The transitional provisions regarding interest expense deductions under Decree 20/2025/ND-CP are crucial for businesses to understand when settling corporate income tax from 2026 onwards. The new regulations not only remove the "bottleneck" of the 30% EBITDA limitation for many bank loans but also open up opportunities for deductions and refunds for interest expenses that were disallowed during the 2020-2024 period. This article provides a comprehensive analysis of the transitional mechanism, calculation methods, practical examples, and legal risks to ensure businesses apply the regulations correctly, completely, and safely when settling their taxes.
Overview of controlling interest expense (Tran 30% EBITDA)
According to the regulations in Decree 132/2020/ND-CP and now Decree 20/2025/ND-CP, the total interest expense after deducting interest on deposits and loans incurred during the period of the taxpayer is deductible when determining taxable corporate income, provided it does not exceed the total net profit from business operations as follows:
EBITDA = Net profit from business operations + Interest expense + Depreciation expense |
This regulation aims to combat tax base erosion and transfer pricing by artificially inflating interest expense between related parties. However, if actual interest expense exceeds this ceiling, the excess will be disallowed when calculating corporate income tax. This is where the transitional provisions for interest expense deductions play a crucial role in protecting a company's cash flow.
The groundbreaking new features of Decree 20/2025/ND-CP
The amendments in Decree 20/2025/ND-CP focus on two main areas: the scope of defining related parties and the mechanism for handling disallowed interest expenses from previous years.
Relax the definition of "affiliated party" with regard to banks.
Previously, according to point d, clause 2, Article 5 of Decree 132/2020/ND-CP, if a business borrowed capital from a credit institution at a ratio exceeding 25% of its equity capital and accounting for over 50% of the total value of medium and long-term debt, that bank would be considered an affiliated party. This regulation caused most businesses using financial leverage from banks to fall into the trap of controlling EBITDA even without intending to engage in transfer pricing.
Decree 20/2025/ND-CP has abolished or relaxed this criterion. As a result, in the 2025 and 2026 tax periods, many entities will move from the status of "having related-party transactions" to "not having related-party transactions," thus no longer being restricted by this interest rate ceiling for newly arising transactions.
Paving the way for the "release" of outstanding interest expense.
More importantly, Decree 20/2025/ND-CP establishes a clear mechanism for handling the disallowed portion of expenses from the 2020-2024 period. This is the core content of the transitional regulations on interest expense that accountants need to understand.
Details of the transitional provisions for interest expense under the new law.
To ensure businesses correctly apply and do not miss out on tax benefits, the regulations on the carry-forward of interest expense under Decree 20/2025/ND-CP need to be broken down into specific principles, including the carry-forward period, scope of application, and how to determine the amount of deductible interest expense across tax periods. Below are the key points that accountants and finance departments need to pay special attention to.
Five-year transition principle
The portion of non-deductible interest expense (the portion exceeding 30% EBITDA) may be carried forward to the next tax period when determining total deductible interest expense. The carry-forward period is continuous and shall not exceed 5 years from the year following the year in which the non-deductible interest expense was incurred.
Mechanism for handling outstanding loan interest before 2025
Decree 20/2025/ND-CP allows businesses to carry forward uncredited interest expenses from previous years to tax periods from 2024 onwards.
- For businesses that have "exited" related-party transactions: Even if there are no longer any related-party transactions, the business is still entitled to carry forward the disallowed interest income from the years when there was a related-party relationship (for a period of 5 years).
- Calculation method: Total interest expense incurred in the current period + Amount of interest expense carried forward from the past is less than or equal to 30% EBITDA of the current period.
However, the ability to carry forward outstanding interest expenses is not the deciding factor in optimizing tax obligations. In fact, the order of allocation and priority of deducting carried-forward interest expenses in each year is crucial, because if applied incorrectly, businesses may let interest expenses expire after 5 years without being able to deduct them.
Order of priority for deductions
To maximize benefits, businesses should apply the "First In, First Out" (FIFO) rule to carry-forward interest. This means that the disallowed interest expense from the furthest year (e.g., 2021) will be prioritized for deduction in 2026 to avoid the expiration of the 5-year grace period.
A practical example illustrating the transitional provisions for interest expense.
Let's assume ABC Company Limited has the following figures in 2026:
- Net profit from business operations: VND 50 billion.
- Interest expense incurred in 2026: VND 15 billion.
- Depreciation cost: 10 billion VND.
- Amount of disallowed (exceeding the ceiling) interest expenses from 2022 that have not yet been transferred: 8 billion VND
Step 1 – Calculate EBITDA for 2026:
EBITDA = 50 + 15 + 10 = 75 billion VND |
Step 2 – Calculate the maximum deductible interest rate:
The ceiling amount = 75 x 30% = 22.5 billion VND |
Step 3 – Determine the deductible interest expense according to the provisions on the carryforward of interest expense; the total amount of interest expense that can be included as a deductible expense is 22.5 billion.
- Priority is given to deducting interest expenses incurred during the year: 15 billion.
- The remaining balance for carry-forward interest is: 22.5 – 15 = 7.5 billion.
- The interest expense from 2022 that will be carried over to 2026 is VND 7.5 billion.
- The remaining interest income from 2022 (8 – 7.5 = 0.5 billion VND) will be carried over to 2027 (if still within the 5-year term).
Although the example illustrates that the mechanism for carrying forward interest expense operates quite smoothly under normal conditions, in reality, tax settlements involve many specific scenarios such as businesses incurring losses, having negative EBITDA, or undergoing business restructuring. These are situations where errors are more likely to occur if not thoroughly analyzed.
See details: Formula for calculating interest on related-party transactions
Analyzing special situations
In reality, the application of the transitional provisions for interest expense is not limited to "textbook" cases. Many businesses face specific scenarios related to business results, restructuring, or changes in operating models, requiring flexible interpretation and handling while still strictly adhering to legal regulations.
Interest expense carryforward when a business incurs losses or has negative EBITDA.
When a business experiences losses or excessive depreciation, resulting in negative EBITDA:
- The ceiling for deductible interest expenses is now zero.
- All net interest expenses incurred during the year will be excluded from 100%.
- This interest expense will be carried forward in full to the following year (tracked separately as an interest loss).
- Mistake to avoid: Many accountants mistakenly believe that if there is a loss, there is no need to declare related-party transactions. This is a misconception that can lead to the loss of carryforward rights later on.
Handling carry-forward interest payments during mergers and acquisitions (M&A).
In the event that company A merges with company B:
- Enterprise B (after the merger) inherits the uncashed-forward interest expense of Enterprise A, provided that this interest expense remains within the 5-year term.
- Detailed handover records and tax reconciliation data should be prepared to avoid disputes with regulatory authorities during post-audits.
The interaction between loss carryforward and interest carryforward.
Businesses need to clearly distinguish between:
- Loss carryforward: Deducted from taxable income before tax is calculated.
- Interest expense forwarding: Added to deductible expenses to determine taxable income. Incorrect calculation of the order can distort the amount of corporate income tax payable, especially when applying preferential tax rates.
Perspective from a MAN – Master Accountant Network expert.
From a tax expert's perspective, the transitional provisions for interest expense deductions in Decree 20/2025/ND-CP represent a loosening of financial regulations. However, to truly optimize this, businesses need to implement a three-step strategy:
Debt-to-Equity Control
Although Decree 20/2025/ND-CP has relaxed bank linkage regulations, if a business borrows from its parent company or other affiliated parties, the 30% ceiling remains very strict. Consider increasing equity capital to reduce the net interest expense ratio.
Optimizing deposit and loan cash flows.
Because the calculation is based on "Net Interest Expense" (Interest Paid – Interest Received on Deposits), increasing income from interest on deposits will help increase the deductible interest expense limit.
Assessing the risks of "Thin Capitalization"
It is necessary to clearly distinguish between interest expense limits based on EBITDA (anti-transfer pricing) and interest expense limits due to insufficient capital contributions as per the schedule. The interest expense corresponding to the remaining capital shortfall will be permanently disallowed and will not be subject to the provisions for carrying forward interest expense deductions.
Conclude
Understanding the regulations on the transitional payment of interest expenses under Decree 20/2025/ND-CP is key for businesses to protect their legitimate interests. In the era of digital tax management in 2026, your data will be automatically verified by the tax authorities. A small mistake in tracking the transitional deadline can lead to unnecessary tax arrears and late payment penalties.
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.
Frequently Asked Questions about the Transitional Provision for Interest Expense
Can interest expense disallowed due to negative EBITDA be carried forward to the following year?
Yes. When EBITDA is negative, the ceiling for deductible interest expense is zero, resulting in all net interest expense being disallowed for the period. This portion of the expense is tracked separately and carried forward to subsequent years, provided it is within 5 years of the year in which it was incurred.
Will a business that incurs losses for many consecutive years lose its right to carry forward interest payments?
There is no loss of entitlement, but there is a risk of expiration. The maximum carry-forward period for interest expense is 5 years, regardless of whether the business is profitable or not. If after 5 years no positive EBITDA is generated to qualify for the carry-forward, the remaining interest expense will be permanently disallowed.
Can interest expenses disallowed due to insufficient capital contributions be carried forward?
No. The portion of interest expense corresponding to the unfulfilled registered capital will be permanently disallowed and will not be subject to the provisions for carrying forward interest expense, even under Decree 20/2025/ND-CP.
Is it mandatory for businesses to declare an appendix to related-party transactions in order to carry forward interest payments?
Yes. Declaring the related-party transaction appendix is a necessary condition for establishing the right to carry forward interest expense. If the business fails to declare or declares incorrectly, the tax authorities may reject the entire amount of carried-forward interest expense during an audit.
When businesses merge, are uncredited interest expenses inherited?
Yes, if the merger or split is carried out in accordance with legal regulations and the interest expense is still within the 5-year period. The acquiring company must have clear tax data handover records to prove its inheritance rights.