The conditions for including interest expense in the cost of fixed assets are one of the most prone to errors during tax settlement, especially for businesses investing in large-scale construction projects or purchasing machinery. Understanding the correct timing of capitalization, the purpose of borrowing, and the supporting documentation not only determines the validity of the fixed asset cost but also directly impacts deductible expenses and the risk of corporate income tax arrears. This article provides a comprehensive analysis of current legal regulations up to 2026, combined with guidance from Circular 330/CT-CS, to help businesses apply the regulations correctly and safely during tax audits.
This article will provide an in-depth analysis of the legal aspects, practical conditions, and tax risks associated with capitalizing interest expense into the cost of fixed assets.
Understanding interest expense and tangible fixed assets correctly.
Before delving into the conditions for including interest expense in the cost of fixed assets, let's clarify the core concepts with MAN – Master Accountant Network. Tangible fixed assets are means of production with a physical form that simultaneously meet the criteria of having a value of 30 million VND or more and a useful life of more than one year.
Interest expense is the payment made for using borrowed capital from credit institutions or other entities. During the investment process, this expense is divided into two types:
- Capitalized interest expense: Added directly to the original cost of the asset (Accounts 211, 241).
- Financial expenses: These are directly included in the business results for the period (Account 635).
Satisfying the calculation conditions interest expense Including depreciation in the original cost of fixed assets helps businesses allocate costs through depreciation, avoiding large losses in the initial investment phase, which is extremely important for large-scale projects.
Conditions for including interest expense in the cost of fixed assets as stipulated by regulations.
Based on current legal documents and the latest guidance from the tax authorities, the following are the prerequisite conditions:
Conditions regarding the timing of expense occurrence.
According to Clause 1, Article 4 of Circular 45/2013/TT-BTC, the original cost of tangible fixed assets includes directly related costs up to the point when the fixed asset is ready for use.
- Capitalization phase: Begins when project costs and loan repayments are incurred.
- Time to stop capitalization: As soon as the asset is in a "ready-to-use" state.
Special note: If the asset is machinery purchased for immediate use (without lengthy installation or testing), the interest expense on the purchase of that asset cannot be capitalized but must be included in expense account 635. Only assets requiring a sufficiently long preparation period (construction, installation) meet the conditions for including interest expense in the original cost of fixed assets.
Conditions regarding loan purpose and required documents.
To provide an explanation in accordance with Article 112 of the Law on Tax Administration No. 38/2019/QH14, the dossier must ensure:
- Loan agreement: Clearly state that the loan is for investment in specific fixed assets. If the loan is for general working capital, the accountant must have a detailed allocation table of interest payments to the portion of capital invested in fixed assets.
- Payment documentation: Payment must be made through a bank to ensure the validity of the deductible expense.
- Interest expense invoices: As instructed in Official Letter 330/CT-CS, interest expense is not subject to VAT (Circular 219/2013/TT-BTC). Businesses need to collect interest payment documents from the bank or invoices from the lending institution as proof.
However, proving the proper purpose of the loan and providing complete documentation is only a necessary condition. In reality, tax authorities also consider the nature of the cash flow generated from the loan throughout the investment process, especially in cases where the borrowed capital is not immediately used and income from interest on deposits is generated, a factor that directly affects the value of capitalized interest expense.
Principle of offsetting interest income from deposits
If the loan for fixed asset investment has not been fully disbursed and the business deposits the funds in a savings account to earn interest, the interest expense included in the cost basis must be the difference after deducting the interest income generated from the savings account.
Accounting and tax treatment based on Official Letter 330/CT-CS
Official document 330/CT-CS emphasizes the close coordination between on-site inspection records and specialized regulations.
Regarding Value Added Tax (VAT)
Since interest on loans is exempt from value-added tax (VAT) according to Clause 8, Article 4 of Circular 219/2013/TT-BTC, which stipulates that financial and banking services are exempt from VAT, including:
- Lending (including costs associated with lending such as interest),
- Discounting and rediscounting of negotiable instruments and other securities.
- Bank guarantee,
- Financial leasing,
- Issuing credit cards.
Interest expenses arising from lending activities (for example, organization A lends capital to organization B and collects interest) are not subject to VAT because lending services and related fees fall under the category of credit granting services, which are exempt from VAT according to this regulation.
To serve as a basis for issuing invoices in accordance with regulations, this determination is based on the provisions of Clause 9, Article 7 and Clause 5, Article 8 of Circular 219/2013/TT-BTC:
“"For construction and installation, the value is the project, project item, or completed work delivered, excluding VAT."”
Clause 5, Article 8 of the Circular 219/2013/TT-BTRegarding the VAT taxable price and the time of determining the VAT taxable price:
“"For construction and installation, including shipbuilding, the acceptance and handover of the project, project item, or completed construction and installation volume is the time of acceptance and handover, regardless of whether payment has been received or not."”
Formula for determining the original cost:
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Original cost = Purchase price + Taxes (non-refundable) + Direct costs + (Interest on borrowed capital) |
Risks and "Tax Traps" During Tax Settlement
Under the supervision of the tax authorities, businesses need to avoid the following mistakes to ensure they meet the conditions for including interest expense in the cost of fixed assets:
- Insufficient capital contribution: The interest expense corresponding to the remaining capital shortfall will be excluded from the original cost and deductible expenses. This is the highest risk during an audit.
- Excessive capitalization: This involves artificially extending the construction period to avoid depreciation and including interest expenses in the cost basis to "beautify" the financial statements. Tax authorities will examine construction logs or technical acceptance reports to reject this practice.
- Related-party transactions (Decree 132/2020/ND-CP): Total interest expense (including the portion included in the cost basis) must still be within the 30% EBITDA limit if the enterprise has related-party transactions.
Based on the legal conditions and practical risks mentioned above, it is clear that capitalizing interest expenses depends not only on regulations but also requires businesses to closely monitor the entire investment process and generated cash flow.
Conclude
Complying with the conditions for including interest expense in the cost of fixed assets requires close coordination between the project and accounting departments. Ensure that all loans have clear documentation of their purpose and that the acceptance report serves as the "golden" milestone for finalizing asset values.
Strict adherence to Circular 45/2013/TT-BTC, Circular 219/2013/TT-BTC, and the guidance in Official Letter 330/CT-CS will help businesses build a transparent and secure financial foundation before every tax settlement period.
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
- Email: 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.
References:
- Tax Administration Law No. 38/2019/QH14
- Circular 45/2013/TT-BTC
- Circular 219/2013/TT-BTC
- Article: Vietnamese Law
Frequently Asked Questions about the conditions for including interest expense in the cost of fixed assets
Are interest payments incurred during the construction suspension period included in the cost of the loan?
According to regulations, if a temporary suspension is necessary (waiting for technical approval, weather conditions, etc.), then capitalization should continue. If the suspension is due to violations or subjective lack of capital, the interest incurred during that period must be included in expense account 635.
Can a personal loan with an interest rate of 15%/year be capitalized?
Yes, if the conditions for including interest expense in the cost of fixed assets are met in terms of the loan purpose. However, the portion of interest exceeding the State Bank's basic interest rate will be excluded when determining deductible expenses for corporate income tax purposes.