If EBITDA is negative, are interest expenses deductible? This is a question of particular concern to many businesses with related-party transactions, especially in the context of increasingly stringent tax audits. Decree 132/2020/ND-CP. A simple misidentification of the 30% EBITDA limit can lead to the complete disallowance of interest expense, increased taxable income, and significant tax recovery risks. This article will analyze in detail the legal nature, the calculation of EBITDA according to tax standards, the mechanism for carrying forward interest expense for 5 years, and optimal strategies to help businesses proactively control related-party transaction risks, protect financial interests, and ensure sustainable tax compliance.
The nature of EBITDA and the rules for capping interest expenses in related-party transactions.
To understand whether interest expense is deductible when EBITDA is negative, it's first necessary to establish a precise definition of EBITDA from the perspective of the Tax Authority. This indicator is not simply a number on financial statements, but a value adjusted according to corporate income tax principles.
How does the formula for calculating tax-deductible EBITDA differ from the accounting EBITDA formula?
Typically, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an indicator reflecting the core operational efficiency of a business. However, according to Clause 3, Article 16 of Decree 132/2020/ND-CP, EBITDA used to calculate the interest expense ceiling has its own unique characteristics:
Taxable EBITDA = Net operating profit + Net interest expense + Depreciation expense |
In there:
- Net profit from business operations: This is the indicator at code [30] on the Appendix of related party transactions, excluding financial revenue (interest on deposits, dividends, etc.) and other financial expenses (excluding interest on loans).
- Net interest expense: This is the total interest expense incurred during the period, minus interest on deposits and loans incurred during the period by the taxpayer.
This distinction is extremely important because if a business incorrectly determines EBITDA according to accounting standards instead of tax standards, the entire calculation of the deductible interest expense limit will be skewed. For entities concerned about whether negative EBITDA will affect the deductibility of interest expense, correctly determining the denominator is a crucial step to avoid tax arrears and late payment penalties.
See also: How to calculate interest expense according to Decree 132.
Why is the question "If EBITDA is negative, are interest expenses deductible?" important?
In Vietnam, heavy industries, real estate, or renewable energy often have extremely high initial investment costs. This leads to depreciation and interest expenses gnawing away at profits in the early years, causing EBITDA to frequently fall into negative or zero territory. Without a thorough understanding of regulations regarding negative EBITDA and whether interest expenses are deductible, businesses can fall into a tax trap: they incur actual losses on paper while having interest expenses disallowed, resulting in having to pay corporate income tax even when the business is not yet profitable.
Legal analysis: If EBITDA is negative, are interest expenses deductible?
This section focuses on directly answering the question of whether interest expenses are deductible if EBITDA is negative. It is based on current legal regulations and the latest guidelines.
Regulations regarding the 30% EBITDA threshold
Decree 132/2020/ND-CP establishes a technical "barrier": Total deductible interest expense cannot exceed 30% EBITDA. When considering a situation where EBITDA is a negative number (loss before interest and depreciation), mathematically, a negative 30% cannot generate a positive value for comparison.
In practice, tax audits in Vietnam show that the Tax Authority shares a unified view: When EBITDA ≤ 0, the deductible interest expense limit is 0. This clearly answers the question "If EBITDA is negative, are interest expenses deductible?" The answer is absolutely not deductible in the year the EBITDA loss occurs. This means that all interest expenses incurred during the period by the related-party transaction company will be excluded from deductible expenses when determining corporate income tax.
Mechanism for carrying forward interest expense to the next period.
Although the answer to whether negative EBITDA means interest expense is deductible in the current year is "No," the law still opens up an important retroactive opportunity. Point c, Clause 3, Article 16 of Decree 132 allows businesses to carry forward disallowed interest expense to subsequent years if they meet stringent conditions.
- Carry-over period: A maximum of 5 consecutive years starting from the year following the year in which the non-deductible interest expense was incurred.
- Condition: The following year must have sufficiently large positive EBITDA to absorb both newly incurred interest expenses and carryover interest expenses (total not exceeding 30% EBITDA for that year).
This regulation helps businesses reduce the burden during the investment phase. However, if after 5 years the business still cannot generate a sufficiently large positive EBITDA, this portion of interest expense will be permanently lost and will no longer be tax deductible. Understanding whether interest expense is deductible when EBITDA is negative helps business accountants be more proactive in monitoring the balance of interest expense carried forward to the next period.
Reference: Formula for calculating interest on related-party transactions.
Technical instructions for filling out Form 01
To address the issue of negative EBITDA, interest expense is deductible, and accountants need to accurately declare it in Appendix I.
Key indicators include:
- Indicator [11]: Total interest expense incurred during the period.
- Indicator [12]: Interest on deposits and interest on loans generated during the period.
- Indicator [13]: Net interest expense (Indicator 11 – Indicator 12).
- Indicator [14]: Net profit from business operations.
- Indicator [15]: Depreciation cost in the period.
How to calculate when EBITDA is negative.
When the sum of [14] + [13] + [15] is a negative number, in the column determining deductible interest expense, the enterprise must record the value as 0. The entire difference between the actual interest expense and this 0 will be recorded as non-deductible expense and adjusted upwards to taxable income at code [B4] on the Corporate Income Tax Return (Form 03/TNDN). Understanding the rule that if EBITDA is negative, interest expense is deductible helps to minimize errors in comparing the Related Party Transactions Appendix and the Tax Return.
A real-world case study and how to handle negative EBITDA.
To better illustrate the issue of whether interest expenses are deductible when EBITDA is negative, let's examine some in-depth scenarios commonly encountered in multinational corporations with MAN – Master Accountant Network.
Case 1: Capital-intensive business during the construction phase
Suppose Company A (with investment capital from its parent company) is building a factory. In 2024, the company had no revenue but incurred interest expenses from banks and related parties totaling VND 50 billion. Due to the lack of revenue, net profit from business operations was negative, resulting in a negative EBITDA of VND 20 billion.
- Result: In answer to the question of whether interest expense is deductible if EBITDA is negative, in this case, the entire 50 billion VND in interest expense is disallowed (Indicator B4).
- Action: The accountant needs to create a tracking sheet for this 50 billion VND amount to be carried over to the next year (not exceeding 5 years).
Case 2: Positive EBITDA but insufficient to absorb existing interest expenses.
In 2025, Company A commences operations, achieving an EBITDA of VND 100 billion. Interest expense incurred in 2025 is VND 25 billion. Interest expense carried over from 2024 is VND 50 billion.
- Maximum deduction limit for 2026: 30% x 100 = 30 billion VND.
- Priority order: The law stipulates that interest expense incurred in the previous period should be deducted first.
- Solution: Since 25 billion (in 2025) is less than 30 billion (the limit), the company is allowed to deduct an additional 5 billion from the previous 50 billion. The remaining 45 billion will remain outstanding and be carried over to 2026. This example reinforces the understanding of whether interest expense is deductible when EBITDA is negative and the offsetting mechanism over the years.
Case 3: The business earns more interest on deposits than on loans.
If a business has interest income from deposits of 20 billion VND and interest expense of 15 billion VND, the net interest expense would be negative 5 billion VND. In this case, the 15 billion VND in interest expense is fully deductible and is not affected by the 30% EBITDA ceiling. This is the key point for businesses to consider: whether negative EBITDA allows for deductible interest expense when supported by financial revenue.
Dangerous misunderstandings to avoid
During audits, tax authorities often focus on common misunderstandings among businesses regarding whether interest expenses are deductible when EBITDA is negative.
Borrowing only from banks, not from affiliated companies, will not result in the borrowing cap.
This is the most common misconception. Decree 132 stipulates that if a business has any related-party transactions, the total interest expense (including loans from independent banks) is capped by the 30% EBITDA ceiling. Therefore, even if the EBITDA is negative, the deductible interest expense still applies to bank loans if the business has sales transactions with the parent company.
See details: Is taking out a bank loan considered a related-party transaction?.
If EBITDA is negative, a Related Party Transaction Profile is not required.
Many businesses believe that losses don't require documentation. Conversely, businesses with negative EBITDA are often suspected of transfer pricing. The lack of documentation to determine the price of related-party transactions leaves businesses without a protective shield. If the objective nature of the loss cannot be proven, the question of whether negative EBITDA allows for deductible interest expenses becomes a real tax burden when interest rates are assessed.
The process of documenting related-party transactions is complex, requiring 3-5 benchmark data points from businesses with similar operations in the same industry. Businesses should consider this carefully. hire someone to prepare related party transaction documents. Obtain a highly convincing documentation from reputable firms with experience and expertise in transfer pricing.
Confusion regarding the 5-year timeframe.
Many corporate accountants confuse this with carrying forward corporate income tax losses. Note that carrying forward interest expense is a separate process, tracked on a separate sheet. If you forget to declare the carry-forward for one year, the business may lose its entitlement to deductible interest expense in subsequent years if EBITDA is negative.
To avoid regrettable mistakes that could lead to business risks, consultation is essential. related party transaction advisory services Choosing reputable, professional, and highly specialized units in related-party transactions like MAN – Master Accountant Network is a safe solution.
Tax optimization strategies for businesses
To proactively address the situation of negative EBITDA and determine whether interest expenses are deductible, businesses need to take the following steps:
Capital structure restructuring
Corporations should consider increasing their charter capital instead of borrowing during periods when long-term negative EBITDA is expected. Capital contributions do not accrue interest, helping businesses avoid being disallowed as an expense under Decree 132. This is the root cause of the problem: whether interest expenses can be deducted when EBITDA is negative.
Centralized cash flow management
By coordinating cash flow among units within the group, businesses can reduce net interest expense. When net interest expense is low, the risk of being disallowed when EBITDA is negative is significantly reduced, and the deductible interest expense is minimized.
Optimizing depreciation and operating costs.
Consider an appropriate depreciation method to avoid making EBITDA too negative. Good EBITDA management will expand the room for interest expense deductions. Always ask yourself: If adjusting depreciation results in negative EBITDA, how much additional interest expense can be deducted?
Prepare the explanatory document.
In the Local File, analyze market factors and entry costs to explain why the EBITDA is negative. Transparency in the file helps the tax authorities understand that the negative EBITDA and the resulting zero interest expense deduction are due to the specifics of the business, not transfer pricing.
Audit risks and the perspective from the Tax Authority.
By 2026, tax authorities are projected to apply artificial intelligence (AI) to review related-party transaction data. Businesses with unusual EBITDA or interest expense figures will be placed on a priority inspection list.
Check for Validity and Affirmation
Beyond just the 30% threshold, the tax authorities will verify whether the loan was actually used for production and business operations. If a business borrows money but leaves it idle or invests it inefficiently, even with positive EBITDA, interest expenses risk being entirely disallowed before reaching the 30% threshold. This further complicates the issue of whether interest expenses are deductible even with negative EBITDA.
Comparison with other businesses in the same industry (Benchmarking)
If a company's EBITDA is negative while its competitors' are positive, the company will face significant difficulties in explaining the situation. Understanding whether negative EBITDA allows for interest expense deductions gives accountants more confidence during audits.
Conclusion and recommendations
The issue of whether interest expenses are deductible when EBITDA is negative has been clarified through the regulations of Decree 132. Although the short-term answer is "No," a long-term strategy helps businesses preserve tax benefits through the carry-forward mechanism.
Checklist for businesses:
- Accurately identify related parties and related-party transactions during the year.
- Start calculating EBITDA using the tax formula as early as the second and third quarters of each year.
- If the projected EBITDA is negative, the deductible interest expense will be zero. Immediately prepare a plan to carry forward expenses or restructure capital.
- Complete the related-party transaction documentation before the corporate income tax settlement deadline.
- Closely monitor the 5-year grace period for interest expense transfers to avoid missing out.
Related-party transactions and interest expense control are extremely complex issues. Understanding whether negative EBITDA allows interest expense deductions is not only about legal compliance but also about the art of corporate financial management in the era of global tax transparency.
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Contact information MAN – Master Accountant Network
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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:
- Decree 132/2020/ND-CP
- Corporate Income Tax Law and its guiding documents.
- The BEPS (OECD) handbook on combating revenue erosion.