Regulations regarding interest expense that cannot be carried forward to the next period.<\/figcaption><\/figure>\nThe story begins in 2017, when <\/span>Decree 20\/2017\/ND-CP This was the first time a threshold of 20% EBITDA was set for interest expense in related-party transactions. At that time, the regulation did not allow the carry-forward of the amount exceeding the threshold, causing a strong backlash from the business community, especially foreign-invested corporations (FDI) with centralized financial models.<\/span><\/p>\nBy 2020, <\/span>Decree 68\/2020\/ND-CP was issued urgently to apply retroactively to the years 2017\u20132018, raising the threshold to 30% and, for the first time, introducing a five-year carryover mechanism. However, this was only a stopgap measure. At the end of 2020, Decree 132\/2020\/N\u0110-CP was issued, fully replacing Decree 20\/2017 and Decree 68, and was subsequently supplemented by Decree 20\/2025\/N\u0110-CP.<\/span><\/p>\nEffective July 1, 2026, Decree No. 255\/2026\/N\u0110-CP officially takes effect, fully replacing Decree No. 132\/2020\/N\u0110-CP and Decree No. 20\/2025\/N\u0110-CP, It will become the current legislation governing related-party transactions, including all provisions on interest expense, effective for the 2026 corporate income tax filing period.<\/span><\/p>\n<\/span>Scope of Application and Cases Where the Interest Expense Limit Does Not Apply<\/b><\/span><\/h3>\nPursuant to Paragraph 3 of Article 16 of Decree No. 255\/2026\/ND-CP, the limit on the total deductible interest expenses specified in subparagraph a of this paragraph applies to enterprises engaged in related-party transactions that fall within the scope of this Decree.<\/p>\n
However, the provision set forth in Article 16, paragraph 3, subparagraph a, does not apply to loans falling under the cases specified in Article 16, paragraph 3, subparagraph c, including:<\/p>\n
\nLoans to taxpayers that are credit institutions as defined in the Law on Credit Institutions No. 32\/2024\/QH15, as amended and supplemented by Law No. 96\/2025\/QH15;<\/li>\n Loans taken out by insurance companies under the Insurance Business Law No. 08\/2022\/QH15, as amended and supplemented by Law No. 139\/2025\/QH15;<\/li>\n Official development assistance (ODA) loans and preferential government loans are implemented through a method where the government borrows from foreign sources and then lends to businesses.;<\/li>\n Loans for implementing national target programs, including the New Rural Development Program and the Sustainable Poverty Reduction Program;<\/li>\n Loans for programs and projects that implement the State\u2019s social welfare policies, including resettlement housing, housing for workers and students, social housing, and other public welfare projects.<\/li>\n<\/ul>\nTherefore, when determining deductible interest expenses, a business must first determine whether the loan falls under the exception to the 30% limit under Point c, Paragraph 3 of Article 16, before calculating the portion of interest expenses that is not deductible.<\/p>\n
<\/span>How to calculate non-deductible interest expense in the period: A preliminary step before carrying it over to the next period.<\/b><\/span><\/h3>\nHow to calculate non-deductible interest expense in the period<\/figcaption><\/figure>\nPursuant to Paragraph 3 of Article 16 of Decree No. 255\/2026\/ND-CP, a business engaged in related-party transactions shall determine deductible interest expenses based on the 30% ratio of total net profit from business operations for the period, plus interest expenses after deducting interest on deposits and interest on loans incurred during the period, plus depreciation expenses incurred during the period.<\/p>\n
The determination process can be summarized as follows:<\/p>\n
<\/span>Step 1: Determine net interest expense.<\/b><\/span><\/h4>\nThe formula for determining net interest expense is as follows:<\/span><\/p>\n\n\n\n\nNet interest expense = Total interest expense incurred during the period \u2013 (Interest on deposits + Interest on loans incurred during the period)<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/span>Step 2: Determine tax-determined EBITDA<\/b><\/span><\/h4>\nHere's how to determine EBITDA for tax purposes:<\/span><\/p>\n\n\n\n\nEBITDA before taxes = Net operating profit + Net interest expense + Depreciation expense for the period<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nNote:<\/p>\n
\nNet operating profit does not include other income or other depreciation and amortization expenses. A company with significant other income\u2014such as gains on the disposal of assets\u2014will see its pre-tax EBITDA be significantly lower than the EBITDA calculated from pre-tax profit.<\/li>\n<\/ul>\n<\/span>Step 3: Determine the 30% threshold.<\/b><\/span><\/h4>\nDeduction threshold:<\/span><\/p>\n\n\n\n\nDeduction threshold = 30% x Taxable EBITDA<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/span>Step 4: Interest expense is not deductible in the current period.<\/b><\/span><\/h4>\nTo determine which interest expense is not deductible in the current period:<\/span><\/p>\n\n\n\n\nInterest expense not deductible in the current period = Net interest expense \u2013 Deduction threshold<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\nNote:<\/b> If the result is less than or equal to 0, the entire interest expense is deducted and there is no carry-forward.<\/span><\/p>\nTax-based EBITDA is not the same as accounting EBITDA. These two figures can differ significantly due to:\u00a0<\/span><\/p>\n\nDepreciation for tax purposes is applied according to Circular 45\/2013 (State depreciation framework), which is different from accounting depreciation according to IAS\/IFRS or the company's internal policy.<\/span><\/li>\nAdjustments that increase or decrease taxable income (unreasonable expenses, tax-exempt income, etc.) change pre-tax profit compared to accounting profit.<\/span><\/li>\nInterest expense capitalized on fixed assets under construction is not included in net interest expense but must be consistent with the treatment throughout the entire documentation.<\/span><\/li>\n<\/ul>\n<\/span>Common mistakes when determining tax-determined EBITDA<\/b><\/span><\/h3>\nBased on our consulting experience, there are three mistakes that occur most frequently:<\/span><\/p>\n\nThe cost of allocating tools and equipment was mistakenly included in the depreciation expense. This is not depreciation of fixed assets and therefore cannot be included in EBITDA for tax purposes.<\/span><\/li>\nFailure to adjust interest expense capitalized on fixed assets under construction results in underestimating net interest expense.\u00a0<\/span><\/li>\nUsing EBITDA directly from audited financial statements without recalculating based on tax figures can result in significant discrepancies between the two numbers.<\/span><\/li>\nUse profit before tax instead of net operating profit.<\/li>\n With the exception of interest on deposits, interest on loans is included in interest expense but is added to EBITDA as gross interest expense.<\/li>\n<\/ul>\n<\/span>Interest expenses cannot be carried forward to the next period: How does the 5-year operating mechanism work?<\/b><\/span><\/h2>\nInterest expenses that are not deductible are carried forward to the next period under Decree 255<\/figcaption><\/figure>\nThe mechanism for not being able to carry forward interest expense deductions is designed to prevent businesses from being unfairly penalized in years with low EBITDA due to cyclical factors. However, this mechanism comes with strict conditions and time limits.<\/span><\/p>\nThe operating principle of the period carryover mechanism is as follows:<\/span><\/p>\n\nMaximum term of 5 years: Any interest expense not deductible in period N is carried over to periods N+1, N+2, N+3, N+4, and N+5. If the entire amount remains unused after the 5th year, it is permanently forfeited, without exception.<\/span><\/li>\nConditions for deduction in the following period: The carried-forward amount may be deducted only if deductible net interest expense is incurred in the following period. lower<\/strong> the 30% EBITDA threshold for that period. The maximum amount that can be deducted is equal to the remaining difference.<\/span><\/li>\nFIFO Principle: Tracking by the year incurred: A five-year limitation period applies separately to each year in which non-deductible interest expenses were incurred. The Decree does not specify the order of use, but in practice, businesses should prioritize using the amounts that arose earlier (following the FIFO principle) to avoid the expiration of older balances.<\/span><\/li>\nNo retroactive application: Once a declaration has been filed, it cannot be adjusted back to the period for which it was already paid. All processing can only be done forward.\u00a0<\/span><\/li>\nThe following conditions must still be met: The period in which the carryover is recognized must include related-party transactions: Subparagraph b permits a carryover only after determining the total deductible interest expense under subparagraph a. This determination applies only to businesses with related-party transactions during the period. If no related-party transactions occur during a period, the carryforward amount from the previous period may not be included in the deduction, while the five-year period still continue running continuously<\/strong>.<\/span><\/li>\n<\/ul>\n<\/span>What happens if, after the 5-year period, the unused interest expense is not fully deductible?<\/b><\/span><\/h3>\nThe rest is lost permanently. There is no tax refund mechanism, no additional adjustments, no exceptions. This is a point that many businesses overlook in their long-term financial planning.<\/span><\/p>\nFor example: <\/b>A company with 50 billion VND in non-deductible interest expenses carried forward from 2021, but with consistently low EBITDA from 2022 to 2025. 2026 is the final year of the carryforward period. If there is still no carryforward allowance available in 2026, the entire 50 billion VND will become a permanently non-deductible expense, equivalent to an additional corporate income tax liability of up to 10 billion VND (at a tax rate of 20%).\u00a0<\/span><\/p>\nImportant Note: <\/b>Failure to monitor and plan for carry-over mechanisms can lead to businesses incurring increased corporate income tax each year if they do not fully utilize the carry-over balance by the 5-year deadline.\u00a0<\/span><\/p>\n<\/span>A real-world case study on interest expense that is not deductible and carried forward to the next period.<\/b><\/span><\/h2>\nTo understand how non-deductible interest expense carried over to the next period works in practice, let's examine three scenarios with increasing levels of complexity with MAN \u2013 Master Accountant Network.<\/span><\/p>\nCase 1<\/b>: Company ABC reported the following figures for the 2026 tax year and the corresponding carryover years 2027\u20132031 (in billions of dong):<\/span><\/p>\n\n\n\nIndex<\/b><\/td>\n Value<\/b><\/td>\n Note<\/b><\/td>\n<\/tr>\n\nTotal interest expense<\/span><\/td>\n 50<\/span><\/td>\n This includes interest expenses from both related and independent parties.<\/span><\/td>\n<\/tr>\n\nInterest income\u00a0<\/span><\/td>\n 5<\/span><\/td>\n Interest on deposits and loans<\/span><\/td>\n<\/tr>\n\nNet interest expense<\/span><\/td>\n 45<\/span><\/td>\n Total interest expense \u2013 Interest income<\/span><\/td>\n<\/tr>\n\nProfit before tax<\/span><\/td>\n 40<\/span><\/td>\n Net operating profit<\/span><\/td>\n<\/tr>\n\nDepreciation of fixed assets<\/span><\/td>\n 15<\/span><\/td>\n According to the framework of Circular 45\/2013\/TT-BTC<\/span><\/td>\n<\/tr>\n\nEBITDA after tax<\/span><\/td>\n 100<\/span><\/td>\n Profit before tax + Net interest expense + Depreciation<\/span><\/td>\n<\/tr>\n\n30% EBITDA threshold\u00a0<\/span><\/td>\n 30<\/span><\/td>\n 30% x 100<\/span><\/td>\n<\/tr>\n\n