Regulations on the Limitation of Interest Expenses: How Construction Companies Can Avoid Back Tax Assessments

In the practice of construction accounting, the interest expense deduction limit is one of the greatest tax risks, yet it is often underestimated. Effective July 1, 2026, this regulation will be implemented in accordance with Decree 255/2026/ND-CP. The Decree replaces Decree No. 132/2020/ND-CP and Decree No. 20/2025/ND-CP, and takes effect immediately for the 2026 corporate income tax filing period. Even a single error in identifying related-party transactions, calculating EBITDA, or tracking deferred interest expenses can result in a business having expenses disallowed, being subject to corporate income tax reassessments, and having to pay substantial late payment penalties.

This article is based on experience in advising and handling tax audits for numerous construction companies. The content covers everything from the legal basis and calculation methods to practical application, helping accountants and business owners understand the new regulations correctly, comply with them properly, and legally optimize interest expense deductions subject to the new limits.

What does it mean for interest expense to be capped?

The interest expense limitation is a corporate income tax provision that caps the amount of interest expense from related-party transactions that a business may claim as a deductible expense. The limit is 30% of EBITDA. This limit applies to total interest expenses, including interest from both related and unrelated parties. The purpose of the regulation is to curb transfer pricing and protect the tax base.

Legal basis and scope of application

To fully understand the regulations controlling interest expense, first, it is necessary to clearly identify the legal documents currently in effect:

• Decree No. 255/2026/NĐ-CP, dated June 30, 2026, regulates tax administration for related-party transactions of enterprises with affiliated relationships. The decree takes effect on July 1, 2026, and applies to the 2026 corporate income tax filing period, replacing Decree No. 132/2020/ND-CP and Decree No. 20/2025/ND-CP.
• Law on Tax Administration No. 108/2025/QH15: Article 5 of Decree 255 refers to the definition of “affiliated parties” in paragraph 17 of Article 4 of this Law.
• The Corporate Income Tax Law and related guidelines on deductible expenses.

Reference: What constitutes a related-party transaction? A full definition according to Decree 255/2026.

Those affected by the regulation on capped interest expense

Many accountants mistakenly believe that all loans are subject to restrictions. In fact, this regulation applies only to businesses with related-party relationships that have engaged in related-party transactions during the period. In Official Letter No. 6487/CT-QLNT dated August 28, 2026, the Tax Department clarified that the determination of related-party relationships is based on criteria regarding ownership, control, management, and transactions between the parties. This determination does not depend on whether or not the business intends to engage in transfer pricing or tax evasion.

In the construction industry, collaborative relationships typically take the following forms:

• Loans from the parent company to carry out the project, at an interest rate that is lower than or higher than the market rate. A related-party relationship arises when the ownership ratio specified in subparagraph a of paragraph 2 of Article 5 is met.
• Borrowing or taking money or assets from the company’s management: A business borrows funds from a director, executive, supervisor, or their relatives. Point l of Clause 2 of Article 5 of Decree 255 defines a related-party relationship when a business borrows, lends, or borrows an amount equivalent to at least 10% of the owners’ contributed capital at the time the transaction occurs during the tax period with individuals who manage or control the enterprise or with individuals falling under one of the relationships specified in subparagraph g of this paragraph.
• Bidding ecosystem. The general contractor and subcontractors are both subject to the management and control of individuals who are related by family ties under Point g, Paragraph 2 of Article 5, or who belong to the same corporate group.
• Large-scale bank loans for projects: Pursuant to Point d, Paragraph 2, Article 5, an affiliated relationship arises when an enterprise guarantees a loan or extends a loan to another enterprise in any form (including loans from a third party secured by the financial resources of an affiliate and financial transactions of a similar nature) provided that the total outstanding balance of the borrowing enterprise’s loans from the lending or guaranteeing enterprise is at least 25% of the borrowing enterprise’s owners’ equity and accounts for more than 50% of the total outstanding balance of all the borrowing enterprise’s medium- and long-term debts.

An important exception for construction companies borrowing from banks: The above provision does not apply when the lender or guarantor is an organization operating under the Law on Credit Institutions and does not directly or indirectly participate in the management, control, capital contribution, or investment in the borrowing enterprise. This exception also applies when the borrowing enterprise and the credit institution are not both subject to the management, control, capital contribution, or investment of a third party, as specified in the provisions cited in Article 5. However, this exception is subject to certain conditions. The enterprise must maintain supporting documentation.

However, correctly identifying the legal basis and the scope of application is only the first step. What is more important for accountants and construction business owners is: “How are capped interest expenses calculated?” and “What is the cap, and how will amounts exceeding the threshold be handled during tax settlement?” To fully answer these questions, join MAN – Master Accountant Network as we delve into an in-depth analysis of the regulations on limited interest expenses under Clause 3, Article 16 of Decree 255/2026/NĐ-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 No. 255/2026/ND-CP stipulates that the total interest expense, after deducting interest income from deposits and interest income from loans (net interest expense) incurred by the taxpayer during the period may be deducted when determining corporate income tax (CIT) taxable income, provided that such deduction does not exceed 30% of the total net operating profit plus net interest expense plus depreciation expense (EBITDA).

Recipe: 

In there: 

Note: 

• Net operating profit: This is Item No. 30 on the Statement of Operating Results. This item includes revenue and financial expenses but excludes other income and other expenses. Therefore, pre-tax profit should not be used as a substitute.
• Net interest expense is equal to the total interest expense incurred during the period, less interest earned on deposits and interest earned on loans during the period. The phrase “after deducting interest earned on deposits and interest earned on loans” appears in both the deduction and the addition sides of the EBITDA calculation, so it must be applied to both sides.
• Depreciation expense: The cost of depreciation of fixed assets and amortization of goodwill arising during the period.

See also: How to Calculate Deductible Interest Expenses Under Decree No. 255/2026/NĐ-CP

The meaning of the number 30% 

The 30% figure is based on the OECD’s recommendation in Action 4 of the BEPS Project (Base Erosion and Profit Shifting). This threshold helps prevent businesses from “inflating” their interest expenses to reduce the corporate income tax they owe in Vietnam. Decree No. 255/2026/NĐ-CP continues to maintain this threshold.

Rules for carrying forward interest expense to the next period.

Point b of Paragraph 3 of Article 16 of Decree No. 255/2026/ND-CP provides as follows:

• 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 Paragraph 3 of Article 16 of Decree 255/2026/NĐ-CP provides fairly clear provisions regarding the cap on interest expense at 30% of EBITDA, when applied in practice—particularly in construction companies— the calculation and determination of deductible expenses give rise to many complex issues. The unique characteristics of long project cycles, interest capitalization, phased project acceptance, and the ecosystem of related-party transactions mean that interest expenses in construction accounting cannot be applied mechanically using a general formula; rather, they require a more in-depth analysis from an operational perspective.

Reference:How to handle interest expenses that exceed 30% EBITDA.

Cases in Which the Cap Does Not Apply

Cases where the cap does not apply, specifically:

• This does not apply to loans taken out by taxpayers that are credit institutions or insurance companies as defined by the Insurance Business Law;
• Official Development Assistance (ODA) loans;
• Government-subsidized loans are provided through a mechanism whereby the government borrows from foreign sources and on-lends the funds to businesses;
• Loans for implementing national target programs (such as the New Rural Development Program and the Sustainable Poverty Reduction Program);
• Investments in programs and projects that implement the State’s social welfare policies (resettlement housing, housing for workers and students, public housing, and other public welfare projects).

Decree 255 updates the references to the 2024 Law on Credit Institutions and the 2022 Law on Insurance Business (as amended and supplemented in 2025). The categories of loans that are excluded remain unchanged.

For construction companies, loans for investment in resettlement housing, worker housing, and social housing projects are of practical significance. If a loan falls into this category, the company must keep separate records documenting the intended use of the funds.

Although Paragraph 3 of Article 16 provides fairly clear guidance, its application in construction companies still gives rise to many complex issues. Long project cycles, capitalization of interest expenses, phased acceptance, and the ecosystem of related-party transactions make it impossible to apply interest expense deductions mechanically using a general formula.

Characteristics 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 the construction industry, interest on loans is typically capitalized into the value of assets under construction (Account 154 or Account 241) in accordance with Accounting Standard No. 16. So, is the capitalized interest on loans—which has not yet been recorded in Account 635 during the period—included in the 30% threshold?

• If interest expense has been capitalized into the asset's value, this amount has not been recognized as an expense in the current period.
• When a project is accepted and transferred to cost of goods sold (Account 632) or depreciated, the interest expense included in that amount will be taken into account.

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 often operates under a “family-run” model or a “networked ecosystem.” For example:

• Construction Company A borrowed money from Mr. Nguyen Van B (Chairman of the Board of Directors and CEO) to purchase an excavator. If the amount borrowed reaches at least 10% of the owner’s contributed capital at the time the transaction occurs, Company A and Mr. B are considered to have a related-party relationship under Point l, Clause 2, Article 5 of Decree 255/2026/NĐ-CP.
• The general contractor assigns 80% of the project volume to a subcontractor operated by the spouse of the general contractor’s director. The two companies may be deemed related parties under Point g, Clause 2, Article 5. In that case, the enterprise engaging in related-party transactions during the period must apply the control threshold to all of its 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, guarantors, and borrowers of money or assets. Then, compare this list with Article 5 of Decree 255/2026/NĐ-CP, particularly subparagraph d (loans, guarantees) and subparagraph l (loans or borrowings from individuals who manage or control the entity). Loan agreements signed in previous years but still in effect in 2026 must also be reviewed. If no related-party transactions occur during the tax period, the enterprise is not subject to the 30% threshold. Nevertheless, the enterprise should still document its conclusions in writing.

Step 2: Gather financial data

Obtain data from the Balance Sheet and Income Statement:

• Net Income from Operating Activities (Code 30).
• Total interest expense incurred during the period (in Account 635 and the capitalized portion of the liability in Accounts 154/241).
• Interest on deposits and interest on loans accrued during the period (Account 515)—include only these two items; do not include exchange rate differences, dividends, or payment discounts.
• Total depreciation expense for the period (Depreciation calculation sheet).

Step 3: Calculate EBITDA and control thresholds.

Apply the formula set forth in point a of paragraph 3 of Article 16. Determine the amount exceeding the threshold to adjust the taxable income upward, and simultaneously open a carryover ledger for each year in which the amount arises.

Step 4: File the declaration in accordance with Appendix I issued pursuant to Decree No. 255/2026/NĐ-CP

Point d of Paragraph 3 of Article 16 provides:

Taxpayers shall declare the interest expense ratio for the tax period in accordance with Appendix I issued together with this Decree.

Appendix I (Information on Related-Party Relationships and Transactions) replaces the reporting form under Decree 132/2020/ND-CP. This appendix must be submitted together with the corporate income tax return. Incomplete or incorrect disclosures may result in penalties, tax assessments, and the disallowance of expenses during tax audits or inspections.

See details: Guidelines for Preparing the Related-Party Transaction Report.

Although the procedures for calculating and reporting interest expense deductions have been clearly outlined, in practice, many construction companies still face back taxes and heavy penalties due to seemingly minor errors in their application. It is precisely this discrepancy between understanding the regulations and correctly implementing them in tax filings that has led to a series of serious errors that accountants must take special care to avoid.

Common mistakes 

Through consulting and practical experience, MAN – Master Accountant Network has observed that accountants often make the following errors regarding the regulations on the limitation of interest expense:

• Calculate interest expenses only from related parties: When there are related-party transactions, the total interest expense (including interest on loans from independent banks) is subject to the 30% threshold;
• Failure to offset deposit interest: The formula uses net interest income on both the deduction side and the addition side of EBITDA. Incorrect offsetting results in an incorrect calculation of EBITDA and the amount exceeding the threshold.
• Failure to disclose related-party relationships arising from borrowing from or lending to individuals who manage or control the entity, as provided for in Point l, Clause 2, Article 5 of Decree No. 255/2026/ND-CP. This error is common in family-owned construction businesses.
• By default, bank loans do not give rise to related-party relationships. The exception for credit institutions under Point d, Paragraph 2 of Article 5 is subject to conditions and requires supporting documentation.
• Do not carry forward interest expense: Construction companies often incur losses in the early years of a project (negative EBITDA), so all interest expense is excluded. If the company does not record this expense to carry it forward to profitable years within a five-year period, it will forfeit this benefit entirely.
• Confusion Between Accounting EBITDA and Tax EBITDA: Using pre-tax profit instead of net operating profit will skew the results when a company has significant other income, such as gains from the disposal of machinery and equipment.

These mistakes show that the problem does not lie in the regulations capping interest expense deductions, but rather in the way businesses have structured their financial plans and organized their financial architecture—which were inappropriate from the outset. By addressing the root cause, construction companies can proactively manage tax risks and optimize costs in a legally compliant manner. So, what are the viable solutions that allow construction companies to both comply with regulations and optimize their financial performance?

Cost-Optimization Solutions for Construction Companies

To mitigate the impact of regulations and legally protect their tax interests, construction companies need to proactively restructure their finances from the outset:

• Increasing authorized capital: Converting a portion of a shareholder loan into capital contributions. This approach not only improves the financial statements and enhances bidding capacity but also significantly reduces regulated net interest expenses.
• Optimizing project cash flow: Use guarantees, letters of credit (L/C), or supply chain financing instead of borrowing cash directly from an affiliate.
• Choosing the timing of revenue recognition: Revenue recognition determines revenue and profit for the period. Balance the timing of revenue recognition to generate sufficient EBITDA to cover interest expenses for the period and any outstanding carryover amounts.
• Bank Loans Secured by Personal Assets: Instead of the business borrowing directly from the individual who manages it, the individual may pledge personal assets as collateral so that the business can borrow funds from an independent financial institution. It is necessary to carefully assess the legal aspects and exclusionary conditions specified in Point d, Clause 2, Article 5 of Decree No. 255/2026/NĐ-CP.
• Separate loans that fall under the exempt category: These are loans for social housing, worker housing, and resettlement housing projects, as specified in Point c, Paragraph 3, Article 16. Businesses must provide documentation proving the intended use of the funds.

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

Decree No. 255/2026/NĐ-CP maintains the 30% EBITDA threshold and the 5-year transition period. However, the decree clarifies and expands the criteria for identifying related-party relationships, particularly regarding loan and borrowing transactions with management personnel. The decree also revises the method for determining related-party relationships through loans and guarantees. For construction companies, this means that the number of entities subject to the control threshold in the 2026 fiscal year may be broader than before.

Misunderstanding or rigidly applying the 30% EBITDA threshold could result in a business losing the right to deduct legitimate expenses, facing corporate income tax reassessments, and incurring significant risks during tax audits. Conversely, by thoroughly understanding the new regulations, closely monitoring related-party transactions, and proactively planning cash flows, businesses can fully control and legally optimize their interest expenses.

If your business is facing difficulties in determining deductible interest expenses, filing Appendix I, or preparing explanatory documentation for an audit, MAN’s team of experts in related-party transactions – Master Accountant Network, with in-depth knowledge of the construction industry, is ready to review these matters with your business ahead of the 2026 tax filing season.

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
• E-mail: man@man.net.vn
• Google Business Profile: View MAN – Master Accountant Network's Google Business Profile 
• LinkedIn Founder: View expert Le Hoang Tuyen's LinkedIn profile. 

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 the Limits on Interest Expense Deductions

Does Decree 255/2026 change the 30% EBITDA cap compared to Decree 132/2020?

No. Decree No. 255/2026/NĐ-CP retains the 30% EBITDA cap, the 5-year transition period, and the categories of excluded loans. The change lies in the scope of determining related-party relationships. Article 5 adds borrowing and lending activities and revises the calculation method for loan conditions and guarantees based on total outstanding debt. As a result, the number of businesses subject to the threshold may be broader than before.

When does Decree No. 255/2026/NĐ-CP take effect?

Decree No. 255/2026/ND-CP takes effect on July 1, 2026, and applies to the 2026 corporate income tax (CIT) filing period. Accordingly, the 2026 corporate income tax return must determine deductible interest expenses in accordance with the new decree. This decree replaces Decree No. 132/2020/ND-CP and Decree No. 20/2025/ND-CP.

Which construction companies are required to comply with the interest expense limitation rule?

Only businesses with related-party relationships as defined in Article 5 of Decree 255/2026/NĐ-CP and that have engaged in related-party transactions during the reporting period are required to comply. In the construction industry, common scenarios include: borrowing from the parent company; borrowing or borrowing money or assets from management; and loans or guarantees that meet the prescribed thresholds. When the regulations apply, the 30% threshold applies to all interest expenses, including bank interest.

Are there any restrictions on interest expenses when taking out a bank loan for a project?

It depends on the circumstances. Specifically, a loan from a credit institution that does not participate in the management, control, capital contribution, or investment in the borrowing enterprise does not give rise to a related-party relationship under Point d, Paragraph 2, Article 5. However, if the enterprise already has related-party transactions from other sources, bank interest must still be included in the 30% EBITDA threshold.

How are interest expenses handled for a construction project that operates at a loss in its early years (negative EBITDA)?

When EBITDA is zero or negative, there is no remaining deduction allowance. All net interest expense for that period is excluded from deductible expenses. The business must record this amount in a carryover account for use in profitable years of the project, within a period of five consecutive years.