Response to issue regarding loan interest cost deducted when calculating CIT in Vietnam

Response to issue regarding loan interest cost deducted when calculating CIT in Vietnam (Internet image) 

Regulations on loan interest cost deducted when calculating CIT in Vietnam

Official Dispatch 51206/CTHN-TTHT in 2022 on deductible interest expenses when calculating corporate income tax issued by Hanoi Tax Department on October 24, 2022.

- Pursuant to Decree 132/2020/ND-CP dated November 5, 2020 of the Government on tax administration for enterprises having associated transactions:

+ Article 2 stipulates the subjects of application

"1. Entities manufacturing and trading goods and services (hereinafter referred to as taxpayers) are payers of the corporate income tax having transactions with their related parties under Article 5 herein.”

+ In Article 5, the parties have an association relationship

"1. Related parties are parties having relationships where:

a) A party is directly or indirectly involved in the management, control of, contribution of capital to, or investment in, the other party;

b) Parties are directly or indirectly affected by the management, control of, contribution of capital, or investment, from the other party."

+ In Article 16 on guidance on determination of costs for assessment of taxes on enterprises engaged in related-party transactions

“...3. Total loan interest cost is deducted in case of determining the income subject to corporate income tax of the enterprise engaged in related-party transactions:

a) Total loan interest cost arising after deducting deposit interests and lending interests within a specific taxable period which is deducted during the process of determination of income subject to the corporate income tax is not 30% more than the net profit generated from business activities within the taxable period plus loan interest costs arising after deducting deposit interests and lending interests arising within the taxable period plus depreciation/amortization expenses arising within that period of a taxpayer;

b) The portion of loan interest cost which is non-deductible as prescribed in point a of this clause is carried forward to the next taxable period for the determination of total loan interest cost deductible if total loan interest cost deductible in the next taxable period is lower than the amount prescribed in point a of this clause. The loan interest costs may be carried forward for a maximum consecutive period of 05 years, counting from the year following the year in which non-deductible loan interest costs arise;

c) The provision in Point a of this Clause shall not apply to loans of taxpayers that are credit institutions as defined in the Law on Credit Institutions; insurance companies as defined in Law on Insurance Business; ODA loans and concessional loans of the Government which are granted to enterprises in the on-lending form; loans intended for implementing national target programs (including new rural area development programs and sustainable poverty reduction programs); loans invested in programs or projects for implementation of State social welfare policies (e.g. resettlement housing, worker or student housing and social housing, and other social welfare projects or programs);

…"

+ Article 22 provides for the effect of implementation

"1. This Decree shall enter into force on December 20, 2020 and take effect from the corporate income tax term of 2020...”

- Pursuant to Article 4 of Circular 96/2015/TT-BTC dated June 22, 2015 of the Ministry of Finance amending Article 6 of Circular 78/2014/TT-BTC (amended in Clause 2, Article 6 of Circular 119/2014/TT-BTC and Article 1 of Circular 151/2014/TT-BTC) as follows:

“Article 6. Deductible and non-deductible expenses when calculating taxable income

1. Except for the non-deductible expenses prescribed in Clause 2 of this Article, every expense is deductible if all of these following conditions are satisfied:

a) The actual expense incurred is related to the enterprise’s business operation.

b) There are sufficient and valid invoices and proof for the expense under the regulations of the law.

c) There is proof of non-cash payment for each invoice for purchase of goods/ services of VND 20 million or over (including VAT).

The proof of non-cash payment must comply with regulations of law on VAT.

…

2. The expenses below are not deductible when calculating taxable income:

2.1. Expenses that do not meet all of the conditions in Clause 1 of this Article.

...2.17. Payment of interest on loan serving business operation taken from entities other than credit institutions or business organizations which exceeds 150% of basic interest rate announced by the State bank at the time of taking the loan... "

Response to issue regarding loan interest cost deducted when calculating CIT in Vietnam

Pursuant to the above provisions, in the event the company borrows capital from the bank to service its production and business activities, the loan interest payment will be included in the deductible expenses when determining taxable income if it satisfies the conditions specified in Clause 1, Article 4 of Circular 96/2015/TT-BTC dated June 22, 2015 of the Ministry of Finance of Vietnam.

In the event that the company is the subject of the application of Decree 132/2020/ND-CP of the Government according to the provisions of Clause 1, Article 2 of Decree 132/2020/ND-CP and there are associated transactions:

The total interest expense (after deducting deposit interest and loan interest) incurred in the period of the company is deductible when calculating income subject to corporate income tax other than meeting the conditions specified in Clause 1, Article 4 of Circular 96/2015/TT-BTC must also meet additional conditions not to exceed the limit of deductible interest expenses as prescribed in Clause 3, Article 16 of Decree 132/2020/ND-CPdated November 5, 2020. government.

Chau Thanh

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