The interest expense limitation is a regulation that caps the amount of interest expense deductible when calculating corporate income tax (CIT) for businesses engaged in related-party transactions. Total interest expenses, after deducting interest on deposits and interest on loans, are deductible up to a maximum of 30% of EBITDA. This regulation was previously set forth in Decree 132/2020/NĐ-CP. Effective July 1, 2026, it is stipulated in Decree 255/2026/ND-CP and will take effect as of the 2026 corporate income tax period.
The 30% EBITDA threshold remains unchanged. However, the method for determining related-party relationships through loans has been adjusted, and loans from independent banks have been officially excluded. Businesses need to fully understand these points to file their tax returns accurately and avoid having expenses disallowed during an audit.
What does the regulation on interest expense limits under Decree 132 mean?
The control of interest expense is a legal provision that limits the portion of interest expense that may be included as a deductible expense when determining the corporate income tax base of a business engaged in related-party transactions.
In short, net interest expense (interest expense minus interest income from deposits and loans) is deductible only up to 30% of EBITDA. Under this regulation, EBITDA is defined as net operating profit plus net interest expense plus depreciation expense for the period.
The objective of the regulation is to prevent businesses from increasing internal borrowing to shift profits and reduce taxable income, thereby ensuring that tax obligations correspond to the actual value of business operations.
Note on Validity: Decree No. 255/2026/ND-CP, issued by the Government on June 30, 2026, takes effect on July 1, 2026, and applies starting with the 2026 corporate income tax (CIT) filing period. Pursuant to Article 23, Decree No. 132/2020/ND-CP and Decree No. 20/2025/ND-CP shall cease to be in effect as of the date Decree No. 255 takes effect.
Regulations on limiting interest expense under Decree 132
Subparagraph a of Paragraph 3 of Article 16 of Decree No. 255/2026/ND-CP stipulates the total interest expense that is deductible when determining corporate income tax (CIT) taxable income for enterprises engaged in related-party transactions as follows:
The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer.
This means that the interest expense deductible when determining taxable income for corporate income tax does not exceed 30% of the total EBITDA (Earnings before interest, tax, depreciation and amortization) of the enterprise.
This provision fully incorporates the provisions of Clause 3, Article 16 of Decree No. 132/2020/ND-CP. When applying this provision, businesses should note the following two points:
- The phrase “after deducting interest on deposits and interest on loans” appears in both the capped expenses section and the section added to EBITDA.
- The original metric is net operating profit, not pre-tax profit.
What is the maximum deductible amount for interest expense under Decree 132 when calculating corporate income tax?
The interest expense deduction limit under Decree 132 is applied to restrict the amount of deductible expenses when calculating corporate income tax. Specifically, businesses are only allowed to deduct interest expenses up to a maximum within the 30% EBITDA range. Any expense exceeding this limit will be disallowed and will not be included as a deductible expense when determining taxable corporate income for the period.
From the Shortcomings of Decree 132 to the Exclusion Provisions in Decree 255
Point d, Paragraph 2, Article 5 of Decree No. 132/2020/ND-CP initially defined a related-party relationship as occurring when an enterprise provides a guarantee or a loan with a principal amount equal to at least 25% of the borrower’s owners’ equity and accounting for more than 50% of the borrower’s total medium- and long-term debt.
This regulation inadvertently covers both banks and independent credit institutions, which have no ownership, management, or control ties to the enterprise. As a result, many enterprises—particularly project-based enterprises with large bank loans—have been deemed to engage in related-party transactions and have had their interest expense limits restricted. In reality, however, these are simply ordinary credit transactions between independent parties.
Current provisions under Point d, Clause 2, Article 5 of Decree No. 255/2026/ND-CP
This shortcoming has been addressed, and Decree No. 255/2026/NĐ-CP continues to stipulate as follows:
An enterprise guarantees or lends capital to another enterprise in any form (including third-party loans secured by related-party financing and similar financial transactions) provided that the total outstanding debt of the borrowing enterprise to the lending or guaranteeing enterprise is at least equal to 25% of the owner's equity of the borrowing enterprise and accounts for more than 50% of the total outstanding debt of all medium and long-term debts of the borrowing enterprise.
The provision set forth in subparagraph d above Not applicable in the following cases:
- Guarantors or lenders—economic organizations operating in accordance with the Law on Credit Institutions—shall not directly or indirectly participate in the management, control, capital contribution, or investment in the borrowing enterprise or the guaranteed enterprise, as provided for in subparagraphs a, c, d, e, g, h, k, l, and m of this paragraph;
- The guarantor or lender is an economic organization operating in accordance with the Law on Credit Institutions, and the borrower or the party receiving the guarantee is not, either directly or indirectly, subject to the management, control, capital contribution, or investment of another party, as provided for in subparagraphs (b), (e), and (i) of this paragraph;
- Creditors and guarantors are state-owned organizations with charter capital that function to buy, sell, and process debt, but do not directly or indirectly participate in the management, control, capital contribution, or investment in the debtor enterprise or the guaranteed enterprise as stipulated in points a and c of this clause.
Compared to the previous Decree 132, businesses should note the following three points:
- The 25% and 50% thresholds are now calculated based on total outstanding balance loans between the borrower and the lender or guarantor, as compared to Total outstanding balance the borrower's medium- and long-term debts.
- The exception for credit institutions is conditional exception. Businesses must retain evidence showing that the lender is not involved in management, control, capital contributions, or investment; they must not assume that all bank loans fall outside the scope.
- The exclusion list now includes cases where an organization buys, sells, or manages debts held by the State with a charter capital of 100%.
Guidelines for determining deductible and non-deductible interest expenses under the interest expense limitation mechanism as stipulated in Decree 132.
To understand how control is applied related party interest expense, Decree 132/2020/ND-CP has stipulated in detail the deductible interest expense. According to Clause 3, Article 16, regarding the total deductible interest expense when determining taxable corporate income for enterprises with related-party transactions, these regulations are presented as follows:
Interest expenses are deductible when calculating corporate income tax for enterprises that have related-party transactions.
Paragraph 3 of Article 16 of Decree No. 255/2026/ND-CP concerns the total amount of interest expenses that are deductible when determining corporate income tax (CIT) taxable income for enterprises engaged in related-party transactions. Specifically, these provisions are set forth as follows:
The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer;
The portion of non-deductible interest expenses as prescribed in Point a of this Clause shall be transferred to the next tax period when determining the total deductible interest expenses in case the total deductible interest expenses arising in the next tax period are lower than the level prescribed in Point a of this Clause. The period for transferring continuously calculated interest expenses shall not exceed 05 years from the year following the year in which non-deductible interest expenses arise;
The provision in subparagraph a of this paragraph does not apply to loans taken out by taxpayers that are credit institutions under the Law on Credit Institutions (as amended and supplemented in 2025); insurance businesses under the Insurance Business Law (as amended and supplemented in 2025); Official Development Assistance (ODA) loans and preferential government loans arranged through the government borrowing from foreign sources for on-lending to enterprises; loans for implementing national target programs (the New Rural Development Program and the Sustainable Poverty Reduction Program); loans for programs and projects implementing the State’s social welfare policies (resettlement housing, housing for workers and students, social housing, and other public welfare projects);
Taxpayers shall declare the interest expense ratio for the tax period in accordance with Appendix I issued together with this Decree.
Businesses should note: The amount of interest expense not yet deducted may only be carried forward to the period in which the interest expense is deducted. lower The 30% EBITDA threshold and the 5-year term are taken into account continuously, without interruption, even in years when the business is unable to use it.
Transitional Provisions: Pursuant to Article 23 of Decree 255/2026/ND-CP, if a business is eligible for the transition period under Article 3 of Decree No. 20/2025/ND-CP, it may continue to be subject to the transition period for the remaining duration as specified in Article 3 of Decree No. 20/2025/ND-CP. This group primarily consists of businesses from the 2020–2023 period that have only affiliate relationships with credit institutions and still have interest expenses that have not been fully carried forward.
See details: How to calculate deductible interest expenses under Decree No. 255/2026/NĐ-CP.
Interest expenses are not deductible when determining taxable income.
In addition to the 30% EBITDA threshold specific to businesses with related-party transactions, all businesses must also comply with the general rules regarding non-deductible interest expenses. These rules are now outlined in Article 10 of Decree No. 320/2025/ND-CP (Guidance on the 2025 Corporate Income Tax Law):
- The portion of interest payment expenses for loans for production and business activities of entities that are not credit institutions or economic organizations exceeding 150% of the basic interest rate announced by the State Bank of Vietnam at the time of borrowing.
- Interest payments on loans corresponding to the remaining registered capital (for private enterprises, this is investment capital) according to the capital contribution schedule stipulated in the company's charter, even if the company has already commenced production and business operations. Interest payments on loans during the investment process that have been recorded in the value of assets or investment projects.
In case an enterprise has contributed enough charter capital, during the business process there is an expense to pay interest on loans to invest in other enterprises, this expense is included in deductible expenses when determining taxable income.
Interest payments on loans corresponding to the remaining charter capital according to the capital contribution schedule stated in the enterprise's charter are not deductible when determining taxable income, which is determined as follows:
- In case the loan amount is less than or equal to the remaining charter capital, the entire loan interest is a non-deductible expense.
- In cases where the loan amount exceeds the outstanding authorized capital based on the capital contribution schedule.
Understanding how to determine deductible and non-deductible interest expenses helps businesses comply with regulations and optimize tax obligations. However, in reality, the process of applying regulations on controlling interest expenses is not always favorable. If businesses do not control records and data well or do not fully understand the exceptions, the risk of tax risks arising, cost exclusions and affecting profits is inevitable.
Reference: Advice on controlling interest expense under Decree 132.
Tax audit risk
Controlling interest expense related to related-party transactions is a key area that tax authorities typically examine first. Common risks include:
- Incorrect calculation of EBITDA;
- Incorrectly offsetting other financial income (such as foreign exchange gains or losses and dividends) against interest on deposits and interest on loans;
- We are unable to track the amount of interest expense carried forward from year to year;
- By default, a bank loan does not give rise to a related-party relationship without supporting documentation.
These errors not only increase the amount of tax owed but also result in late payment penalties and administrative tax penalties.
Therefore, businesses need to review their affiliated relationships in accordance with Article 5, recalculate the 30% EBITDA threshold pursuant to Paragraph 3 of Article 16 of Decree 255/2026/NĐ-CP starting with the 2026 fiscal year, and simultaneously develop an appropriate borrowing strategy.
Conclude
Compliance with interest expense control not only helps tax authorities control related-party transactions but also forces businesses to be transparent in their borrowing activities. However, if they are not prepared, businesses are at risk of having their expenses excluded, tax arrears collected and administrative fines imposed. To minimize this risk, businesses need to build a complete profile and have a reasonable borrowing plan.
To ensure safety and effectiveness, businesses should seek consultation. organizations with expertise and experience in the field to provide detailed support and guidance.
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Frequently Asked Questions on the Limitation of Interest Expenses Under Decree 132
Is Decree 132 still applied to limit interest expense?
No. Effective July 1, 2026, Decree No. 132/2020/ND-CP and Decree No. 20/2025/ND-CP will be repealed. The limitation on interest expense deductions for the 2026 corporate income tax (CIT) filing period will be implemented in accordance with Decree No. 255/2026/ND-CP. However, businesses subject to the transitional provisions under Article 3 of Decree No. 20/2025/ND-CP will continue to be subject to those provisions for the remainder of the period.
Which businesses are required to apply the regulations limiting interest expense deductions?
A business is a corporate income tax payer that engages in transactions with related parties as defined in Article 5 of Decree 255/2026/ND-CP. This is particularly noteworthy for businesses that borrow funds from a parent company, a company within the same corporate group, or in cases where a related-party relationship is established through guarantees or loans.
How is EBITDA interpreted in the context of regulations limiting interest expense?
EBITDA, as defined in this regulation, is equal to net operating income for the period, plus interest expense (after deducting interest earned on deposits and interest received on loans), plus depreciation expense for the period. This calculation differs from standard management EBITDA because it is not derived from pre-tax income.
Will interest expenses exceeding the 30% EBITDA amount be completely lost?
No. According to Point b, Clause 3, Article 16 of Decree No. 255/2026/ND-CP, the excess amount is carried forward to the next tax period when the deductible interest expense for that period is less than the 30% EBITDA threshold. The carryover period shall not exceed 5 years, starting from the year following the year in which the excess arose.
Are businesses that borrow from banks subject to limits on interest expense?
If a business only borrows from a bank that falls under the exclusion criteria and does not engage in any other related-party transactions, the business is not subject to the 30% EBITDA restriction. In that case, interest expenses are deductible in accordance with the general provisions of corporate income tax law. Conversely, if the business engages in other related-party transactions during the period (such as borrowing from its parent company), the total interest expense—including bank interest—must still be calculated based on the 30% EBITDA threshold.