Can interest expenses be carried forward if EBITDA is negative? This is a question of particular concern to many CFOs, chief accountants, and businesses with related-party transactions. When EBITDA is less than or equal to zero, all interest expenses may be disallowed as deductible expenses, leading to the risk of corporate income tax arrears and significant cash flow pressure. However, according to regulations... Decree 132/2020/ND-CP and updates from Decree 20/2025/ND-CP, However, businesses still have the mechanism to carry forward interest expense exceeding the ceiling to up to 5 subsequent years if they meet the declaration conditions. This article will provide an in-depth analysis of the legal nature, the mechanism for carrying forward interest expense, the latest changes, and effective tax management strategies to ensure businesses do not lose their legitimate deduction rights.
The Nature of EBITDA from the Perspective of Taxes and Transfer Pricing
Before delving into whether negative EBITDA can be used to carry forward interest expense, it's necessary to agree on how to determine EBITDA in the context of global anti-transfer pricing strategies (BEPS Action 4).
Unlike EBITDA in management financial statements (which is usually simply Operating Profit + Depreciation), EBITDA under Vietnamese tax regulations is more strictly defined to serve the purpose of capping interest expense. This is a safeguard mechanism to prevent the transfer of profits across borders through debt instruments.
Accordingly, taxable EBITDA is determined by the following formula:
EBITDA = Net Operating Profit + Net Interest Expense (after deducting interest on deposits/loans) + Depreciation |
So, can negative EBITDA be used to carry forward interest expense? Only by correctly determining taxable EBITDA (which can differ significantly from accounting EBITDA due to adjustments for other income and non-deductible expenses) can a business determine the roadmap for carrying forward interest expense in subsequent years.
Can interest expenses be carried forward if EBITDA is negative?
This is key information that every chief accountant needs to master in order to explain things to the tax authorities. MAN – Master Accountant Network will break down the issue into two layers: the current layer (year of occurrence) and the future layer (year of transition).
Why does negative EBITDA lead to interest expense being immediately disallowed?
Based on Clause 3, Article 16 of Decree 132/2020/ND-CP, if a company's EBITDA is less than or equal to 0, the ceiling for deductible interest expense in the period will also default to 0. Therefore, it will never yield a positive value for deduction.
This means that, in a fiscal year where the business is performing poorly or is undergoing significant investment resulting in operating and depreciation costs exceeding profits, the entire net interest expense incurred will be considered a non-deductible expense when settling corporate income tax. However, don't worry too much about whether negative EBITDA can be carried forward as interest expense, as the law has established a transitional mechanism to protect the long-term interests of businesses.
Mechanism for carrying forward interest expense to the next period.
The Vietnamese tax legal system does not drastically eliminate the rights of businesses. The possibility of carrying forward negative EBITDA as interest expense has been clearly established. There is a solution.
According to regulations, any interest expense exceeding the ceiling (including cases where the ceiling is exceeded due to negative or zero EBITDA) will be carried forward to the next tax period. This mechanism is similar to loss carryforward in corporate income tax but has its own unique characteristics:
- Carry-over period: Continuously for no more than 5 years from the year following the year in which the non-deductible interest expense was incurred.
- Method of transfer: The business will carry over the disallowed interest expense from the year with negative EBITDA to the year with positive EBITDA. In the following year, the total of interest expense incurred during the year + interest expense carried over from the year with negative EBITDA must be within the 30% EBITDA limit of the current year.
So, can negative EBITDA be carried forward as interest expense? The answer is that it is a "potential tax asset" that businesses need to manage carefully in order to be reimbursed in the form of a reduction in tax payable over the next five years.
New provisions from Decree 20/2025/ND-CP affect the transfer of expenses.
This decree introduces three landmark changes to how negative EBITDA can carry forward interest expense:
FIFO rule in interest rate conversion
Decree 20/2025 clarifies the application of the First-In, First-Out rule for disallowed interest expense. This is extremely beneficial for businesses with prolonged periods of negative EBITDA. Prioritizing the carry-forward of the oldest interest expenses helps minimize the risk of these expenses expiring within 5 years.
Excluding extraordinary income
To protect businesses from significant fluctuations in EBITDA due to asset liquidation or other income, Decree 20/2025 stipulates that EBITDA should only be calculated based on net profit from core business operations. This change helps to make the EBITDA indicator more stable and predictable.
Easing restrictions on infrastructure units and government incentives.
National key projects often have negative EBITDA in the first 3-7 years. Decree 20/2025 has opened up a mechanism to exempt certain entities from the interest expense ceiling. For these entities, they don't even need to worry about whether negative EBITDA can be carried forward as interest expense, because they can deduct the incurred interest expense if they meet the conditions for disbursing public investment capital or ODA loans.
Potential risks and common mistakes when transferring interest expense.
While it is possible to carry forward interest expenses when EBITDA is negative, the process is fraught with legal pitfalls.
- Failure to declare on Form 01: If a business does not reflect the disallowed interest expense in the related-party transaction appendix from the year with negative EBITDA, the tax authorities have the right to refuse to allow its carry-forward to subsequent years on the grounds that there is no opening balance.
- Confusion between accounting EBITDA and tax EBITDA: The most common mistake is using EBITDA on financial statements to calculate the 30% ceiling. If the actual EBITDA (after tax adjustment) is negative but the business confidently claims deductions based on positive accounting EBITDA, the risk of back taxes and late payment penalties is extremely high.
- Five-year carry-forward period expires: Many accountants do not closely monitor the carry-forward period for interest expenses. After the fifth year, if the interest expense carried forward from the year with negative EBITDA is not fully utilized, the business is forced to write off this balance, causing unnecessary financial losses.
To ensure maximum safety and optimize tax payments, businesses should consult the following: related party transaction advisory services The errors should be reviewed by specialized and experienced units.
Strategies for optimizing the financial structure of businesses with low EBITDA.
To proactively address the issue of negative EBITDA and whether interest expense can be carried forward, the transfer pricing experts at MAN – Master Accountant Network recommend that businesses take the following steps:
Balancing debt and equity
If a company is projected to have negative EBITDA in the long term, raising capital through debt financing (especially from the parent company) will not offer tax benefits. Instead, increasing charter capital or using financial leasing (depending on the circumstances) may be a smarter solution to avoid having expenses tied up for too long.
Maximize your deposit interest earnings to increase your deduction capacity.
Because the calculation is based on "net interest expense" (interest on loans or deposits), businesses can optimize idle cash flow to generate financial revenue. This reduces the numerator of the calculation, thereby indirectly allowing the interest expense incurred when EBITDA is negative to be easily "absorbed" into years with positive EBITDA.
Establish a separate interest rate tracking system.
Businesses need to create a separate tracking sheet for disallowed interest expense, similar to a loss tracking sheet. This sheet must detail the year of occurrence, the amount carried forward, the remaining amount, and the expiration date. This is crucial evidence when dealing with tax inspectors regarding the issue of whether negative EBITDA allows for the carryforward of interest expense.
Conclude
Whether negative EBITDA allows for the carryforward of interest expense is not just a technical issue in corporate income tax settlement, but also a measure of the financial management capacity and tax risk control of enterprises with related-party transactions. When EBITDA is negative, interest expense is not completely lost but can still be carried forward for up to 5 years according to the regulations in Decree 132/2020/ND-CP and updated from Decree 20/2025/ND-CP, if the enterprise declares correctly, monitors fully, and has a reasonable strategy for its use.
However, even a small error in determining taxable EBITDA, declaring related-party transactions, or controlling the 5-year carryover period can cause businesses to lose deductions. Therefore, instead of reacting passively when tax authorities conduct an audit, businesses should proactively review their capital structure, check interest expense limits from the beginning of the year, and build a separate tracking system for each disallowed interest expense.
If your business is facing difficulties with interest expense limits, related-party transaction documentation, or needs advice on optimizing related-party transaction taxes, connect with MAN – Master Accountant Network's team of tax and transfer pricing experts for in-depth support, minimizing the risk of tax audits and maximizing the protection of your legitimate tax rights in the long term.
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Contact information MAN – Master Accountant Network
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Content production by: Mr. Le Hoang Tuyen – Founder and CEO of MAN – Master Accountant Network, CPA Vietnam with over 30 years of experience in accounting, auditing, and financial consulting.
Frequently Asked Questions: Can interest expense be carried forward if EBITDA is negative?
Yes. According to the arm's length principle, the tax authorities have the right to determine the market interest rate for 0% loans between related parties. In this case, the business will incur a fixed interest expense, and because the EBITDA is negative, this entire expense will be disallowed and carried over to the next period.
Yes, shifting interest expense deductions to a tax-exempt year would waste the business's own deduction benefits. If possible, consider adjusting your business plan to consolidate these deductions into the years when you begin filing 100% taxes or years when you are only eligible for a 50% tax reduction.
Typically, regulations on expense carryforward apply to balances remaining within the 5-year term at the time the Decree takes effect. Businesses need to carefully review the transitional provisions of Decree 20/2025 to ensure they do not miss out on benefits when negative EBITDA allows for the carryforward of interest expense.If EBITDA is negative but the parent company provides interest-free loans (0%), will there be any problems?
Can interest expenses from a year with negative EBITDA be carried forward to the year the business is exempt from tax under scheme 100%?
Does Decree 20/2025 have retroactive effect on previous years with negative EBITDA?