The formula for calculating interest on related-party transactions is a mandatory content that businesses must master to comply with Decree 132/2020/ND-CP and minimize the risk of being excluded from expenses during tax inspections. In the context of tax authorities strengthening control of related-party transactions, understanding the correct calculation method, the limit for controlling interest expenses and how to apply EBITDA according to current regulations becomes more important than ever. The following section will clearly analyze each step in the formula for calculating interest on related-party transactions, citing practical evidence and notes when declaring, helping businesses apply accurately and confidently in tax settlement records.
Before going into the formula for calculating interest on related-party transactions, businesses need to clearly understand the basic concepts.
What is affiliate trading?
Related transactions are transactions arising in the production and business process between related parties. According to Article 1 Decree 132/2020/ND-CPThese transactions include: buying, selling, exchanging, renting, leasing, borrowing, lending, transferring goods, services, assets, as well as borrowing, lending, financial services, financial guarantees and other financial instruments.
Details of cases in which parties are identified as having an Affiliated Relationship
Pursuant to Article 5 of Decree 132/2020/ND-CP, parties are considered to have an affiliated relationship if they fall into one of the following cases:
- Direct capital ownership relationship 25%: One party directly or indirectly holds at least 25% of the other party's equity capital.
- 25% Common Equity Ownership Relationship: Both parties have at least 25% of owner's equity held directly or indirectly by a third party.
- Parent-Subsidiary Relationship: A third party directly or indirectly exercises significant control over the operations or financial and business decisions of the two parties (e.g., through financial and business agreements, etc.).
- Director or Joint Manager Relationship (30%): Both parties have at least 30% members of the Board of Directors (Director, General Director, Deputy Director, Deputy General Director) of each party appointed from the same individual or the same group of individuals with family relationships.
- Personal or family relationship between the Executive Director or General Manager of one party and the Executive Director or General Manager of the other party.
- Dominance Relationship through Assets or Services: One party directly or indirectly exercises significant control over the other party's decisions regarding the purchase, sale of goods, or provision of services (For example: Monopolizing the supply of important inputs or outputs).
- Guarantee or Loan Relationship (25% equity & 50% long-term debt)
- Material/Supply Dependency Relationship (Over 50%): One party receives from the other party or from the other party's affiliates supplies, raw materials, semi-finished products or services that account for over 50% of the recipient's total cost of production or total cost of goods sold.
- Output Dependent Relationship (Over 50%): One party sells or purchases assets, goods, or services that account for over 50% of the total value of assets sold or the total value of goods purchased by the other party.
- Profit-affecting contractual/agreement relationship: One party is controlled by the other through agreements regarding risk sharing, profit control, business dominance, or other agreements.
- Resident personal relationship (business control): An individual residing in Vietnam is a member of the Board of Directors or holds an important position controlling the business activities of both parties.
Important Note: The deductibility of interest expenses in related party transactions is always limited, even if the loan is not from the related party but from a third party (e.g. a Bank), but the loan has a guarantee from the related party.
Arm's Length Principle
The important principle in managing related transactions is the Arm's Length Principle. The Arm's Length Principle is understood as: Related transactions must be priced according to the principle of analysis and comparison with independent transactions (transactions between unrelated parties) under similar conditions.
With the aim of ensuring that the enterprise's corporate income tax obligations are not reduced due to the impact of related-party relationships. The determination of the formula for calculating related-party transaction interest and loan interest must comply with this principle.
Formula for calculating total deductible interest expense and 30% EBITDA Control
This is the main part, answering in detail the question about the formula for calculating interest on related-party transactions according to Vietnamese law.
Formula for calculating interest on limited linked transactions
According to Clause 3, Article 16, Decree 132/2020/ND-CP, the total interest expense deductible when determining taxable income for enterprises with related-party transactions must not exceed 30% of the total Net profit from business activities plus Interest Expenses and Depreciation Expense (also known as adjusted EBITDA).
Therefore, the formula for calculating the maximum deductible related-party transaction interest is:
Adjusted EBITDA = Net operating profit + Net interest expense + Depreciation expense |
Note: All financial indicators must be determined based on actual figures recorded on the enterprise's Financial Statements during the tax period.
Detailed explanation of the indicators in the formula for calculating interest on related-party transactions
To avoid errors when applying the formula for calculating interest on related-party transactions, it is necessary to clearly understand the meaning of each component:
| Indicators | Explanation and data sources | Meaning |
| Net interest expense | Take from Financial Expenses (account 635) minus Financial Revenue (account 515) related to deposit interest or loan interest. | Is the total net cost of interest that a business has to bear. |
| Net operating profit | Taken from the indicator (Code 21) on the Income Statement. This is earnings before interest and taxes (EBIT) but does not include other income. | Demonstrates the core business performance of the enterprise. |
| Depreciation expense | Total depreciation costs of fixed assets incurred during the period (Taken from operating and production costs). | Measure of non-cash expenses. |
| Adjusted EBITDA | How to calculate EBITDA in standard related party transactions according to Decree 132/2020/ND-CP. | Represents profitability before being affected by decisions on taxes, capital structure (interest) and long-term investments (depreciation). |
From the table above, it can be seen that each indicator in the Adjusted EBITDA formula has a clear data source on the financial reporting system and has its own meaning in assessing the financial health of the enterprise. When properly synthesized, these indicators help enterprises accurately determine the ability to generate profits before the impact of interest, taxes and depreciation in accordance with the standards of Decree 132/2020/ND-CP. This is also an important basis for correctly calculating deductible interest expenses, limiting the risk of being adjusted during tax inspections.
Handling of non-deductible interest expenses (Excess ceiling portion)
If the total net interest expense of the enterprise exceeds the 30% Adjusted EBITDA limit, the excess will be deducted when determining taxable income. This is the non-deductible interest expense in related-party transactions.
- Carry-forward rule: This non-deductible portion of interest expense is allowed to be carried forward to the next corporate income tax period.
- Transition period: The period for transferring interest expenses calculated continuously shall not exceed 05 years, starting from the year following the year in which non-deductible interest expenses arise.
For example: If in 2024 there is 100 million VND of interest deducted, and in 2025 the company is allowed to deduct an additional 50 million VND from the limit, then that 50 million VND will be used to offset the 100 million VND of 2024. The remaining 50 million VND balance will continue to be carried forward to 2026.
Negative EBITDA Case
According to the formula for calculating interest on related-party transactions in Decree 132/2020/ND-CP, if adjusted EBITDA has a value of 0 or a negative value:
| Net borrowing costs deducted ≤30%× (adjusted EBITDA) |
When EBITDA is less than or equal to 0, then 30% EBITDA will also be 0 or negative. Therefore, according to the principle:
- Enterprises will not be allowed to deduct any net interest expenses when determining taxable income of CIT. All net interest expenses incurred during the period will be deducted and carried forward to the next tax periods (maximum 5 years).
Although negative EBITDA makes all net interest expenses not deductible, enterprises still need to determine the correct loan interest rate according to regulations to ensure valid related party transaction records. Therefore, the following is the method of determining the interest rate that enterprises must comply with when incurring related party loans.
Standard Interest Rate Determination Method Independent Transaction
The 30% EBITDA limit is a financial barrier. However, businesses must also comply with the Arm's Length Interest Rate principle based on comparison methods. The application of these methods is to ensure that the loan interest rate from the related party is not pushed too high compared to the market.
The methods for determining transfer pricing are given priority according to Decree 132/2020/ND-CP:
Independent transaction price comparison method
The principle of comparing the interest rate of a linked loan with the interest rates of similar independent loans that the enterprise or other independent parties have made.
This method is often preferred in lending because interest rates are the easiest to compare if similar independent transactions (in terms of loan amount, term, currency, credit profile) are found.
Profit Based Methods
- Resale Price Method (RPM) and Cost Plus Method (CPM): Less directly applicable to loan transactions, but can be used to evaluate the profitability of a financial service provider or an intra-group loan.
- Transactional Net Margin Method (TNMM): Assesses whether the borrower's net profit (before interest and taxes) is consistent with independent companies in the same industry.
After understanding the method of determining interest rates in related-party transactions, businesses also need to consider more deeply the compounding effect of interest rates. This factor can cause financial costs to balloon rapidly if not tightly controlled.
The Double Effect of Interest and Limits 30%
Businesses should note that the 30% EBITDA limit and the independent interest principle are two independent but jointly applied criteria.
- Interest Rate Criteria: If the linked loan interest rate is too high compared to the market, the portion of the loan interest that exceeds the independent rate will be eliminated first.
- 30% Limit Criteria: Total interest expense (after adjusting for market interest rates, if any) continues to be subject to the 30% Adjusted EBITDA limit.
This ensures that the tax authorities have tight control over both price (interest rates) and debt repayment capacity (based on business performance and EBITDA).
Detailed example illustrating the interest limit formula
This section will help you understand how to calculate deductible interest expense in 2025 related party transactions through a practical example.
Cases where interest expenses are not deductible
Example 1: Company A has related party transactions with the following accounting figures for 2025.
| Indicators | Amount (VND) | Note |
| Net profit from operations. | 1.800.000.000 | Code 21 Business results report. |
| Total interest expense incurred during the period. | 1.200.000.000 | |
| Total deposit interest and loan interest accrued during the period. | 200.000.000 | Financial revenue from deposits. |
| Depreciation expense incurred during the period. | 800.000.000 |
From the illustrative data, below are detailed calculation steps to determine the deductible interest expense when calculating corporate income tax in 2025.
Apply the formula to calculate the indexes in the table below:
| Indicators | Value (VND) |
| Actual Net Interest Expense Incurred | 1.000.000.000 |
| Maximum deductible (30% EBITDA) | 1.080.000.000 |
| Net Interest Expense is deductible when calculating CIT | 1.000.000.000 |
| Non-deductible interest expenses | 0 |
In this case, the actual Net Interest Expense (VND 1 billion) is lower than the 30% EBITDA limit (VND 1.08 billion). Therefore, the entire VND 1 billion of net interest expense is considered a deductible expense when determining taxable income.
Example illustrating the excluded case
Suppose company A has different figures that interest expense incurred is 2,500,000,000 VND.
Then the new net interest expense is:
| Net interest expense = 2,500,000,000 – 200,000,000 = 2,300,000,000 |
Identify deductible costs:
- Actual Net Interest Expense: VND 2,300,000,000
- Maximum deductible: 1,470,000,000 VND
- The interest expense deducted then is VND 830,000,000
Company A is exempted from interest expense of VND 830 million when calculating corporate income tax. This VND 830 million is allowed to be carried forward to the next tax periods, up to 05 years.
Instructions for declaring related party transactions
Accurate declaration is the final step to complete tax records and avoid penalties. Enterprises using the formula for calculating interest on related-party transactions must declare on the appendices attached to the Corporate Income Tax Finalization Declaration.
Required Appendices
Taxpayers with related-party transactions within the scope of Decree 132 must declare information according to the following Appendices:
- Appendix I (Form 01): Information on related parties and related transactions. This is where the details of related parties and types of transactions (including borrowing and lending transactions) are listed.
- Appendix II (Form 02): Declaration of determining related party transaction prices.
- Appendix III (Form 03): Country-by-country profit report (applicable to large corporations).
To complete the tax dossier and ensure compliance with regulations, enterprises need to fill in all information according to the appendices attached to the Corporate Income Tax Finalization Declaration. The next part will provide detailed instructions on the declaration of interest expenses for related-party transactions in each appendix, helping enterprises to be transparent and avoid risks when inspected by tax authorities.
Content of Interest Expense Declaration
In Appendix I and II, enterprises must clearly present the components used in the formula for calculating EBITDA related-party transaction interest, including:
- Total net interest expense.
- Net profit from operations.
- Depreciation expense.
- Adjusted EBITDA calculation results.
- The interest expense portion is eliminated and the portion is carried forward to the next period.
The responsibility to prove the transfer pricing under the arm's length principle rests with the taxpayer. Enterprises need to prepare documents to determine the transfer pricing to protect the data.
Conclusion and recommendations
To ensure compliance with regulations and optimize costs, businesses should master the formula for calculating interest on related-party transactions and apply financial management measures synchronously. First of all, establish a periodic financial model to forecast EBITDA and the maximum deductible interest expense, thereby adjusting the loan structure in a timely manner. At the same time, fully prepare the Transfer Pricing Determination Documents right from the beginning of the tax period, ensuring that interest rates and loan terms are proven according to the principle of independent transactions. In addition, clearly accounting for net interest expenses, depreciation expenses and net profits will help apply the formula accurately and transparently.
Taking the above steps will help businesses not only comply with the law but also avoid unnecessary tax arrears, optimize costs and maintain sustainable financial performance.
Contact MAN – Master Accountant Network for detailed advice and support.
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.
Editor MAN – Master Accountant Network