In 2026, as tax management for businesses with related-party transactions becomes increasingly stringent, understanding and mastering legal regulations is no longer an option but a mandatory requirement. One of the "hot spots" that tax authorities frequently focus on during inspections is financial expenses. This article will provide detailed guidance on how to calculate deductible interest expenses in related-party transactions based on the following criteria. Decree 132/2020/ND-CP, This helps businesses avoid unfortunate risks during the corporate income tax settlement period.
Why is it necessary to control interest expense in related-party transactions?
The concept of thin capitalization is no longer unfamiliar to foreign-invested enterprises (FDI) or multinational corporations. When a business receives loan capital from related parties, tax authorities will question the independence and economic nature of this loan.
Tax authorities exercise strict control to prevent businesses from transferring profits from countries with high tax rates to countries with low tax rates or to the parent company through unreasonable increases in interest expenses. Without a thorough understanding of how to calculate deductible interest expenses in related-party transactions, businesses can easily have a portion of their interest expenses disallowed as deductible expenses when calculating corporate income tax. This not only increases the amount of tax payable but also leads to administrative penalties for incorrect declarations.
The formula and method for accurately calculating deductible interest expense in related-party transactions.
This is a crucial aspect that corporate accounting departments need to pay close attention to. The calculation of deductible interest expense in related-party transactions is not simply based on the ending balance, but must strictly adhere to the EBITDA (Earnings Before Interest, Taxes, and Depreciation) control principle.
The components that make up the total cost of interest (Gross)
Many businesses often make the mistake of thinking they can subtract interest earned from deposits (Net) from interest paid on loans. In reality, according to current regulations, we must use the Gross principle (Total amount incurred).
The total interest expense incurred by the taxpayer during the period includes:
- Interest on loans from credit institutions and affiliated parties.
- Other financial fees: Guarantee fees, financing arrangement fees, and financial advisory fees related to the loan.
Note: Income from interest on deposits or loans must absolutely not be offset against other income.
EBITDA formula as per tax regulations
EBITDA is a core indicator in calculating deductible interest expenses in related-party transactions. The formula is defined as follows:
EBITDA = Net profit from business operations + Interest expense + Depreciation expense |
In there:
- Net profit from business operations: Determined from the income statement.
- Interest expense: The total interest expense incurred during the period (as stated above).
- Depreciation expense: The total cost of depreciation of fixed assets during the period.
Note: Businesses need to eliminate unusual income not derived from core business operations to ensure that EBITDA accurately reflects the entity's actual cash-generating capacity.
See also: How to calculate interest expense according to Decree 132.
30% Comparison Rule
This is the final filter in calculating deductible interest expense in related-party transactions. After determining the total interest expense and EBITDA, the business takes the following steps:
Determine the ceiling using the formula:
The ceiling = 30% x EBITDA |
Then, two scenarios can occur:
- If the total interest expense is less than or equal to the ceiling: The entire interest expense is deductible.
- If total interest expense exceeds the ceiling: The excess amount will be excluded from deductible expenses when calculating corporate income tax.
Instructions on handling non-deductible interest expenses.
Based on practical experience in tax audits in recent years, MAN – Master Accountant Network has observed that most businesses feel confused and face many difficulties when the amount of disallowed interest expense becomes too large. However, Decree 132/2020/ND-CP has opened up transitional regulations, helping to alleviate the pressure on businesses regarding interest expense.
If interest expense is not deductible this year, the business is allowed to carry it forward to the next five years when determining the total deductible interest expense for those years. For effective management, accountants need to create a detailed tracking table for each year in which non-deductible interest expense is incurred. This helps businesses maximize their future EBITDA potential, optimizing tax obligations instead of wastefully losing benefits.
Exceptional cases where interest expense limits do not apply.
Not all loans are subject to the 30% EBITDA rule. Understanding the exemptions is crucial in determining deductible interest expenses in related-party transactions. These loans include:
- Official Development Assistance (ODA) loans are concessional loans from the government.
- Loans for implementing national target programs (new rural development program, sustainable poverty reduction program, etc.).
- Loans for investment in programs and projects implementing the State's social welfare policies (social housing, housing for workers, resettlement projects, etc.).
To qualify for these incentives, businesses need to maintain complete records and project approval documents, clearly demonstrating that the loan funds are intended for the aforementioned activities. If supporting documentation is lacking, the tax authorities have the right to reject the exemption.
Bottlenecks and risks when tax authorities conduct audits.
When delving deeper into how to calculate deductible interest expenses in related-party transactions, businesses need to be aware of common risks encountered during audits:
- Higher-than-market interest rates: If interest paid to related parties is higher than the market rate, the tax authorities have the right to reassess the reasonable interest rate. The difference will not only be immediately disallowed but will also distort EBITDA, making overall calculations difficult.
- Misuse of borrowed funds: Borrowing money for production and business but actually using it for financial investments or equity contributions. This is a point that attracts the attention of inspectors.
- Missing related-party transaction appendices: This is a basic but extremely serious error. Missing Appendices I, II, III, and IV attached to the Corporate Income Tax Return means the business has not fulfilled its declaration obligations, leading to the risk of administrative penalties and the tax authorities disallowing all interest expense deductions.
This process is overly complex, requiring too much technical expertise, from determining pricing methods appropriate to the industry and compiling comparative data from 3-5 companies in the same sector to providing explanations to the tax authorities. Businesses should consult other sources. related party transaction documentation service Professional and experienced to ensure the set related-party transaction pricing documentation Highly persuasive.
Tax management strategy for the accounting department
To ensure that interest expense deductions in related-party transactions proceed smoothly, the Chief Accountant needs to do the following:
- Step 1 – Review the list of related-party transactions: Compile a list of related parties and the loans incurred. Carefully categorize which are independent loans and which are related-party loans.
- Step 2 – Standardize financial data: Examine unusual income, accurately classify depreciation expenses. Ensure the Income Statement accurately reflects the true situation.
- Step 3 – Documentation: Gather loan agreements, disbursement documents, and documents proving market interest rates.
- Step 4 – Periodic Review: Conduct quarterly trial calculations to forecast tax risks and adjust cash flow accordingly. Don't wait until the end of the year to finalize your accounts.
If EBITDA is negative, how is the deductible interest expense from related-party transactions calculated?
According to regulations, if EBITDA is less than or equal to 0, the 30% ceiling for EBITDA will also be 0. In this case, all interest expense for the period will be disallowed. This is an extremely risky situation for newly established businesses or companies undergoing significant investment but without substantial revenue or profit. In this situation, understanding the regulations regarding the carry-forward of interest expense for five years is the only "lifeline" for businesses to protect their expenses.
Frequently Asked Questions about Calculating Deductible Interest Expense in Related-Party Transactions
Yes. According to regulations, the 30% EBITDA limit applies to the total interest expense incurred during the period by the business, regardless of whether it is borrowed from related parties or independent credit institutions. The misconception that only related-party borrowing is subject to this limit poses a significant risk to businesses.
Yes. The portion of interest expense exceeding the 30% EBITDA ceiling is permitted to be carried forward to subsequent years to determine the total deductible interest expense. The carry-forward period is 5 consecutive years, starting from the year following the year in which the non-deductible interest expense was incurred.
The tax authorities will examine the cash flow and disbursement documents. Businesses need to provide loan agreements, disbursement documents from the bank, and payment documents to suppliers. If the borrowed funds are used for financial investments or relending, it is highly likely to be considered misused and disallowed as an expense.
Exemptions include: ODA loans, preferential government loans, or loans for national target programs and social welfare policy projects. To qualify for these incentives, businesses must have complete documentation and project approvals from competent authorities proving the source of funds for the aforementioned activities.Are interest expenses from independent commercial banks included in the 30% EBITDA limit?
If interest expenses are not deductible this year, can I carry them forward to next year?
How can I prove that the loan is being used for production and business activities?
When are businesses exempt from the 30% EBITDA restriction?
Conclude
Complying with regulations regarding the calculation of deductible interest expenses in related-party transactions is a complex task requiring careful consideration and in-depth knowledge. Beyond simply applying formulas, accountants need a proactive tax management mindset to protect the company's interests.
If your business is dealing with complex related-party transactions or requires a review of its tax records, don't hesitate to seek assistance from experts. related party transaction advisory services professional
For any questions or further information, please contact your company. Contact MAN – Master Accountant Network via:
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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.