Controlling interest expenses in related-party transactions is a crucial aspect that businesses need to consider when incurring loans with related parties. Failure to correctly determine deductible interest expenses can lead to the risk of having these expenses disallowed during corporate income tax settlements. Decree 132/2020/ND-CP sets a limit of 30% based on EBITDA to control interest expenses incurred in related-party transactions.
This article summarizes all current regulations, from the core principles in Decree 132/2020/ND-CP to the groundbreaking changes. Decree 20/2025/ND-CP This is to help businesses understand the legal aspects and know where they stand within this overall picture.
What is interest rate cap in related-party transactions?
Interest expense limits are mechanisms that restrict the portion of interest expense deductible by businesses with related-party transactions when determining taxable corporate income. The core objective of this regulation is to combat transfer pricing through debt instruments, that is, to prevent related parties from artificially inflating interest rates or outstanding debt to erode taxable profits in Vietnam.
The primary legal basis is Decree 132/2020/ND-CP (effective from December 20, 2020, applicable from the 2020 tax year, replacing Decree 20/2017 and Decree 68/2020). This regulation only applies to corporate income tax payers who have transactions with related parties as defined in Article 5 of the Decree. Businesses with no related parties are not subject to this regulation.
The 30% EBITDA limit is based on Decree 132.
According to Clause 3, Article 16 Decree 132/2020/ND-CP, The total interest expense after deducting interest on deposits and loans incurred during the period by a business with related-party transactions, which is included in deductible expenses, must not exceed the total net profit from business operations during the period plus net interest expense and depreciation expense incurred during the period.
The portion of interest expense that is not deductible will be carried forward to the next tax period and will be deductible if the total deductible interest expense of the subsequent period is lower than the ceiling. The carry-forward period is continuous and does not exceed 5 years from the year following the year in which it was incurred.
The most confusing point: The limit applies to the entire interest expense of the enterprise, not just the interest expense incurred with related parties. This means that once an entity is classified as having related-party transactions, even interest expenses from regular banks are included in the calculation of the 30% ceiling. This is the reason why many domestic enterprises have been negatively affected and is also the direct cause of the amendment and issuance of Decree 20/2025/ND-CP.
How to calculate deductible interest expense according to Decree 132
To determine the acceptable portion of interest expense, businesses can follow these steps:
Step 1: Determine net interest expense.
General business:
- Total interest expense incurred during the period;
- Subtract the interest earned on the deposit;
- Subtract any interest expense incurred during the period.
The result is the net interest expense used for comparison with the 30% limit.
Step 2: Determine EBITDA
In this context, EBITDA is understood as:
EBITDA = Net profit from business operations + Net interest expense + Depreciation expense |
After obtaining EBITDA, the business uses the 30% EBITDA to determine the maximum deductible interest expense.
Maximum deductible interest expense = 30% x EBITDA |
In there:
Net interest expense = Interest expense incurred – Interest on deposits – Interest on loans |
Example: Let's assume that company X in Vietnam, which specializes in manufacturing electronic components, has the following financial indicators during the period:
- Net profit from business operations: 10 billion VND
- Interest expense incurred: 8 billion VND
- Interest earned on deposits and loans: 1 billion VND
- Depreciation cost: 3 billion VND.
The specific calculation steps are as follows:
| Step | Indicators | How to calculate | Result |
| 1 | Net interest expense | Interest expense – Interest on deposits | 7 billion VND |
| 2 | Calculate EBITDA | Profit + Net interest expense + Depreciation | 20 billion VND |
| 3 | The ceiling is deducted. | 30% x EBITDA | 6 billion VND |
| 4 | Compare interest rates with the ceiling. | Interest rate > Ceiling | Exceeding the ceiling |
| 5 | The amount to be deducted in the period | The deductible amount for the period is equal to the deductible limit. | 6 billion VND |
| 6 | Excess amount (not deductible) | Net interest expense – Deductible portion | 1 billion VND will be carried over to subsequent installments, for a maximum of 5 years. |
Important Note: If EBITDA is negative (the business is incurring a net loss and depreciation is insufficient to offset it), the 30% ceiling will be very low or zero, leading to the risk that a large portion of interest expense will be disallowed. This is a sensitive situation that needs careful review before preparing the tax return.
See also: Formula for calculating interest on related-party transactions.
Important updates to Decree 20/2025/ND-CP
This is a crucial section that all businesses must update to avoid misapplying the law. On February 10, 2025, the Government issued Decree 20/2025/ND-CP amending and supplementing several articles of Decree 132/2020/ND-CP. The Decree takes effect from March 27, 2025 and applies immediately from the corporate income tax period of 2024.
The most notable amendments in Decree 20/2025 are:
Exclude independent credit institutions from the scope of affiliated parties.
Previously, a bank or credit institution lending to a business exceeding a certain threshold could be considered an affiliated party, leading to the business being subject to interest rate caps (30%). This was despite the fact that the two parties were completely independent and had no ownership relationship. Decree 20/2025 amends point d, clause 2, Article 5 specifically as follows:
If the lender or guarantor is an independent credit institution (operating under the Law on Credit Institutions) that does not participate in the management, control, capital contribution, or investment in the borrowing enterprise (and vice versa), then that loan relationship is not considered a related party relationship.
As a result, the interest expense portion of these businesses is no longer subject to the 30% EBITDA cap.
See also: Is taking out a bank loan considered a related-party transaction?.
Clarify the criteria for identifying linkages through loan financing.
A loan-based relationship only arises when the total outstanding debt of the borrowing enterprise to the lender or guarantor simultaneously satisfies both conditions: it is at least equal to 25% of the owner's equity and accounts for more than 50% of the total outstanding medium and long-term debt of the borrowing enterprise.
Adding coordination responsibilities
The Decree amends Clause 2 of Article 21, specifying more clearly the responsibilities of the State Bank of Vietnam in coordinating the provision of information and controlling financial transactions between related parties.
Replace Appendix I on affiliate information
Replacing Appendix I on related party information and related party transactions, the declaration form accompanying the corporate income tax return has also been updated according to Decree 20/2025/ND-CP.
Transitional provisions require special attention.
For tax periods from 2020 to 2023, if a business borrows only through an affiliated relationship with a credit institution (according to the old point d) and its interest expense is disallowed according to point a, clause 3, Article 16, then from the 2024 tax period onwards:
- In cases where a business no longer has an affiliated relationship and no related-party transactions arise according to the new regulations: The portion of interest expense that has not been deducted or fully carried forward as of the end of 2023 will be evenly allocated to the remaining periods during the transition period.
- In cases where the enterprise still has related-party relationships and related-party transactions: The portion of interest expense that has not yet been deducted will continue to be processed according to point b, clause 3, Article 16 of Decree 132 (normal transition, only used when EBITDA is large enough to absorb it).
Note: Decree 20/2025 does not repeal Article 16 of Decree 132. Businesses that still have related-party relationships with other parties (such as parent-subsidiary companies, individual managers, etc.) will continue to be subject to the same limitation on interest expense at 30% EBITDA as before.
Interest expense on related-party transactions: Handling of excess amounts
How to handle the part related party interest expense Exceeding the 30% limit is the most easily overlooked aspect for businesses, as its impact and duration span many years and require continuous monitoring.
- Any excess interest expense incurred in a period is not lost but is carried forward to subsequent tax periods.
- This portion is only deductible in the following period if the actual interest expense for that period is lower than the 30% ceiling, meaning there is still "room" for absorption.
- The maximum transition period is 05 consecutive years. If the transition period is exceeded without the full transition, the remaining portion will not be carried over and will be permanently disqualified.
MAN – Master Accountant Network Recommendation: Due to this specific situation, businesses should create a tracking table for excess interest expense over the years to easily monitor and adjust, thereby avoiding errors in underpaying taxes and losing legal carryforward rights.
Consulting on controlling interest expense under Decree 132
If your business feels that regulations are too layered and your internal staff lacks the confidence to ensure every figure is compliant with the law, then now is the right time to consider partnering with a professional firm. With experience working with numerous FDI businesses across various sectors, MAN – Master Accountant Network specializes in... Consulting on controlling interest expense under Decree 132 with specific support such as:
- Review and accurately identify the scope of related parties.
- Calculate EBITDA and advise on a roadmap for transitioning interest expense.
- Declaration Related Party Transaction Appendix Regarding affiliated parties.
The biggest benefit of partnering with MAN lies not only in getting a figure right, but also in having an independent party verifying the entire logic, correctly determining tax obligations, thereby minimizing the risk of tax arrears and providing greater peace of mind when facing tax audits and inspections.
Conclude
Limiting interest expense on related-party transactions is a regulation that businesses should not ignore, especially in cases involving borrowing between related parties. Correctly identifying related-party transactions, accurately calculating net interest expense, and controlling the 30% EBITDA limit will help businesses minimize the risk of having expenses disallowed during tax settlement.
With tax authorities increasingly focusing on regulations regarding related-party transactions, businesses should proactively review their internal records, data, and processes to ensure compliance. When accounting resources lack sufficient expertise, a solution is needed. Transfer pricing consultancy It can assist businesses in checking and handling matters in accordance with legal regulations.
Contact MAN – Master Accountant Network For free support and advice!
Contact information MAN – Master Accountant Network
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Responsible for production and professional content review by: Mr. Le Hoang Tuyen – Founder & CEO of MAN – Master Accountant Network. He is a CPA Vietnam auditor with over 30 years of in-depth experience in accounting, auditing, taxation, and corporate legal consulting.
Frequently Asked Questions about Interest Rate Caps in Related-Party Transactions
Yes. In cases where companies have the same owner or a controlling relationship as defined by regulations on related-party transactions, loans between the parties may be considered related-party transactions. In such cases, the enterprise needs to assess its declaration obligations and apply the regulations on limiting interest expense deductions as stipulated in Decree 132/2020/ND-CP.
Businesses do not calculate each loan separately to apply the 30% limit; instead, they need to determine the total net interest expense for the period and then compare it to the limit based on EBITDA. Therefore, businesses need to compile all loans, interest expenses, and related financial income to avoid discrepancies in calculations.
The overall conditions for application need to be considered. The regulation limiting interest expense applies to enterprises with related-party transactions according to Decree 132/2020/ND-CP. Not only loans from related parties, but enterprises need to assess all transactions within the scope of regulation to determine their obligations.
Not all cases are automatically carried forward. Businesses need to ensure that the interest expense falls under the categories eligible for carry-forward and must continuously monitor it for a maximum of 5 years from the year following the year in which the uncredited expense was incurred.
The calculation must be based on indicators defined by tax regulations. Businesses need to compare accounting data, financial statements, and tax settlement documents to correctly determine net profit, net interest expense, and depreciation expense as the basis for calculating EBITDA.
Businesses should retain documents such as: Loan agreements; Documents proving loan transactions; Interest payment receipts; Related party transaction records; and Calculation sheets for determining deductible interest expenses according to Decree 132. Having complete documentation will make it easier for businesses to explain matters to the tax authorities.Are interest rate caps applied to loans between companies with the same owner?
How do businesses with multiple loans determine interest rate limits?
If a business does not incur interest income from related parties but does borrow from banks, will it be subject to interest rate caps?
Is it permissible for businesses to carry forward any excess interest expense exceeding the limit to the following year?
According to Decree 132, should the calculation of interest expense be based on accounting data or tax settlement data?
What documents should businesses prepare to prove that interest expenses are legitimate?