Deductible interest expenses for corporate income tax calculation for enterprises with related party transactions in Vietnam

Deductible interest expenses for corporate income tax calculation for enterprises with related party transactions in Vietnam​ (Image from the internet)

1. What are interest expenses according to the law in Vietnam?

Based on point 3.8, clause 3, Article 113 of Circular 200/2014/TT-BTC, interest expenses are defined as follows:

3.8. Interest Expenses (Code 23):

This criterion reflects the interest expenses payable that are accounted into financial expenses during the reporting period. Data to record this criterion is based on the Detailed Ledger of Account 635.

Interest expenses can be understood as costs a unit must pay to the lender corresponding to the loan amount, calculated by the interest rate multiplied by the unpaid debt. On the Income Statement, interest expenses represent the interest payable incurred during the tax declaration period.

2. Deductible interest expenses for corporate income tax calculation for enterprises with related party transactions in Vietnam

According to clause 3, Article 16 of Decree 132/2020/ND-CP, regulations on deductible interest expenses when determining taxable income for enterprises with related party transactions are as follows:

- Total interest expenses after deducting interest received from deposits and loans incurred during the period of the taxpayer are deductible when determining the taxable corporate income not exceeding 30% of the sum of net profit from business activities in the period plus interest expenses after deducting interest received from deposits and loans incurred during the period plus depreciation expenses incurred during the period of the taxpayer;

- The part of interest expenses not deductible according to the provisions at point a of this clause is transferred to the next tax period when determining the total deductible interest expenses if the total interest expenses incurred for deduction of the next tax period are lower than the provision specified at point a, clause 3, Article 16 of Decree 132/2020/ND-CP.

The period for transferring deductible interest expenses is continuous and shall not exceed 5 years from the year following the year in which non-deductible interest expenses arise;

- The regulation at point a of this clause does not apply to loans of taxpayers who are credit institutions according to the Law on Credit Institutions 2010; insurance business organizations according to the Insurance Business Law 2000;

Loans from official development assistance (ODA), concessional loans of the Government of Vietnam for enterprises, loans for the implementation of national target programs (new rural construction and sustainable poverty reduction programs);

Loans for investment in programs and projects implementing State social welfare policies (resettlement housing, worker housing, student housing, social housing, and other public welfare projects);

- Taxpayers shall declare the interest expense ratio in the tax period according to Annex I issued with Decree 132/2020/ND-CP.

3. Service expenses among related parties in Vietnam

Service expenses among related parties:

(1) Except for expenses specified at point (2), taxpayers are allowed to deduct service expenses into taxable expenses during the period if they meet the following conditions:

- Services provided have commercial, financial, economic value, and directly serve the taxpayer's business activities;

- Services from related parties are determined to be provided under conditions and circumstances that independent parties would pay for these services;

- Service fees are paid based on the arm's length principle and related party pricing method or allocation of service fees among related parties must be uniformly applied throughout the group for similar services. Taxpayers must provide contracts, documents, invoices, and information on pricing methods, allocation factors, and the group's pricing policy for the services provided.

In cases involving centers specializing in and synergizing added value for the group, taxpayers must determine the total value generated from these functions, determining the appropriate profit allocation with contributions of related parties after deducting (-) corresponding service fees for related parties performing coordination functions, providing services of similar independent transactions.

(2) Service expenses that are not deductible when determining taxable income include: Expenses arising from services provided solely to serve interests or create value for other related parties; services serving the interests of the shareholders of the related party; duplicate services provided by multiple related parties for the same type of service, where no added value for the taxpayer can be determined; services that essentially are benefits the taxpayer receives due to being a member of a group and additional costs by the related party for third-party services provided through related intermediaries contributing no additional value to the service.

(clause 2, Article 16 of Decree 132/2020/ND-CP)

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