The regulations under Decree 132 limit the deductible interest expense when calculating corporate income tax. Accordingly, the total deductible interest expense, after deducting interest on deposits and loans, is limited to a maximum of 30% of EBITDA. This regulation directly impacts the tax obligations and financial strategies of businesses, especially those with related-party transactions or large bank loans.
This mechanism aims to ensure that tax obligations accurately reflect the nature of business operations, while preventing transfer pricing risks. Understanding how to calculate and apply interest expense controls not only helps businesses comply with legal regulations, but also optimizes a transparent and sustainable tax management strategy.
What does the regulation on interest expense limits under Decree 132 mean?
The limitation on interest expense under Decree 132 is a legal regulation that limits the amount of interest expense that can be included as a deductible expense when determining taxable corporate income.
According to Decree 132/2020/ND-CP:
The total net interest expense of a business can only be deducted up to a maximum of 30% of total net profit from business operations plus interest expense plus depreciation expense (EBITDA).
The regulations on interest expense limits under Decree 132 aim to prevent businesses from increasing internal borrowing to manipulate transfer pricing, reduce taxable profits, and ensure that tax obligations correspond to the true value of business operations.
Regulations on limiting interest expense under Decree 132
The regulations on interest expense deductions under Decree 132 clearly state that the total interest expense deductible when determining taxable income for corporate income tax purposes for enterprises with related-party transactions is determined as follows:
The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer.
This means that the interest expense deductible when determining taxable income for corporate income tax does not exceed 30% of the total EBITDA (Earnings before interest, taxes, depreciation and amortization) of the enterprise.
What is the maximum deductible amount for interest expense under Decree 132 when calculating corporate income tax?
The interest expense deduction limit under Decree 132 is applied to restrict the amount of deductible expenses when calculating corporate income tax. Specifically, businesses are only allowed to deduct interest expenses up to a maximum within the 30% EBITDA range. Any expense exceeding this limit will be disallowed and will not be included as a deductible expense when determining taxable corporate income for the period.
Shortcomings in the regulations controlling interest expense under Decree 132.
One of the issues causing many difficulties for businesses today is the regulation on determining the relationship through loan capital stated in Point d, Clause 2, Article 5 of Decree 132/2020/ND-CP:
An enterprise guarantees or lends capital to another enterprise in any form (including third-party loans secured by related-party financing and similar financial transactions) provided that the loan amount is at least 25% of the owner's equity of the borrowing enterprise and accounts for more than 50% of the total value of the borrowing enterprise's medium and long-term debts.
According to the Decree, the mechanism for limiting interest expense applies to enterprises with related-party transactions, in which the total deductible interest expense must not exceed 30% EBITDA (earnings before interest, taxes, and depreciation). Any interest expense exceeding this threshold will be disallowed and will not be included as a deductible expense when determining taxable corporate income.
The provisions of Point d, Clause 2, Article 5, Decree No. 132 may include entities that are essentially independent parties such as banks and independent credit institutions that have no capital ownership relationship.
This reality creates problems when many businesses only incur loans from independent organizations, but are still identified as having affiliated relationships. As a result, these transactions are considered affiliated transactions and are subject to regulations controlling interest expenses.
Regarding regulations on interest expense limits, many businesses have argued that borrowing from banks to finance production and business operations is a common and legitimate need.
Essentially, this is also a normal lending activity of the bank. The business and the bank are completely independent parties, with no control, management, or capital contribution relationship. Therefore, the interest expense incurred is actually a reasonable expense that directly serves the business's production and operations.
Therefore, controlling interest expenses and types of interest expenses for businesses in this case is not appropriate.
Add exclusion clause
Therefore, the Ministry of Finance has proposed amending and supplementing Point d, Clause 2, Article 5 of Decree 132/2020/ND-CP on tax management for enterprises with related-party transactions, in the direction of excluding certain cases from the scope of defining related-party relationships. This is considered a necessary adjustment to address the shortcomings in applying the regulation limiting interest expense deductions for loans that actually arise from independent transactions.
An enterprise guarantees or lends capital to another enterprise in any form (including loans from third parties secured by the financial resources of the related party and financial transactions of a similar nature) on the condition that the loan amount is at least equal to 25% of the capital contribution of the owner of the borrowing enterprise and accounts for more than 50% of the total value of the medium- and long-term debts of the borrowing enterprise.”
The provisions in Point d of this Clause do not apply to the following cases:
The guarantor or lender is an organization or enterprise operating in accordance with the Law on Credit Institutions and not directly or indirectly involved in the management, control, capital contribution, or investment in the borrowing enterprise or the guaranteed enterprise as stipulated in points a, c, d, e, g, h, k, l, and m of this clause.
The guarantor or lender is an organization or enterprise operating under the provisions of the Law on Credit Institutions and the borrowing or guaranteed enterprise, not directly or indirectly, under the management, control, capital contribution or investment of another party as prescribed in points b, e and i of this clause.”
This proposal will help resolve difficulties and obstacles in applying interest expense limits for businesses. In particular, for businesses with specific projects or key projects, when borrowing from banks and meeting the stipulated conditions, the business and the bank will no longer be considered related parties.
Guidelines for determining deductible and non-deductible interest expenses under the interest expense limitation mechanism as stipulated in Decree 132.
To understand how control is applied related party interest expense, Decree 132/2020/ND-CP has stipulated in detail the deductible interest expense. According to Clause 3, Article 16, regarding the total deductible interest expense when determining taxable corporate income for enterprises with related-party transactions, these regulations are presented as follows:
Interest expenses are deductible when calculating corporate income tax for enterprises that have related-party transactions.
According to Clause 3, Article 16 on total interest expenses deductible when determining taxable income for enterprises with related-party transactions. Specifically, these regulations are presented as follows:
The total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable income for corporate income tax purposes, provided it does not exceed 30% of the total net profit from business operations during the period plus interest expense after deducting interest on deposits and loans incurred during the period plus depreciation expense incurred during the period of the taxpayer;
The portion of non-deductible interest expenses as prescribed in Point a of this Clause shall be transferred to the next tax period when determining the total deductible interest expenses in case the total deductible interest expenses arising in the next tax period are lower than the level prescribed in Point a of this Clause. The period for transferring continuously calculated interest expenses shall not exceed 05 years from the year following the year in which non-deductible interest expenses arise;c) The provisions in point a of this clause do not apply to loans of taxpayers who are credit institutions. Law on Credit Institutions; insurance business organization according to Law on Insurance Business; Official Development Assistance (ODA) loans, preferential government loans implemented through the method of the government borrowing from foreign sources and then lending to enterprises; loans for national target programs (new rural development program and sustainable poverty reduction program); loans for investment in programs and projects implementing the State's social welfare policies (resettlement housing, housing for workers and students, social housing and other public welfare projects).
Taxpayers shall declare the interest expense ratio for the tax period in accordance with Appendix I issued together with this Decree.
Interest expenses are not deductible when determining taxable income.
Expenses that are not deductible when determining taxable income include:
- The portion of interest payment expenses for loans for production and business activities of entities that are not credit institutions or economic organizations exceeding 150% of the basic interest rate announced by the State Bank of Vietnam at the time of borrowing.
- Interest payments on loans corresponding to the remaining registered capital (for private enterprises, this is investment capital) according to the capital contribution schedule stipulated in the company's charter, even if the company has already commenced production and business operations. Interest payments on loans during the investment process that have been recorded in the value of assets or investment projects.
In case an enterprise has contributed enough charter capital, during the business process there is an expense to pay interest on loans to invest in other enterprises, this expense is included in deductible expenses when determining taxable income.
Interest payments on loans corresponding to the remaining charter capital according to the capital contribution schedule stated in the enterprise's charter are not deductible when determining taxable income, which is determined as follows:
- In case the loan amount is less than or equal to the remaining charter capital, the entire loan interest is a non-deductible expense.
- In case the loan amount is larger than the remaining charter capital according to the capital contribution schedule.”
Understanding how to determine deductible and non-deductible interest expenses helps businesses comply with regulations and optimize tax obligations. However, in reality, the process of applying regulations on controlling interest expenses is not always favorable. If businesses do not control records and data well or do not fully understand the exceptions, the risk of tax risks arising, cost exclusions and affecting profits is inevitable.
See also: Advice on controlling interest expense under Decree 132.
Tax audit risk
Controlling interest expenses is associated with related-party transactions and is a factor that businesses must pay special attention to. If the legality of the loan cannot be proven or the expenses exceed the interest expense control ratio, the business risks having its expenses excluded when the tax authority inspects. This not only increases tax obligations but also poses the risk of being penalized for declaring and proving expenses.
In addition, controlling interest expenses also directly affects taxable profits, capital structure, financial planning and tax risks of the enterprise. Therefore, understanding the regulations in Decree 132/2020/ND-CP and building a reasonable borrowing strategy is the key to helping enterprises optimize financial costs while ensuring compliance with the law.
Answers to frequently asked questions regarding the control of interest expense under Decree 132.
Which businesses are required to apply the regulations limiting interest expense deductions?
This regulation applies to businesses with related-party transactions as stipulated in Decree 132/2020/ND-CP. It is particularly relevant for businesses that borrow large amounts of capital from affiliated companies or whose related-party relationships are established through guarantees or loans.
How is EBITDA interpreted in the context of regulations limiting interest expense?
EBITDA stands for earnings before interest, taxes, and depreciation. This is the basis for determining the ceiling on deductible interest expenses when calculating corporate income tax, as stipulated in Decree 132.
Will interest expenses exceeding the 30% EBITDA amount be completely lost?
No. The portion of interest expense exceeding the allowed limit can be carried forward to subsequent tax periods for continued consideration as a deduction. However, the maximum continuous carry-forward period is no more than 5 years from the year following the year in which the non-deductible expense was incurred.
Are bank loans considered related-party transactions?
In some cases, bank loans may be identified as related-party transactions if they meet the loan-to-value ratio requirements stipulated in Article 5 of Decree 132. However, the Ministry of Finance has proposed adding an exclusion clause for independent credit institutions to address the shortcomings faced by businesses.
Are businesses that borrow from banks subject to limits on interest expense?
If a loan is identified as a related-party transaction, the interest expense limitation mechanism may still apply. However, according to the new draft amendment, many cases of borrowing from independent banks will be excluded from the scope of determining related-party relationships.
Conclude
Compliance with interest expense control not only helps tax authorities control related-party transactions but also forces businesses to be transparent in their borrowing activities. However, if they are not prepared, businesses are at risk of having their expenses excluded, tax arrears collected and administrative fines imposed. To minimize this risk, businesses need to build a complete profile and have a reasonable borrowing plan.
To ensure safety and effectiveness, businesses should seek consultation. dRelated party transaction advisory services We seek detailed support and guidance from units with expertise and experience in the field.
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Content production by: Mr. Le Hoang Tuyen – Founder & CEO of MAN – Master Accountant Network, CPA Vietnam auditors with over 30 years of experience in accounting, auditing, and financial consulting.