How to calculate deductible interest expense: What businesses need to know now.

In an increasingly complex global economic landscape, corporate financial management is not just about generating profits, but also about compliance with and optimization of tax obligations. For foreign-invested enterprises (FDI) or corporations with multiple subsidiaries, calculating deductible interest expenses is always a major challenge for accounting and finance departments.

Entering the 2026 tax year, the tax authorities will continue to tighten controls based on the principles of Decree 132/2020/ND-CP. This article will provide a comprehensive and accurate legal and practical overview to help businesses more confidently determine reasonable interest expense.

Legal context regarding tax management and interest expense

Since Decree 132/2020/ND-CP officially came into effect, the tax authorities' stance on controlling interest expense has become clearer and more resolute. The core objective is to prevent transfer pricing through interest expenses and the phenomenon of thin capitalization, where businesses borrow excessively from related parties to inflate costs, thereby reducing taxable income in Vietnam.

By 2026, the application of artificial intelligence (AI) in tax risk management will allow the General Department of Taxation to reconcile data between related-party transaction declarations and financial statements in real time. Therefore, mastering how to calculate deductible interest expenses will no longer be an option, but a mandatory requirement to maintain business compliance.

The necessary conditions for interest expense to be considered valid before deduction are met.

A common mistake is that many accountants focus only on the 30% limit and forget that, before applying the limit formula, the interest expense must meet the basic conditions of the Corporate Income Tax Law. To understand how to calculate deductible interest expense, businesses need to check the following four filters:

Serving production and business activities

Loans must have a clear purpose, substantiated by a business plan or investment project. If a business borrows funds but leaves them idle in its account or lends them to related parties without earning interest, the tax authorities have the right to disallow the corresponding interest expense.

Capital contribution obligations according to schedule.

According to Circular 96/2015/TT-BTC, Interest expense corresponding to the remaining capital shortfall according to the capital contribution schedule stipulated in the company's charter will not be included in deductible expenses. This is the first and most important step in calculating deductible interest expense. Businesses must eliminate this portion of interest expense before including the data in the 30% EBITDA control formula.

Independent interest rate controls

If borrowing from entities other than credit institutions (e.g., personal loans), the interest rate must not exceed the basic interest rate announced by the State Bank of Vietnam. Any amount exceeding this limit will certainly be excluded from deductible expenses.

See details: Is taking out a bank loan considered a related-party transaction?.

Legality of payment documents

All interest payments must be supported by a loan agreement, personal income tax withholding certificate (if borrowing from an individual), and most importantly, non-cash payment documentation for loans/principal and interest repayments of 20 million VND or more.

Identifying the relationship: A prerequisite

The method for calculating deductible interest expenses under the 30% limit applies when a business has related-party transactions during the period. Common criteria for identifying related parties include:

• Capital ownership: One party directly or indirectly holds at least 25% of the other party's capital contribution.
• Debt: The business borrows or lends at least 25% of the owner's equity and that loan/lending accounts for more than 50% of the total value of the borrowing business's medium and long-term debt.
• Management: One business controls the personnel and financial decisions of the other business through management agreements.

In 2026, tax authorities will place particular emphasis on implicit related-party relationships facilitated through intermediaries. Therefore, conducting a self-assessment of related-party relationships is a wise step before implementing methods for calculating deductible interest expenses.

See details: Forms of related-party transactions.

Detailed instructions on how to calculate deductible interest expense (Rule 30% EBITDA)

This is the heart of Decree 132/2020/ND-CP and also the content that demands absolute accuracy in calculations.

Formula for determining the ceiling

Total net interest expense deductible shall not exceed 30% of taxable EBITDA.

Specifically, the method for calculating deductible interest expense is based on the following formula:

In there:

Analyze the indicators in the formula.

To accurately apply the above formula, businesses need to carefully break down each component of EBITDA for tax purposes, specifically as follows:

• Net profit from business operations: Determined from item 30 on the income statement. Note that this excludes profit from financial activities (already offset in net interest expense) and other income.
• Depreciation expense: Includes depreciation of tangible and intangible fixed assets and reasonable allocations of goodwill as stipulated by tax regulations.
• Offsetting interest on deposits: A new and beneficial feature for businesses is the ability to subtract interest on deposits/loans from interest on loans before comparing it to the 30% figure. If interest on deposits is greater than interest on loans, then all interest expense for that period is deductible (assuming other conditions are met).

The difference between Tax EBITDA and Accounting EBITDA

Accountants need to be extremely cautious: EBITDA in the calculation of deductible interest expense is a purely tax-exclusive figure. Expenses that are recorded by accounting but excluded by tax (such as uninvoiced expenses, expenses exceeding limits) must be excluded before determining Net Profit for EBITDA calculation.

A detailed example illustrating how to calculate deductible interest expense.

Let's analyze a real-world example of TechVina Joint Stock Company (with related-party transactions) in the 2025 financial year:

Actual data:

• Net profit from business operations: 20 billion VND.
• Interest expenses incurred from banks and the parent company: VND 12 billion.
• Interest earned on idle cash deposits: 2 billion VND.
• Asset depreciation expense: 5 billion VND.

Steps to apply the method for calculating deductible interest expense:

• Determine the net interest expense: 12 billion – 2 billion = 10 billion VND.
• Determine taxable EBITDA: 20 billion VND (Profit) + 10 billion VND (Net Interest Expense) + 5 billion VND (Depreciation) = 35 billion VND.
• Determine the interest rate ceiling (30%): 30% * 35 billion = 10.5 billion VND.
• Result: Since the net interest expense (10 billion) is less than the ceiling (10.5 billion), the entire 10 billion net interest expense is accepted as a deductible expense. The total actual deductible interest expense is 12 billion (including the portion offset by interest on deposits).

Conversely, if in the example above, the net interest expense is 15 billion, the business will only be able to deduct 10.5 billion and must exclude 4.5 billion from expenses when calculating corporate income tax. Clearly, understanding how deductible interest expense is calculated helps businesses accurately forecast their tax liability.

Mechanism for carrying forward non-deductible interest expense

Decree 132/2020/ND-CP provides a flexible mechanism: The portion of interest expense disallowed due to exceeding the 30% ceiling is allowed to be carried forward to the next tax period.

• Transfer period: Maximum of 5 consecutive years from the year the disallowed loan interest was incurred.
• How it works: In the following year, if the net interest expense incurred is lower than that year's 30% ceiling, the business is allowed to add the old interest expense to offset it, provided that the total does not exceed the current year's 30% EBITDA.

This mechanism requires accountants to meticulously track disallowed interest expense balances over the years, similar to tracking carried-forward losses. Understanding how deductible interest expense is calculated over multiple periods helps businesses develop effective long-term financial plans.

Common mistakes that lead to inspection risks.

In our consulting practice, MAN – Master Accountant Network has identified common mistakes that lead to significant tax arrears for businesses, related to the calculation of deductible interest expenses:

Misunderstanding the scope of application (Independent Loan)

The biggest mistake is assuming that interest expenses from independent banks are not subject to limits. In reality, once a business has related-party transactions, the total interest expense (including bank loans, personal loans, and parent company loans) must be included in the formula for calculating the 30% ceiling.

Negative or excessively low EBITDA

For newly established businesses or those experiencing significant losses, negative net profit can drag EBITDA down below net interest expense. In the case of negative EBITDA, the calculation of deductible interest expense will result in a ceiling of zero. This means that all interest expense for that year will be disallowed and carried over to subsequent years when profitability is achieved.

Failure to separate capitalized interest expense.

Many businesses do not separate the portion of interest expense that is being capitalized into fixed assets (work-in-progress construction investments). This portion of interest expense has not been included in the expenses for the period and therefore is not subject to the 30% EBITDA adjustment.

Strategies for optimizing interest costs for FDI enterprises.

To optimize tax payments, businesses need to proactively implement management solutions early on, rather than waiting until tax settlement:

Capital structure transformation (From debt to equity)

If the projected EBITDA is not high enough, the company may consider converting a portion of its debt into equity. This not only helps reduce net interest expense but also improves the financial statements for credit purposes.

Strictly control interest rates on deposits and loans.

Optimizing income from interest on deposits/loans will directly reduce net interest expense, thereby helping businesses easily stay within the safe range for calculating deductible interest expenses.

Create professional related-party transaction records.

Local files and master files are not only compliance obligations but also a shield protecting businesses. In complex cases, businesses should seek professional help. related party transaction advisory services To ensure the objectivity of transactions, always adhere to the arm's length principle of interest rates and the nature of the loan, avoiding disruption caused by tax authorities reassessing figures. How to calculate deductible interest expense of the unit. Proactive consultation. related party transaction documentation service Professional and experienced services from reputable organizations like MAN – Master Accountant Network will help businesses minimize the risk of being subject to tax audits.

Conclude

Determining the correct method for calculating deductible interest expenses is a core requirement for ensuring financial security and tax compliance for businesses in 2026. With the support of technology and increasingly stringent regulations, businesses need to exercise absolute caution in declaring and settling their accounts.

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
• 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.

Frequently Asked Questions about How to Calculate Deductible Interest Expense