Interest Expense In Related Party Transactions 2026 – Key Considerations For FDI Enterprises

One of the most significant risks in related party transactions is interest expense, which is often considered a “key concern” for many enterprises.

1. Why is interest expense capped?

The limitation of interest expense based on EBITDA is introduced to control profit shifting risks through financial transactions, particularly among FDI enterprises.
In practice, many groups tend to finance their subsidiaries via intra-group loans with high interest rates, thereby increasing interest expenses and reducing taxable income in Vietnam. Using EBITDA as the basis for the cap helps reflect the true profitability from core business operations, eliminating the impact of capital structure and accounting policies. According to recommendations of the OECD, this is an important tool to prevent Base Erosion and Profit Shifting (BEPS). This regulation also ensures tax fairness among enterprises with different capital structures.
In Vietnam, the interest expense cap has been legalized and becomes a key component in managing related party transactions under Decree 132/2020/ND-CP and Decree 20/2025/ND-CP. Therefore, enterprises should proactively review their financial structure and prepare appropriate documentation to mitigate tax audit risks.

2. 30% EBITDA Cap

Under Decree 132/2020/ND-CP, total net interest expense – i.e., interest expense after offsetting interest income from deposits or loans – is deductible for CIT purposes but capped at 30% of EBITDA. EBITDA is defined as net profit from business operations plus net interest expense and depreciation expense.
This regulation applies to both related party and third-party interest expenses but is only triggered when the enterprise has related party transactions.

The formula is as follows:

Maximum deductible interest expense = 30% × EBITDA

Where:

• EBITDA (for tax purposes) = Net operating profit + Net interest expense + Depreciation expense

   

• Net interest expense = Interest expense – Interest income (from deposits/loans)
  

3. Treatment of Non-deductible Interest Expense

The portion of interest expense (including both related party and third-party loans, if any) exceeding 30% of EBITDA is not deductible in the relevant tax period.
However, such non-deductible interest expense can be carried forward to subsequent tax periods, provided that the deductible interest expense in those periods does not exceed the 30% EBITDA cap. The carryforward period is up to five consecutive years, starting from the year following the year in which the expense arises.

Under Decree 20/2025/ND-CP, an additional provision applies: for CIT periods from 2020–2023, if an enterprise only had related party relationships through borrowing with economic organizations, and from 2024 no longer has related party relationships/transactions, the remaining unutilized interest expense (as of the end of 2023) shall be evenly allocated and carried forward within the remaining period, up to a maximum of 5 years.

👉 Summary Table of Deductible Interest Expense by Scenario

Notes:

• Net interest expense = Interest expense – Interest income (from deposits/loans)

   

• (*) Unused carried-forward amounts from prior periods may continue to be carried forward within the 5-year limit.

Based on TPM’s experience, proper cash flow planning and structuring of both intra-group and external borrowings are critical in managing interest expense risks. Enterprises should develop projected EBITDA scenarios, assess the impact of the 30% cap, and consider capital restructuring solutions, such as increasing equity instead of maintaining excessive intra-group debt, to optimize deductible expenses while ensuring compliance with regulations.

For detailed advisory on transfer pricing risks, preparation of transfer pricing documentation, or optimization of interest expenses in related party transactions, please contact TPM Tax Agency experts.

 ✉️ Contact:

Van Le – Head of Tax Advisory

T: +84 916 777 662

E: van.le@tpm.com.vn

Or TPM Hotline: +84 28 3505 1800