The company just finished its tax period with net interest expense of 45 billion VND, but its taxable EBITDA was only 100 billion VND. The tax authorities applied the 30% threshold, meaning only 30 billion VND was deductible, while the remaining 15 billion VND was disallowed as a deductible expense for the period. The question is: Will that 15 billion VND be lost permanently?
The answer is no, if the business understands and correctly implements the mechanism that interest expense cannot be carried forward to the next period. Decree 132/2020/ND-CP. This is one of the most crucial regulations in the field of related-party transactions, directly affecting the corporate income tax (CIT) obligations of thousands of related businesses.
This article will present the entire regulation regarding non-deductible interest expense carry-forward, from the legal basis, calculation formula, 5-year carry-forward mechanism, specific examples, to declaration guidelines and practical risks to be aware of.
Where does the regulation that interest expense cannot be carried forward to the next period originate from?
The story begins in 2017, when Decree 20/2017/ND-CP This was the first time a threshold of 20% EBITDA was set for interest expense in related-party transactions. At that time, the regulation did not allow the carry-forward of the amount exceeding the threshold, causing a strong backlash from the business community, especially foreign-invested corporations (FDI) with centralized financial models.
By 2020, Decree 68/2020/ND-CP It was hastily issued to retroactively apply to the years 2017-2018, raising the threshold to 30% and, for the first time, adding a 5-year carry-over mechanism. However, this was only a temporary solution. At the end of 2020, Decree 132/2020/ND-CP was issued, replacing both Decree 20 and Decree 68, becoming the current document regulating the field of related-party transactions, including all regulations on interest expense that cannot be carried forward to the next period.
Applicable subjects and cases of exemption
Not all businesses are required to comply with this 30% threshold. Four cases are completely exempt, provided each condition is met independently:
- The business did not have any related-party transactions during the tax period.
- The business only has related-party transactions with domestic related parties, subject to the same tax rate, and neither party is entitled to corporate income tax incentives.
- Credit institutions and insurance companies operate in accordance with specialized laws.
- The company has signed an Advance Pricing Agreement (APA) that is applied according to the approved APA.
How to calculate non-deductible interest expense in the period: A preliminary step before carrying it over to the next period.
Before discussing the carry-forward mechanism, it's crucial to accurately determine the amount of non-deductible interest expense. This is the step where many businesses make the most mistakes due to confusion between accounting and tax figures.
Step 1: Determine net interest expense.
The formula for determining net interest expense is as follows:
Net interest expense = Total interest expense – Interest income |
Step 2: Determine tax-determined EBITDA
Here's how to determine EBITDA for tax purposes:
Taxable EBITDA = Profit before Corporate Income Tax + Net Interest Expense + Depreciation of Fixed Assets + Taxable Depreciation of Investment Properties |
Step 3: Determine the 30% threshold.
Deduction threshold:
Deduction threshold = 30% x Taxable EBITDA |
Step 4: Interest expense is not deductible in the current period.
To determine which interest expense is not deductible in the current period:
Interest expense not deductible in the current period = Net interest expense – Deduction threshold |
Note: If the result is less than or equal to 0, the entire interest expense is deducted and there is no carry-forward.
Tax-based EBITDA is not the same as accounting EBITDA. These two figures can differ significantly due to:
- Depreciation for tax purposes is applied according to Circular 45/2013 (State depreciation framework), which is different from accounting depreciation according to IAS/IFRS or the company's internal policy.
- Adjustments that increase or decrease taxable income (unreasonable expenses, tax-exempt income, etc.) change pre-tax profit compared to accounting profit.
- Interest expense capitalized on fixed assets under construction is not included in net interest expense but must be consistent with the treatment throughout the entire documentation.
Common mistakes when determining tax-determined EBITDA
Based on our consulting experience, there are three mistakes that occur most frequently:
- The cost of allocating tools and equipment was mistakenly included in the depreciation expense. This is not depreciation of fixed assets and therefore cannot be included in EBITDA for tax purposes.
- Failure to adjust interest expense capitalized on fixed assets under construction results in underestimating net interest expense.
- Using EBITDA directly from audited financial statements without recalculating based on tax figures can result in significant discrepancies between the two numbers.
Interest expenses cannot be carried forward to the next period: How does the 5-year operating mechanism work?
The mechanism for not being able to carry forward interest expense deductions is designed to prevent businesses from being unfairly penalized in years with low EBITDA due to cyclical factors. However, this mechanism comes with strict conditions and time limits.
The operating principle of the period carryover mechanism is as follows:
- Maximum term of 5 years: Any interest expense not deductible in period N is carried over to periods N+1, N+2, N+3, N+4, and N+5. If the entire amount remains unused after the 5th year, it is permanently forfeited, without exception.
- Conditions for deduction in the following period: The total of (net interest expense incurred in the following period) plus (amount carried over from the previous period) must be ≤ 30% EBITDA in the following period. This means that the amount carried over must still be available in the following period to absorb it.
- The FIFO principle states that transactions generated in a given period must be used first. It is not permissible to arbitrarily choose which year's transactions should be used first.
- No retroactive application: Once a declaration has been filed, it cannot be adjusted back to the period for which it was already paid. All processing can only be done forward.
- The transaction must still be subject to the regulations: In the period of receipt of the transfer, the business must still be subject to the regulations. If no related-party transactions occur in the following period, the carry-forward amount has no legal basis for deduction.
What happens if, after the 5-year period, the unused interest expense is not fully deductible?
The rest is lost permanently. There is no tax refund mechanism, no additional adjustments, no exceptions. This is a point that many businesses overlook in their long-term financial planning.
For example: The company has 50 billion VND in non-deductible interest expenses carried forward from 2021, but its EBITDA has remained low from 2022 to 2025. By 2026, this entire 50 billion VND will become a permanent non-deductible expense, equivalent to an additional corporate income tax liability of up to 10 billion VND (at tax rate 20%).
Important Note: Failure to monitor and plan for carry-over mechanisms can lead to businesses incurring increased corporate income tax each year if they do not fully utilize the carry-over balance by the 5-year deadline.
A real-world case study on interest expense that is not deductible and carried forward to the next period.
To understand how non-deductible interest expense carried over to the next period works in practice, let's examine three scenarios with increasing levels of complexity with MAN – Master Accountant Network.
Case 1ABC Company has the following indicators for the 2023 tax year (unit: billion VND):
| Index | Value | Note |
| Total interest expense | 50 | This includes interest expenses from both related and independent parties. |
| Interest income | 5 | Interest on deposits and loans |
| Net interest expense | 45 | Total interest expense – Interest income |
| Profit before tax | 40 | After corporate income tax adjustment |
| Depreciation of fixed assets | 15 | According to the framework of Circular 45/2013/TT-BTC |
| EBITDA after tax | 100 | Profit before tax + Net interest expense + Depreciation |
| 30% EBITDA threshold | 30 | 30% x 100 |
| Deductible during the period | 30 | Maximum equal to threshold |
| No deductions or carry-overs to the next period are allowed. | 15 | Net interest expense – 30% EBITDA threshold, carried over to 2024 to 2028 |
Case 2: Carryover over multiple years with fluctuating EBITDA
Let's assume 15 billion VND from 2023 is carried over. EBITDA in subsequent years will fluctuate due to market conditions:
| Period | Net interest expense | EBITDA after tax | Threshold 30% | Remaining | The amount transferred will be deducted. | Excess carryover |
| 2023 (original) | 45 | 100 | 30 | 15 | ||
| 2024 | 20 | 120 | 36 | 16 | 15 (end) | |
| 2025 | 0 | 0 (out of stock) |
In this example, the net interest expense for 2024 is only 20 billion VND, while the 30% EBITDA threshold is 36 billion VND, leaving a surplus of 16 billion VND. The entire 15 billion VND carried forward is deducted in 2024 and does not need to be carried over.
Case 3: Risk of expiration in 5 years
Suppose a real estate company has 30 billion VND in non-deductible interest expenses carried forward from 2021. Due to the sluggish market from 2022–2024, the annual EBITDA is only sufficient to cover newly incurred interest expenses. By 2026, this 30 billion VND matures, resulting in a loss equivalent to 6 billion VND in additional corporate income tax payable, with no mechanism in place to offset this loss.
See also: How to calculate interest expense according to Decree 132.
How should interest expense that is not deductible be carried forward to the next period on tax returns?
Accurate declaration is a prerequisite for tax authorities to accept the carry-forward. Errors in declaration may lead to the tax authorities rejecting the entire carry-forward right, even if the business meets all the data requirements.
- Appendix II This is a mandatory form that must be included with the annual corporate income tax return for businesses. affiliate transactions
- Interest expense declaration section: Clearly state the total net interest expense, tax-deductible EBITDA, 30% threshold, deductible and non-deductible portions for the period.
- Period carry-over section: Declare the balance carried over from each previous period (according to each base year), the amount deducted in this period from each year carried over, and the remaining balance carried forward.
- The FIFO principle must clearly state that the preceding year N must be accounted for before year N+1, N+2…
See also: Instructions for declaring related-party transactions on HTKK.
What risks could cause a business to lose the right to use non-deductible interest expenses carried over to the next period?
In reality, many businesses are aware of the regulations but still lose their carryover rights due to operational risks. Below are four of the most common risks and how to prevent them.
Monitoring in violation of the FIFO principle.
When multiple years carry over (e.g., carrying over from 2021, 2022, and 2023) are present, businesses sometimes mistakenly declare the 2023 figures before the 2021 figures. The tax authorities may reject the deductible portion if they detect a violation of the FIFO principle, leading to the risk of the 2021 figures expiring and being lost before they are used.
EBITDA is expected to fall sharply in the next period.
In highly cyclical industries (real estate, construction, large-scale manufacturing), EBITDA can decline by 50-70¢ TP3T during unfavorable market years. In such cases, not only will carry-forward not be eligible, but even new net interest expenses incurred during the period may exceed 30¢ TP3T, creating additional carry-forward balances and increasing time pressure.
Restructuring eliminates the conditions for related-party transactions.
When a corporation restructures, splits its business, or changes its ownership structure, resulting in the business no longer being an affiliated entity in any subsequent period, the business is no longer subject to the regulations, and the legal basis for continuing to deduct the non-deductible interest expense carried forward to the next period becomes unclear.
Errors in determining net interest expense.
Interest expense capitalized on fixed assets under construction (according to VAS 16) is not included in interest expense on the income statement, but some businesses mistakenly include it in net interest expense when calculating the 30% threshold, leading to underestimation of the deductible amount and unnecessary carry-forward.
To avoid unfortunate risks that could affect your company's finances, please refer to the following: related party transaction advisory services We seek support and assistance from professional, reputable, and experienced organizations.
Frequently Asked Questions about Interest Expenses That Cannot Be Carried Forward
Dependent branches file corporate income tax returns together with the head office; therefore, net interest expense and EBITDA figures are aggregated at the legal entity level (head office). Independent branches with their own tax identification numbers file tax returns independently and apply separate regulations regarding non-deductible interest expense carried forward to the next period, within the scope of that legal entity.
When a business is dissolved, all tax settlements are carried out at the dissolution period. Any unused carry-over balances cannot be deducted, similar to the situation after the expiration of a 5-year term. Currently, there are no regulations allowing the inheritance of carry-over balances in cases of mergers or consolidations; therefore, caution is needed when planning M&A deals involving entities with such balances.
Each year of origin must be declared separately on Appendix 02/TNDN. All carry-over amounts cannot be combined into a single line because the tax authorities need to verify the 5-year period of each balance.
Businesses that sign an APA are completely exempt from the 30% EBITDA threshold, but only within the scope and duration of the approved APA. After the APA expires without renewal, the business must return to comply with the regulations regarding non-deductible interest expense carry-forward as stipulated in Decree 132.Does the policy of not being able to carry forward interest expense to the next period apply to branches?
If a business dissolves before the 5-year period is over, how are the remaining balances handled?
Should interest expense carried over to another period be declared separately or included in the total?
Will businesses that sign APA agreements be affected by this regulation?
Conclusion and recommendations
The regulation regarding the non-deductible carry-forward of interest expenses is a crucial legal basis in Vietnam's anti-transfer pricing system. Understanding and correctly applying this regulation not only helps businesses comply with tax obligations but also protects their legitimate financial interests in the long term.
Four key points to remember:
- The 30% EBITDA threshold based on tax is the basis for determining the non-deductible portion to be calculated based on tax figures, not accounting data.
- The non-deductible portion can be carried forward for a maximum of 5 years using the FIFO method.
- If the money is not used up within 5 years, it is lost permanently.
- Accurately declaring the Appendix, following the FIFO method correctly, and maintaining complete records of EBITDA calculations are prerequisites for protecting your interests.
To optimize the impact of non-deductible interest expense carried forward to the next period, businesses should develop a 5-year financial plan from the time the balance is generated, assess their ability to absorb future EBITDA, and consider adjusting their capital structure or investment timing to maximize room for growth in subsequent periods.
Contact MAN – Master Accountant Network For free support and advice!
Contact information MAN – Master Accountant Network
- Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
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- Email: man@man.net.vn
Content production by: Mr. Le Hoang Tuyen – Founder and CEO of MAN – Master Accountant Network, CPA Vietnam auditors with over 30 years of experience in accounting, auditing, and financial consulting.