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Many FDI companies are funded by their parent through loans rather than additional capital. In that case, the interest deduction cap (khống chế chi phí lãi vay) may mean part of the interest cannot be deducted for this year's corporate income tax (CIT/TNDN). This article walks through a worked case, step by step, so chief accountants can check their own position before finalization. It was prepared by the accounting team at ACCA Consulting Vietnam.
1. What is the interest deduction cap, and who does it apply to?
This rule belongs to the body of regulations on related party transactions. For a company that has transactions with related parties, total interest expense (net of deposit interest and lending interest) is deductible only up to a percentage of EBITDA for the tax period. The excess is disallowed for that year but may be carried forward to subsequent periods within the prescribed time limit.
A common misunderstanding: the cap applies to all of the company's interest, not just interest paid to the parent. As long as the company falls within scope because it has related party transactions, interest on independent bank loans is also included in total interest, except for the exclusions set out in the amending and supplementing regulations. Because the list of exclusions has changed with successive amendments, check the regulations in force before preparing the appendix.
- EBITDA for tax purposes is not taken directly from the group's management reports. It is determined using the formula in the related party transaction regulations, typically net operating profit plus net interest expense plus depreciation.
- Net interest = interest expense for the period − deposit interest − lending interest.
- The cap percentage is set by the related party transaction decree in force. The case below uses 30% purely to illustrate the calculation; companies must check the rate in the current regulations.
2. Hypothetical case: Company A borrows VND 60 billion from its parent
Company A is an FDI component manufacturer (illustrative example). In year N, it borrows from its parent to buy machinery and also takes a domestic bank loan for working capital. Year N figures (VND million):
| Item | Amount | Source |
|---|---|---|
| Net operating profit | 4,000 | Income statement |
| Interest expense (parent + bank) | 3,000 | Ledger for account 635 |
| Bank deposit interest | 200 | Ledger for account 515 |
| Depreciation for the period | 1,200 | Fixed asset depreciation schedule |
| Taxable income before adjustment | 4,000 | Assumes no other adjustments |
3. Step-by-step interest cap calculation
- 1Calculate net interest
3,000 − 200 = VND 2,800 million.
- 2Calculate EBITDA
4,000 + 2,800 + 1,200 = VND 8,000 million.
- 3Calculate the cap
8,000 × 30% (illustrative rate) = VND 2,400 million.
- 4Compare
Net interest of 2,800 exceeds the cap of 2,400 by VND 400 million.
- 5Increase taxable income
Add 400 million to year N taxable income: 4,000 + 400 = 4,400.
- 6Track the carry-forward
Record the 400 million in the register of non-deductible interest to carry forward to the next year.
At the standard CIT rate of 20%, tax payable for year N rises from 800 to 880 million VND. This 80 million difference is not lost for good. It is tax paid early, which can be recovered in later years when there is headroom below the cap.
Illustrative example; the 30% cap is used for illustration only, and the figures are not those of a real company.
View as table
| Before adjustment | After adjustment | |
|---|---|---|
| Deductible interest | 2,800 million VND | 2,400 million VND |
| Taxable income | 4,000 million VND | 4,400 million VND |
| CIT at 20% | 800 million VND | 880 million VND |
4. How is excess interest carried forward?
In year N+1, suppose Company A increases output: EBITDA reaches 10,000 million and net interest falls to 2,300 million after some principal is repaid. The cap for year N+1 is 3,000 million, leaving 700 million of headroom. The 400 million carried forward from year N is deducted in year N+1. Total deductible interest in year N+1 is 2,700 million, still below the cap.
| Year | EBITDA | Cap | Net interest | Excess arising | Carry-forward used | Balance carried forward |
|---|---|---|---|---|---|---|
| N | 8,000 | 2,400 | 2,800 | 400 | 0 | 400 |
| N+1 | 10,000 | 3,000 | 2,300 | 0 | 400 | 0 |
This register should be set up from the first year an excess arises. In a tax audit, the authority will reconcile the carried-forward amounts with each year's related party transaction appendix to the CIT finalization. The carry-forward period and order of use follow current regulations.
5. Common mistakes when applying the interest cap
- Taking EBITDA from the group's IFRS reports instead of from the financial statements under Vietnamese Accounting Standards (VAS).
- Forgetting to deduct deposit and lending interest when calculating net interest.
- Including only interest paid to the parent in the cap calculation and omitting bank interest.
- Not capitalizing interest on assets under construction correctly, distorting interest for the period.
- Mistakenly including exchange differences on foreign currency loans in interest.
- Not keeping a register of the excess, so the carry-forward cannot be proven the following year.
Apart from the interest cap, loans from related parties must also carry an interest rate consistent with arm's length transactions. In addition, such a loan must be registered with the State Bank of Vietnam if it is a foreign loan subject to registration. These two issues are separate from the calculation above.
FAQ
Does an FDI company that does not borrow from its parent need to apply the interest cap?
If the company still has other related party transactions, such as purchases or service fees with the group, it may still be within scope. In that case the cap applies to all interest, including bank loans, except for the exclusions under the current regulations.
What happens if EBITDA is negative?
When EBITDA is negative or very low, the cap is close to zero, so most of the interest will be carried forward. Track the carry-forward period carefully so you do not lose the right to deduct it.
Does disallowed interest require an adjustment to the accounting books?
No. It is an adjustment made when calculating taxable income on the finalization return. The accounting books still record the full interest expense under the accounting standards.
Where can I find the cap percentage?
In the decree on tax administration for enterprises with related party transactions and its amending and supplementing documents. The 30% figure in this article is used only as an illustration.
Check your interest worksheet before finalization
Send your annual figures to ACCA Consulting Vietnam for a free preliminary review. Accounting services based in Ho Chi Minh City, with remote support nationwide.
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