Borrowing from the holding is the cheapest way to fund a Vietnamese subsidiary — until the deductible interest cap turns part of the interest expense into a permanent cost for the year. Vietnam does not use an old-style debt-to-equity ratio; the current instrument is a 30% of EBITDA cap applied to related-party situations under the transfer pricing framework. This article explains the cap mechanism, the fate of excess interest, and why ‘thin capitalization’ in Vietnam is an EBITDA problem rather than a capital ratio problem.
The cap mechanism: 30% of EBITDA, computed on net interest
Under Vietnam’s transfer pricing framework — formerly Decree 132/2020/ND-CP and, from the 2026 corporate income tax period, Decree 255/2026/ND-CP (in force from 1 July 2026, replacing Decree 132/2020) — total deductible interest expense of an enterprise with related-party transactions is capped at 30% of net operating profit plus interest expense and depreciation (that is, EBITDA as adjusted by the decree’s formula). Interest expense is computed net: loan interest minus deposit and lending interest arising in the period. The cap applies to the enterprise’s entire interest expense where it has related-party transactions, not only to the holding loan, so a large bank loan consumes the same cap as the internal loan. An enterprise with no related-party transactions is outside this cap.
Where excess interest goes: carried forward five years, not lost at once
Interest above the cap is not disallowed forever: it is carried into following tax periods and becomes deductible in later years if those years have spare cap room, for a maximum carry-forward of five consecutive years from the year it arose. The lifeline condition is documentation: the enterprise must declare related-party transactions and interest expense on the transfer pricing forms of the framework, otherwise the carried amount is easily rejected at inspection for lack of proven origin. Financially, holding loans should be sized backwards from the subsidiary’s projected EBITDA: borrowing beyond the cap’s absorption capacity does not add usable capital, it creates a deferred tax asset wrapped in audit risk.
Why it is called thin capitalization without a debt ratio
Vietnam has no fixed debt-to-equity thin capitalization ratio in tax law. The thin-cap effect comes from three stacked layers: the 30% EBITDA interest cap described above; the requirement that related-party interest rates conform to the arm’s length principle under the transfer pricing framework of Decree 255/2026/ND-CP — a rate above what an independent party would accept is adjusted; and registration of medium and long-term foreign loans with the State Bank under Circular 38/2026/TT-NHNN, without which the bank cannot execute drawdown and repayment. Together with purpose and ceiling rules on enterprise foreign borrowing, ‘thin capitalization’ in Vietnam is a combined tax and foreign exchange discipline, not a single ratio.
Designing a holding loan to survive inspection
Four documents decide a loan’s fate under scrutiny: a loan agreement with full commercial terms like a bank loan (tenor, rate, repayment schedule, late payment sanctions); evidence the rate sat within the market range at inception; the foreign loan registration file where registration is required; and actual cash movement through the ICA matching the agreement. Interest paid out also bears foreign contractor tax withholding (deemed corporate income tax of 5% on interest under the current framework), deducted by the subsidiary before remittance. The more a loan looks like a casual internal arrangement — no tenor, oral rate, endless extensions — the easier it is for the tax authority to treat it as disguised equity and disallow the interest entirely.
Frequently asked questions
1. A subsidiary borrows from its Singapore holding — how much interest is deductible?
Total net interest expense is deductible up to 30% of adjusted EBITDA for the period, for enterprises with related-party transactions under Decree 255/2026/ND-CP. The cap covers the enterprise’s entire interest bill, not just the holding loan.
2. What happens to interest above the threshold?
The excess is carried forward and deductible in later years when the cap has spare room, for up to five consecutive years from the year it arose, provided related-party and interest declarations were properly filed. Only after five unabsorbed years is it lost.
3. At what debt-to-equity ratio is a company thinly capitalized?
Vietnam sets no fixed debt-to-equity ratio in tax law. The practical constraints are the 30% EBITDA interest cap, arm’s length interest pricing in transfer pricing, and foreign loan registration — three layers that together produce the anti-thin-capitalization effect.
4. Is interest paid to the holding subject to withholding?
Yes. Interest paid abroad bears foreign contractor tax, with deemed corporate income tax of 5% on the taxable revenue under the current framework; the subsidiary withholds before remitting through the ICA.
5. Must a holding loan be registered with the State Bank?
Medium and long-term foreign loans fall under registration pursuant to foreign borrowing rules and Circular 38/2026/TT-NHNN. Without timely registration the bank will not process drawdown and repayment, and the interest expense faces risk at tax finalization as well.
This article has been quality-reviewed by the FLAW AI Legal Council