense incurred during the period, plus depreciation expense incurred during the period.
The deductible interest expense cap equals 30% multiplied by EBITDA as determined above. The portion of net interest expense exceeding this cap is excluded from deductible expenses when determining taxable income for corporate income tax purposes for that period.
Treatment and carry-forward of the excess
- Interest expense disallowed for exceeding the cap is carried forward to the following tax period when determining total deductible interest expense, provided the net interest expense arising in that following period is lower than the 30% EBITDA cap for that period
- The continuous carry-forward period must not exceed 5 years from the year following the year in which the non-deductible interest expense arose
- Enterprises need to track the carried-forward interest expense separately by the year in which it arose, to avoid carrying it forward to the wrong year or beyond the permitted period
- Once the carry-forward period has expired without the amount being fully used, the remaining interest expense becomes permanently non-deductible
Worked example (illustrative figures only)
Assume Company A, during the tax period, has net profit from business operations of VND 20 billion, depreciation expense of VND 8 billion, interest expense incurred of VND 15 billion, and deposit interest and lending interest earned of VND 1 billion. These are illustrative figures used only to demonstrate the calculation and do not reflect the actual figures of any enterprise.
Net interest expense equals VND 15 billion minus VND 1 billion, i.e. VND 14 billion.
EBITDA equals VND 20 billion plus VND 14 billion plus VND 8 billion, i.e. VND 42 billion.
The deductible interest expense cap equals 30% multiplied by VND 42 billion, i.e. VND 12.6 billion.
Because actual net interest expense (VND 14 billion) exceeds the cap (VND 12.6 billion), the excess of VND 1.4 billion is not deductible in this period. This amount is carried forward to subsequent tax periods for up to 5 years, provided net interest expense in the following period is lower than the cap for that period.
This example illustrates the calculation mechanism only and does not replace the actual calculation based on the enterprise's audited financial statements.
Frequently asked questions
Does the 30% EBITDA cap apply to all enterprises, or only enterprises with related-party transactions? It applies only to enterprises within the scope of Decree 132/2020/ND-CP, that is, enterprises with related-party transactions arising during the tax period.
Is a loan from an independent commercial bank, not a related party, included in the cap? Yes. The cap applies to the enterprise's total net interest expense, regardless of whether the loan is sourced from a related party or an independent party, provided the enterprise is subject to the Decree.
Is the non-deductible interest expense refunded in cash? No. This is not a tax refund; it is a mechanism allowing the expense to be carried forward and deducted in a later period when determining taxable income, within the prescribed maximum period.
Are enterprises with negative equity or accumulated losses excluded from this rule? Decree 132/2020/ND-CP does not provide for an exclusion based on equity position or a loss-making result; enterprises need to review their specific situation with a tax expert to determine the obligation and any applicable specific exclusions.
Book a consultation with TLA to review your interest expense cap and optimise the carried-forward expense for your enterprise.
