Understanding the regulations regarding limits on interest expense deductions is crucial to avoiding construction tax risks.

In construction accounting practice, interest expense is subject to limitations. Decree 132/2020/ND-CP Interest expense is one of the biggest yet often underestimated tax risks. A single error in identifying related-party transactions, calculating EBITDA, or tracking carry-forward interest can lead to the disqualification of expenses, back taxes on corporate income, and significant late payment penalties. Based on experience advising and handling tax audits for numerous construction companies, this article will analyze the legal basis, calculation methods, and practical application to help accountants and business owners understand, correctly implement, and legally optimize the handling of interest expense subject to limitations under Decree 132/2020/ND-CP.

What does it mean for interest expense to be capped?

Interest expense is controlled (usually 30% EBITDAThis is a regulation on corporate income tax (CIT) in Vietnam, limiting the portion of interest expense (from related parties and independent parties) that businesses can deduct when determining taxable income, aiming to restrict transfer pricing and taxable income, and mainly applied to businesses with related-party transactions.

Legal basis and scope of application

To fully understand the regulations regarding the limitation of interest expense, it is first necessary to identify the currently effective legal documents:

• Decree 132/2020/ND-CP: This is the "essential" document regulating tax management for enterprises with related-party transactions. It completely replaces Decree 20/2017/ND-CP and Decree 68/2020/ND-CP.
• Law on Tax Administration No. 38/2019/QH14: The highest legal framework regarding the tax obligations of enterprises.
• Circular 80/2021/TT-BTC: Detailed guidance on declaring and fulfilling related tax obligations.

Those affected by the regulation on capped interest expense

Many accountants mistakenly believe that all loans are subject to limitations. In reality, the regulation limiting interest expense only applies to businesses with related-party transactions.

In the construction industry, related-party transactions typically take the following forms:

• Borrowing from the parent company: To carry out the project, the parent company lends money to the subsidiary at interest rates lower or higher than the market rate.
• Borrowing in the name of an individual: Businesses borrow money from their director, contributing members, or their relatives (if they meet the ownership/management ratio threshold as stipulated in Article 5 of Decree 132/2020/ND-CP).
• Contractor ecosystem: General contractors and subcontractors share the same operator or belong to the same Financial Group.

However, correctly identifying the legal basis and applicable subjects is only the beginning. More importantly, for accountants and construction business owners, the key question is: "How is the interest expense limit calculated?", "What is the limit and how will any excess be handled during tax settlement?". To fully answer these questions, let's delve into the regulations on interest expense limits in Clause 3, Article 16 of Decree 132/2020/ND-CP, which directly determines the deductibility of interest expenses when calculating corporate income tax (CIT).

Detailed analysis of regulations controlling interest expense.

This is the most crucial aspect that every construction accountant needs to master in order to properly comply with regulations regarding the limitation of interest expense.

Control threshold 30% EBITDA

Decree 132/2020/ND-CP stipulates that the total interest expense after deducting interest on deposits and loans (net interest expense) incurred during the period of the taxpayer is deductible when determining taxable corporate income, provided it does not exceed 30% of total net profit from business operations plus net interest expense plus depreciation expense (EBITDA).

Recipe: 

In there: 

Note: 

• Net profit: Profit from business operations (Code 30 on the Income Statement), note that this does not include profit from financial activities other than interest on loans.
• Net interest expense: Total interest expense incurred minus interest on deposits or loans.
• Depreciation expense: The cost of depreciation of fixed assets and amortization of goodwill arising during the period.

The meaning of the number 30% 

Why 30%? This figure is based on the OECD's recommendation in Action 4 of the BEPS Project (Combating Base Erosion and Profit Shifting). Applying a regulation that limits interest expense to 30% EBITDA helps prevent businesses from artificially inflating interest expenses to reduce their corporate income tax liability in Vietnam.

Rules for carrying forward interest expense to the next period.

A positive aspect of Decree 132/2020/ND-CP compared to previous regulations is that it allows the carry-forward of excluded interest expense.

• Any interest expense exceeding the amount specified in tax code 30% will be carried forward to the next tax period.
• Transfer period: Not more than 5 consecutive years.
• When carried over, total interest expense (including interest incurred in that period and interest carried over) must still comply with the threshold of not exceeding 30% EBITDA for that year.

Although Clause 3, Article 16 of Decree 132/2020/ND-CP clearly stipulates the threshold for deductible interest expenses based on the 30% EBITDA ratio, its application in practice, especially in construction enterprises, raises many complex issues in calculating and determining deductible expenses. The unique characteristics of long project cycles, interest capitalization, phased acceptance, and the ecosystem of related-party transactions mean that interest expenses in construction accounting cannot be calculated mechanically using a general formula, but require deeper analysis from a professional perspective.

The specifics of interest expense in construction companies.

Construction accounting has very different operations compared to trade or services, which directly affects the application of regulations on capped interest expense deductions.

The problem of interest expense accounting (Capitalization according to VAS 16)

In construction, interest expenses are typically capitalized into the value of assets under construction (Account 154 or Account 241) according to Accounting Standard No. 16.

So, will capitalized interest expenses (not included in account 635 during the period) be included in the 30% threshold of the regulations on limited interest expense deductions?

• If interest expense has been capitalized into the asset's value, it is not considered an "expense" in the current period.
• However, when that asset (construction project) is accepted and converted into cost of goods sold (Account 632) or depreciated, the hidden interest expense will be considered.

Extremely important note: Accountants need to separate the capitalized interest expense from related-party loans for separate tracking, avoiding double exclusion or omission when calculating corporate income tax later.

Potential related-party transactions in the construction industry.

The Vietnamese construction industry is characterized by the existence of "family-run" or "interconnected ecosystem" models. For example:

• Construction company A borrowed money from Mr. Nguyen Van B (Chairman of the Board of Directors) to buy an excavator. If Mr. B owns more than 25% of contributed capital, this is a related-party transaction.
• The main contractor subcontracts the work (80%) to a subcontractor, but the subcontractor is owned by the spouse of the main contractor's director. Any loans between these two parties trigger a regulation limiting interest expense.

The unique characteristics of interest expense capitalization, long-term project cash flows, and potential related-party transactions within construction businesses make the application of regulations on interest expense deductions far more complex than in other industries. To avoid errors in determining deductible expenses and ensure tax returns stand up to audit, accountants need not only to understand the nature of the business but also to master the calculation techniques and declaration procedures in accordance with legal regulations.

Technical guide for calculating and filing taxes.

To comply with regulations regarding the limitation of interest expense, accountants should follow these four steps:

Step 1: Identify the relationships between people.

Review the list of shareholders, lenders, and borrowers to compare it with Article 5 of Decree 132/2020/ND-CP. If there are no related-party transactions, then this 30% threshold does not need to be considered.

Step 2: Gather financial data

Obtain data from the Balance Sheet and Income Statement:

• Net profit from business operations (MS 30).
• Total interest expense (in account 635 and the capitalized debt portion 154/241).
• Total revenue from interest on deposits and loans (Account 515).
• Total depreciation expense for the period (Depreciation calculation sheet).

Step 3: Calculate EBITDA and control thresholds.

Applying the formula mentioned above, businesses can refer to additional detailed formulas along with real-world case studies.

See also: Formula for calculating interest on related-party transactions 

Step 4: Fill out the Related Party Transaction Declaration Form (Form No. 01)

This is a mandatory legal step. In Form No. 01 issued with Decree 132, accountants must declare in detail the related parties, transaction values, and especially the determination of deductible interest expenses. Failure to submit this form will result in the assessment of taxes and very high administrative penalties for the business. It must be submitted along with the corporate income tax return.

See details: Instructions for the related-party transaction declaration form.

Although the procedures for calculating and declaring interest expense are clearly defined in Decree 132/2020/ND-CP, in practice, many construction companies still face significant tax arrears and penalties due to seemingly minor errors in application. The discrepancy between understanding the regulations and correctly implementing them in tax filings has led to a series of serious errors that accountants need to particularly avoid.

Common mistakes 

During our consulting and practical work experience, we have observed that accountants often make the following mistakes regarding regulations on capped interest expense:

• Interest expense from related parties only: Many people think that only interest paid to the parent company is subject to limits. However, once there are related-party transactions, the total interest expense (including interest from independent banks) is included in the "basket" for calculating the 30% threshold.
• Forgetting to offset interest on deposits: The formula for calculating EBITDA is "Net Interest on Borrowed Assets". If you forget to subtract the interest earned from banks, your company's EBITDA will be calculated incorrectly, leading to losses for the business.
• Failure to track interest expense carried forward: Construction companies often incur losses in the early years of a project (negative EBITDA). In this case, all interest expense is disallowed. If accounting fails to record this to carry forward to the third or fourth year when profits are generated, the company will lose this benefit entirely.
• Confusion between accounting EBITDA and tax EBITDA: Certain unreasonable expenses (disallowed for tax purposes) need to be adjusted before calculating EBITDA to ensure they match audit figures.

These mistakes show that the problem lies not in the regulations limiting interest expense, but in how construction businesses understand and organize their financial structure inappropriately from the outset. By correctly understanding the nature of Decree 132/2020/ND-CP, businesses can proactively control tax risks and optimize costs legally. So what are the feasible solutions to help construction businesses comply with regulations without compromising financial efficiency?

Cost-effective solutions for construction companies.

To minimize the impact of regulations limiting interest expense deductions and to legally protect tax interests, construction companies cannot simply rely on "accurate calculation and complete declaration," but need to proactively restructure their finances and optimize cash flow from the outset. Below are some practical solutions:

• Increase charter capital: Instead of borrowing from shareholders, convert those loans into equity contributions. This will improve financial statements, enhance bidding capabilities, and eliminate the risk of interest rate caps.
• Optimize project cash flow: Utilize guarantees, letters of credit (L/C), or supply chain financing instead of directly borrowing cash from stakeholders.
• Choosing the right time for project completion: In construction, project completion determines revenue and profit. Carefully consider the timing of project completion to generate a sufficiently large EBITDA to absorb all interest expenses for the period.
• Borrowing from banks using personal assets: Instead of businesses borrowing directly from individuals, allow individuals to mortgage their assets to the bank so that the business can borrow capital independently (the legal aspects of this transaction need to be carefully assessed).

However, all the above solutions for optimizing interest expense are only truly effective when businesses correctly understand the nature of the regulations controlling interest expense and proactively restructure their finances from the outset, instead of reacting passively when tax authorities conduct an audit. This is also why construction companies need to re-evaluate their capital strategy and the role of tax accounting in the long term.

Conclude

The regulations on interest expense limits under Decree 132/2020/ND-CP are not only a tax compliance requirement but also a "measure" of the soundness of a construction company's financial structure. Misunderstanding or mechanically applying the 30% EBITDA threshold can cause businesses to lose their right to deduct legitimate expenses, face corporate income tax arrears, and create significant risks during tax audits. Conversely, if accountants and business owners understand the nature of the regulations, closely monitor related-party transactions, and proactively plan their cash flow, interest expenses can be legally controlled and optimized.

In the context of construction projects increasingly relying on financial leverage, reviewing loan structures, related-party transaction records, and interest expense calculation methods should be done periodically, rather than waiting for tax authorities to intervene. If businesses are facing difficulties in determining deductible interest expenses, preparing related-party transaction declarations, or preparing explanatory documents for audits, consulting with the expert team at MAN – Master Accountant Network, who have in-depth knowledge of the construction industry, will help minimize risks and protect tax benefits sustainably.

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 and CEO of MAN – Master Accountant Network, CPA Vietnam with over 30 years of experience in accounting, auditing, and financial consulting.

Editorial Board of MAN – Master Accountant Network