Interest expense related to related-party transactions is currently one of the "hot topics" causing many businesses to be subject to back taxes of tens to hundreds of billions of VND on corporate income tax after just one inspection.
In reality, many businesses still apply market interest rates and have complete documentation, but are still disallowed as interest expense simply because they exceed the 30% EBITDA threshold according to Decree 132/2020/ND-CP. In some cases, even with negative EBITDA, the entire interest expense is disallowed.
So what are related-party transaction interest expenses, why are they so tightly controlled, how to calculate standard 30% EBITDA according to tax regulations, and most importantly: how to optimize them legally and avoid tax traps from the start?
This article will help you:
- Understanding the true nature of related-party transaction interest expenses.
- Understand the rules for controlling 30% EBITDA according to Decree 132.
- Avoid common mistakes that cause businesses to have interest expense disallowed.
- Implement optimal strategies that are safe, legal, and immediately deployable.
What is interest expense on related-party transactions?
Interest expense related to related-party transactions is an expense arising from loans between related parties (between a parent company and a subsidiary, companies within the same group, or parties with controlling power over each other).
Interest expense on related-party transactions includes not only loans from the parent company abroad, but also:
- Intercompany loans within the same domestic group.
- Borrowing from individuals who control businesses
- Indirect borrowing through guarantees, but essentially internal capital.
The tax authorities don't look at the form of the contract, but at the essence of capital control.
This is why many businesses are "unexpectedly" classified as related-party transactions even though they did not borrow directly from the parent company.
This is not a loan from a bank or an independent third party, but an internal loan within the group. This interest expense is calculated based on the interest rate agreed upon by the related parties, but must comply with the arm's length principle, meaning that the interest rate cannot be too high or too low compared to the market level, to avoid transferring profits to reduce corporate income tax.
With roles and risks:
- Financial flexibility: Helps subsidiaries or member companies in the group easily access capital without depending on banks.
- Optimize cost of capital: Can set reasonable interest rates, reduce overall financial costs.
- Tax risk: If interest expense exceeds 30% EBITDA or the interest rate is unreasonable, the tax authority may exclude interest expense when calculating corporate income tax, leading to an increase in tax payable.
In short, interest expense related to related-party transactions is a powerful financial tool but also a "tax trap" if not properly managed and optimized.
Why is affiliate trading so tightly controlled?
The main objective of controlling related-party transactions is to prevent transfer pricing. Specifically, related parties may intentionally adjust the purchase and sale prices of goods, services, or internal loan interest rates to transfer profits from high-tax areas to low-tax areas, reducing tax obligations in Vietnam.
Interest expense is a common transfer pricing tool. By setting higher-than-market interest rates on internal loans, businesses can easily increase costs in Vietnam (reducing taxable profits) and transfer money abroad as interest income (taxed abroad or exempted under tax treaties). Therefore, the regulation on controlling interest expense was created to set a “quantitative barrier” for this behavior.
The tax authority's framework of thought
From the tax authority's perspective, interest expense is not simply a financial expense, but rather:
- A tool for manipulating profits quickly and discreetly;
- No complicated input invoices are required;
- It's easy to "increase costs" simply by adjusting interest rates or loan sizes.
Therefore, the 30% EBITDA rule is designed as follows:
- A quantitative barrier (easy to test, easy to apply)
- No proof of transfer pricing is required; exceeding the threshold will result in disqualification.
Even with market-correct interest rates, interest expenses can still be excluded.
Opportunities and Risks in Borrowing in Related-Party Transactions
Interest expenses arising from borrowing between related parties bring many benefits:
- Flexible: Easy to transfer capital within the group.
- Low Cost: Interest rates can be set below market rates to support the subsidiary.
- Optimization: Theoretically, using debt can optimize the financial structure.
However, the tax risks are huge:
- Risk of Improper Interest Rate: The loan must comply with the arm's length principle (the interest rate must be equivalent to the loan from the bank or an independent party). If the interest rate is too high, the loan interest may be adjusted down by the tax authority according to the arm's length principle.
- 30% EBITDA Control Risk: This is a quantitative risk. Even if the interest rate is the market rate, if the total net interest expense exceeds 30% Operating Profit plus Interest Expense and Depreciation (EBITDA), the excess is excluded from deductible expenses.
Understanding how to classify interest expenses in related-party transactions under the 30% threshold is key to ensuring compliance.
Current Legal Regulations on Controlling Interest Expenses
The most direct and comprehensive regulation governing the management of interest expenses in related-party transactions is Decree No. 132/2020/ND-CP. This is the most official and legal source of information today.
Legal Origin and Scope of Application
Article 16, Decree No. 132/2020/ND-CP dated November 5, 2020 of the Government regulating tax management for enterprises with related-party transactions.
The scope of application of this regulation on controlling interest expenses is very broad, including all enterprises with related transactions, regardless of size or business sector, if interest expenses arise.
Interest Expense Control Rule: Threshold 30% EBITDA
Article 16 of Decree 132/2020/ND-CP stipulates as follows:
“Total interest expense deductible when determining taxable income of corporate income tax shall not exceed 30% of Total net profit from business activities in the period plus interest expense and depreciation expense incurred in the period of the taxpayer."
Source: Law Library
This rule means that no matter how many businesses interest expense If incurred, the tax authority will only accept a portion of that cost corresponding to a safety threshold.
EBITDA details by corporate income tax
To calculate the 30% control threshold, it is necessary to accurately determine EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is extremely important from a tax perspective. EBITDA in related party transactions is not exactly the same as EBITDA under conventional accounting standards.
EBITDA is calculated as follows:
EBITDA = Net operating profit + Interest expense + Expenses |
Businesses need to pay attention to each component:
To accurately determine the deductible interest expense in related-party transactions, it is necessary to first understand the components that make up EBITDA under CIT. The three key elements are: Net operating profit, Interest expense, and Depreciation expense.
| Indicators | Define | Note |
| Profit from business operations. | Is the profit indicator from business activities on the Business Performance Report. | This profit does not include other income. |
| Interest expense | Total interest expense incurred during the period, serving production and business activities (including related and independent transactions). | Exclude: Interest income, loan interest and calculate on the basis of Net Interest Expense. |
| Depreciation Expense | Total depreciation costs of fixed assets, intangible assets and allocation costs included in production and business costs in the period. |
Understanding the components in the above table is the foundation for calculating EBITDA under CIT and determining the maximum deductible interest expense in related-party transactions. Once you have a firm grasp of Net Operating Profit, Net Interest Expense and Depreciation Expense, you can apply the 30% EBITDA principle correctly, avoiding the risk of interest expense exclusion or tax collection.
Cases where Control is not applicable
The 30% EBITDA control does not apply to all businesses. Specifically, the following cases are excluded:
- Enterprises with no related party transactions: If an enterprise does not have any related party transactions during the period, this interest expense control rule will not apply.
- Loans that are not related party transactions: If interest expenses arise from loans from credit institutions, banks (independent parties), or from parties that are not related parties, these interest expenses will not be controlled under the 30% EBITDA rule.
- Specialized enterprises: Enterprises such as public service units, enterprises operating in specific fields (securities, insurance, etc.) have separate regulations or follow Decree 132/2020/ND-CP exempted.
In summary, if a business has interest expenses in related-party transactions, it needs to calculate the 30% EBITDA threshold.
What happens when a business deducts interest expenses?
The deductible interest expense will increase the taxable income of the enterprise, thereby increasing the amount of tax payable. This directly affects the net profit of the company. In addition, non-compliance can lead to the risk of being sanctioned for tax violations during the tax inspection and examination process later. This is the biggest concern that the accounting and finance department of enterprises often faces.
Important warning regarding tax-determined EBITDA.
The EBITDA used to calculate the 30% control is neither management EBITDA nor EBITDA presented to the bank.
Many businesses report positive EBITDA in their management statements but have negative or low tax-deposited EBITDA due to:
- Non-deductible expenses
- Revenue is not yet eligible for recognition.
- Unrealized exchange rate differences
Detailed instructions: Calculations and applications
Calculating deductible interest expenses in related-party transactions requires meticulousness and a clear understanding of the nature of financial indicators as prescribed by Decree 132/2020/ND-CP. This is a detailed answer to the question "Formula for calculating deductible interest expenses in related-party transactions".
Formula for calculating deductible interest expenses
To accurately determine the deductible interest expense in related-party transactions, enterprises need to comply with the calculation process according to Decree 132/2020/ND-CP. This process includes many consecutive steps, from determining net interest expense to calculating EBITDA by tax and comparing with the 30% control threshold.
The table below clearly outlines all the steps, making it easy for businesses to compare and apply to actual data.
| Steps to take | Content | Recipe |
| Step 1 | Calculate Net Interest Expense (NIE) | NIE = Total Interest Expenses Incurred (linked + independent) − Interest Income from Deposits and Loans. This is the basis for comparison with the 30% EBITDA threshold. |
| Step 2 | Determine Net Operating Profit. | Taken from item 30 on the Income Statement. |
| Step 3 | Calculate depreciation expense | Determine all depreciation of fixed assets, intangible fixed assets and allocated costs calculated during the period. |
| Step 4 | Calculate EBITDA based on corporate income tax. | EBITDA = Operating Profit + Total Interest Expenses Incurred + Depreciation Expense. |
| Step 5 | Determine the maximum deductible interest expense (Control Threshold). | Maximum threshold = 30% x EBITDA. |
| Comparative conclusion | Determine deductible interest expenses. | If NIE is lower than the 30% EBITDA Threshold, the entire NIE is deducted. If NIE is greater than the 30% EBITDA Threshold, the excess is excluded from deductible expenses. |
In summary, understanding each step in the table above helps businesses proactively control interest expenses and accurately assess the risk of exceeding the 30% EBITDA threshold. Once NIE, EBITDA and the maximum control level have been determined, businesses can quickly conclude which interest expenses can be deducted and which must be eliminated.
Example of Positive EBITDA
Now that you understand the process and the components of tax-based EBITDA, the next step is to see how these metrics work in practice. The example below uses hypothetical Company A figures to illustrate the entire process of calculating Net Interest Expense, EBITDA, and the 30% control threshold. The following table will help you easily visualize and apply it to your business.
| Indicators | Value (Billion VND) | Note |
| Net operating profit | 100 | Indicator 30 Business performance report. |
| Total Interest Expenses Incurred (Intermediate + Independent) | 40 | Interest expense from affiliated parties: 35 billion; Independent: 5 billion |
| Interest income from deposits. | 5 | Excluded when calculating net interest. |
| Depreciation expense | 20 |
This table will be used to calculate:
Net Interest Expense (NIE)
NIE = 40 – 5 = 35 billion VND |
EBITDA after tax
| EBITDA by tax = Operating profit + Total interest expense incurred + depreciation = 100 + 40 + 20 = 160 billion VND |
Control threshold 30% EBITDA
EBITDA threshold = 30% × 160 = 48 billion VND |
Conclude: Net interest expense of 35 billion is lower than 48 billion, so the whole is deductible when calculating corporate income tax.
Special Case: Negative EBITDA Interest Expense Type
A negative EBITDA occurs when a business suffers heavy losses from its operations, causing its Net Operating Profit to be negative and have an absolute value greater than the sum of Interest Expense and Depreciation Expense.
When EBITDA is negative, what will the Control Threshold be?
- Determine EBITDA: EBITDA will be a negative number (eg: minus 50 Billion VND).
- Maximum Threshold Calculation: If EBITDA is negative, it will give a negative number
- Control Principle: According to the guidance of the General Department of Taxation, since the control threshold is a negative number, the maximum deductible interest expense must be 0.
If EBITDA is negative, the maximum deductible Interest Expense will be determined as 0 (zero billion VND).
This means that the entire Net Interest Expense (NIE) of the business will be excluded from deductible expenses for the period. This is a huge tax risk for businesses that are in the investment phase, expanding production or facing business difficulties.
In reality, negative EBITDA is not just an accounting issue, but reflects:
- Businesses are using financial leverage too early.
- Or the capital structure is not suitable for the investment phase.
Many international corporations have proactively accepted accounting losses but adjusted their capital structure to avoid negative EBITDA at tax rates, thereby preserving deductible interest expenses in the long term.
Detailed illustration with negative EBITDA
To better illustrate how EBITDA is determined and the 30% limit on deductible interest expenses under Decree 132, let us analyze a real-life example. The following table presents Company B’s financial figures for the period, including net profit, interest expense, interest income, and depreciation expense, the core factors that determine the acceptable level of interest expense.
| Indicators | Value | Meaning |
| Profit from business operations. | minus 150 billion | The company is losing money from its operations. This has a strong impact on its EBITDA and the 30% limit on deductible interest expenses. |
| Total interest expense incurred | 40 billion | This is the total interest payable during the period. |
| Interest income from deposits | 0 | There is no financial income to offset the interest expense resulting in a Net Interest Expense of 40 billion. |
| Depreciation expense | 20 billion | Non-cash expenses, which will be added back when calculating EBITDA. |
Preliminary conclusions:
- Net interest expense is 40 billion
- EBITDA according to corporate income tax is negative 90 billion
Because EBITDA is negative, according to the 30% EBITDA principle (Decree 132/2020/ND-CP), all interest expenses are at risk of being eliminated (ie not deductible when calculating CIT).
Strategies for optimizing interest costs on related-party transactions.
To avoid the risk of being excluded from interest expenses and optimize legal costs, businesses need to have proactive financial and tax strategies.
Smart Capital and EBITDA Planning
Proactive capital planning is the best defense. You should regularly monitor the following indicators:
- EBITDA Forecast: Regularly forecast Net Income, Depreciation to estimate EBITDA. In the investment years, when Depreciation is large and profit is not yet available, the risk of negative EBITDA minus interest expense is very high.
- Equity and Debt Orientation: Prioritize increasing Equity in the early stages of establishment or large expansion to reduce leverage ratio and reduce pressure on interest expenses.
- Adjust loan timing: If possible, extend the loan schedule or convert internal loans into equity before the end of the tax period.
Diversify funding sources and borrow from independent parties
One of the most effective strategies is to reduce the dependence on interest costs in related-party transactions:
- Borrowing from Banks: Increase borrowing from independent credit institutions (commercial banks). Interest expenses arising from these loans will not be controlled by the 30% EBITDA rule.
- Guarantee: The parent company can guarantee loans to its subsidiaries from independent banks instead of lending directly.
Compliance with the Affiliate Transaction Profile
Whether or not you are excluded from interest expenses, preparing a Linked Transaction File is mandatory.
- Arm's Length Principle: Always ensure that internal borrowing interest rates are consistent with market interest rates. Although Decree 132/2020/ND-CP has a quantitative rule (30% EBITDA), the tax authority still has the right to check and adjust interest rates if they are not consistent with the arm's length principle.
- Documentation: Prepare complete supporting documents (Country Profile, Global Profile, Country-by-Country Profit Report) to defend the applied interest rate.
Regularly conduct reviews
Set up a quarterly “tax health” check system:
- Quarterly Review: Calculate estimated EBITDA and Net Interest Expense on a quarterly basis.
- Sensitivity Analysis: Analyze how much a change in EBITDA would result in exceeding the 30% threshold. From there, the finance department can propose timely business or financial adjustments.
When EBITDA is unstable or negative, addressing the situation at the time of settlement is too late. Instead, businesses need to approach the issue of interest expense on related-party transactions systematically and according to a roadmap, from short-term to long-term.
Below are three levels of strategies to optimize interest expense, helping businesses comply with Decree 132/2020/ND-CP while legally protecting their tax interests.
Short-term strategy (for the fiscal year)
- Review of NIE – EBITDA on a quarterly basis
- Adjusting the timing of expense recognition and depreciation.
- Extend or restructure internal loans.
Medium-term strategy (1-3 years)
- Convert a portion of linked loans into equity.
- Increase independent borrowing with guarantees.
- Adjusting the internal financing model
Long-term strategy (corporate structure)
- Redesigning the linked financial policy
- Standardize related-party transaction records from the start.
- Optimizing taxes while ensuring compliance with BEPS
Conclude
Interest expenses on related-party transactions are no longer a matter of "dealing with them if audited," but have become a factor that needs to be proactively controlled right from the financial planning stage.
Rule 30% EBITDA under Decree 132/2020/ND-CP is a rigid limit with no subjective exceptions. Even a small deviation in the way EBITDA is determined can cause a business to lose all right to deduct interest expense.
If your business:
- There are significant interest expenses related to related-party transactions.
- Currently in the investment phase, with low or negative EBITDA.
- Or perhaps the impact of Decree 132 has never been systematically reviewed.
Early assessment and proper restructuring will help businesses avoid the risk of tax arrears, while turning the 30% EBITDA limit into a legitimate tax leverage.
MAN – Master Accountant Network is ready to partner with businesses in accurately determining taxable EBITDA, reviewing deductible interest expenses, and building safe and sustainable financial strategies.
Contact information MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
- Mobile/Zalo: 0903 963 163 – 0903 428 622
- E-mail: man@man.net.vn
Content production by: Mr. Le Hoang Tuyen – Founder & CEO MAN – Master Accountant Network, Vietnamese CPA Auditor with over 30 years of experience in Accounting, Auditing and Financial Consulting.
Frequently Asked Questions about Related-Party Interest Expenses (FAQs)
If EBITDA is negative, can interest expense be deducted?
No. When EBITDA is negative, the 30% threshold also becomes negative, resulting in the elimination of all interest expenses. This is a common situation in newly invested, growing or recession-affected businesses.
Can businesses carry forward the eliminated interest expense to subsequent years?
Yes. According to Decree 132/2020/ND-CP, the eliminated interest expense can be transferred for a maximum of the next 5 years, if in those years the enterprise has positive EBITDA.
Is a non-interest bearing loan from a parent company considered a risky related party transaction?
Maybe. If the loan is interest-free or the interest rate is too low, the tax authorities may determine that this is a non-arm's length transaction, and the business may be re-assessed at a market interest rate.
The deposit interest is small but is it mandatory to deduct it when calculating net interest expense?
Yes. Even if the value is small, interest income from deposits or loans must still be deducted when determining net interest expense according to regulations.
Are FDI enterprises with many years of losses subject to interest expense scrutiny?
Yes. Tax authorities are currently focusing on inspecting FDI enterprises with prolonged losses, especially when the proportion of interest expenses is high, which can easily lead to suspicion of transfer pricing through internal interest.
MAN Editorial Board – Master Accountant Network