Case Study: Back-Taxed VND 8 Billion Because Interest Expenses Exceeded the Transfer Pricing Cap

Note at the outset: the scenario below is an illustrative case study constructed to explain the legal rules — the company name is fictional, and every figure is expressly identified as an illustrative number. This article analyzes the legal framework currently in force and the compliance lessons to draw from it; it does not reflect any real case involving any particular enterprise or tax authority.

An FDI manufacturer in Vietnam, with charter capital of VND 50 billion, borrowed VND 200 billion from its offshore parent to build its factory. The interest rate was 8% per year — a level the company itself believed was entirely reasonable against market benchmarks. For three consecutive years, the full interest expense was booked and declared as deductible in computing corporate income tax (CIT). Then a thematic tax audit on related-party transactions produced an assessment decision imposing total obligations of nearly VND 8 billion: back-taxed CIT, an underdeclaration penalty, and late-payment interest. The sting: the loan's interest rate was never criticized as unreasonable — the problem lay in a figure the chief accountant had never put into a tax computation: the 30% EBITDA cap.

1. Background: a capital structure very familiar to FDI enterprises

Company A (a fictional name) is a 100% foreign-owned enterprise manufacturing electronic components in an industrial park in northern Vietnam. Its parent — a group headquartered in Singapore — holds 100% of Company A's VND 50 billion charter capital.

In its first year of operation, to invest in its production lines, Company A signed a VND 200 billion loan agreement with its parent at 8% interest per year, for a term of five years. Under this structure, Company A incurred VND 16 billion of interest expense each year. The company earned negligible bank deposit interest and did not engage in any lending activity, so net interest expense each year was also approximately VND 16 billion.

Over three consecutive tax years, Company A consistently had related-party transactions (purchasing raw materials from its parent, paying management service fees to its parent, and the loan itself). The company prepared transfer pricing documentation (Hồ sơ xác định giá giao dịch liên kết) and filed the related-party transaction appendix with its annual CIT finalization return — in other words, the formal transfer pricing compliance obligations were discharged. The finance department also benchmarked the 8% rate against commercial bank loans in Vietnam and assessed it as consistent with the arm's-length principle.

That very sense of "safety" was where the problem began.

2. The problem: the tax audit and the VND 8 billion figure

During the tax audit covering three tax years, the audit team did not dispute the reasonableness of the 8% interest rate. Instead, it applied an independent computation: capping deductible interest expense at 30% of EBITDA under the rules on tax administration of related-party transactions.

Audit results (illustrative figures):

VND 30 billion of interest expense was disallowed from deductible expenses → taxable CIT income increased by VND 30 billion. From there, the assessment decision fixed three items (illustrative figures):

• Back-taxed CIT: VND 30 billion × 20% = VND 6 billion;
• Administrative penalty for underdeclaration resulting in a tax shortfall: 20% × VND 6 billion = VND 1.2 billion;
• Late-payment interest up to the date of the assessment decision (provisionally calculated, illustrative): VND 0.8 billion.

Total: VND 8 billion — for a loan the company still believed carried "a reasonable rate and complete documentation."

3. Legal analysis: where the 30% EBITDA cap sits and how it operates

3.1. Why Company A fell within the adjustment

The parent holds 100% of Company A's charter capital — far above the capital threshold for establishing a related-party relationship (one party directly or indirectly holding at least 25% of the other party's owner capital). The loan from the parent is a related-party transaction. Once an enterprise has related-party transactions in a tax year, the entire related-party tax administration mechanism is triggered — including the interest-expense cap rule.

3.2. The current rules: from Decree 132/2020 to Decree 255/2026

The interest-expense cap first appeared in Decree 20/2017/ND-CP (Nghị định 20/2017/ND-CP) at a 20% EBITDA threshold, and was raised to 30% by Article 16(3) of Decree 132/2020/ND-CP (Nghị định 132/2020/ND-CP). That was the basis tax authorities applied for tax years before 2026.

From 01/7/2026, Decree 255/2026/ND-CP (Nghị định 255/2026/ND-CP) on tax administration of related-party transactions takes effect, applicable from the 2026 CIT tax year, replacing Decree 132/2020/ND-CP (Nghị định 132/2020/ND-CP) (and Decree 20/2025/ND-CP (Nghị định 20/2025/ND-CP)). The point that matters for businesses: Article 16(3) of Decree 255/2026/ND-CP carries forward verbatim the 30% EBITDA mechanism. In other words, this rule has not disappeared — it remains the "rule of the game" in force for every tax year from 2026 onward.

The core content of the rule: total interest expense after deducting deposit interest and lending interest arising in the period deductible in determining taxable CIT income may not exceed 30% of the sum of net profit from business operations for the period plus interest expense after deducting deposit interest and lending interest arising in the period plus depreciation arising in the period. The excess may be carried forward to the following tax year where headroom remains under the 30% cap, for a maximum of 05 consecutive years from the year following the year in which it arose.

3.3. Where tax EBITDA differs from accounting EBITDA

"EBITDA" in the tax rule is built from three components:

• Net profit from business operations — an income-statement line item, excluding other income;
• Net interest expense — total interest expense arising in the period after deducting deposit interest and lending interest arising in the period;
• Depreciation arising in the period included in production and business expenses.

Businesses should note two technical points: other income (e.g., gains on asset disposals, extraordinary income) does not increase EBITDA for this purpose; and bank deposit interest must be deducted from interest expense before testing against the cap — enterprises holding large deposits will find their "cap" lower than intuition suggests.

3.4. Three misconceptions that trap businesses

First misconception: "only loans from related parties are capped." In reality, once the enterprise has related-party transactions in the tax year, the enterprise's total interest expense for the year — including loans from fully independent commercial banks — must go into the 30% EBITDA computation. The cap attaches to the status of being an enterprise with related-party transactions, not to the source of each loan.

Second misconception: "an arm's-length interest rate is safe." The 30% EBITDA cap is a mechanical, absolute threshold, operating independently of the arm's-length principle. The enterprise must pass two separate "gates": the interest rate must be arm's-length and total net interest expense must stay within 30% of EBITDA. Passing the first gate does not mean passing the second — exactly what happened to Company A.

Third misconception: "the 5-year carryforward means nothing is lost." The rule allows the disallowed interest expense to be carried to subsequent years (maximum 05 years) on condition that the later year has headroom under the cap. For an enterprise maintaining high leverage for a prolonged period — where interest expense exceeds the cap every year — the following years will have no headroom either, and the carried-forward amount may expire after 05 years without a single dong being usable. This is not a default lifebuoy.

3.5. Exceptions: who is outside the cap

The cap does not apply to taxpayers that are credit institutions under the law on credit institutions, insurance businesses under the law on insurance business; official development assistance (ODA) loans, preferential Government loans implemented by way of the Government borrowing offshore and relending to enterprises; and loans implementing national target programs. An ordinary FDI manufacturer such as Company A falls into none of these exceptions.

4. The cost of getting it wrong: three layers of obligation

Returning to the VND 8 billion figure in the illustrative case, the three layers of obligation arise in the following legal sequence:

Layer 1 — Back-taxed CIT (VND 6 billion). When the excess interest expense is disallowed, taxable income increases by VND 30 billion; at the standard 20% CIT rate, the additional tax payable is VND 6 billion. The tax authority does this through inspection and audit, issuing an assessment decision under its powers in the Law on Tax Administration 108/2025/QH15 (Luật Quản lý thuế 108/2025/QH15). Note: the tax authority's power to back-tax can reach multiple prior tax years within the statutory limitation period — in the illustrative case, three consecutive years.

Layer 2 — Administrative penalty (VND 1.2 billion). Declaring the full interest expense as deductible when the rule only allows up to 30% of EBITDA constitutes underdeclaration resulting in a tax shortfall, punishable by 20% of the underdeclared tax under Article 16 of Decree 125/2020/ND-CP (Nghị định 125/2020/ND-CP) (as amended by Decree 310/2025/ND-CP (Nghị định 310/2025/ND-CP)). This must be distinguished from tax evasion — the 1 to 3 times penalty band under Article 17 — which is the heavier tier reserved for conduct of a fraudulent character; which tier applies depends on the tax authority's assessment in each specific case.

Layer 3 — Late-payment interest (VND 0.8 billion illustrative). The underdeclared tax accrues late-payment interest at 0.03%/day under the Law on Tax Administration 108/2025/QH15 (Luật Quản lý thuế 108/2025/QH15), running from the day after the tax payment deadline for each year. Because the error spanned multiple years, the late-payment interest accumulated into a significant sum — often the "layer" that pushes total obligations far beyond the enterprise's original estimate.

5. Lessons drawn from the case study

Lesson 1 — The 30% EBITDA cap must be present in every financial model involving related parties. As soon as the enterprise anticipates related-party transactions in the year (even a single small purchase from the parent), the finance function must build the 30% EBITDA computation into the tax planning process — not merely check it at finalization.

Lesson 2 — Thin capital + intra-group borrowing is the highest-risk combination. Company A had a debt-to-equity ratio of 4:1 (VND 200 billion borrowed against VND 50 billion of capital). The higher the leverage, the easier it is for interest expense to breach the cap — especially in the early years, when net profit from business operations is still low and EBITDA is small.

Lesson 3 — Do not confuse "formal compliance" with "substantive compliance." Company A prepared transfer pricing documentation and filed its appendices in full — but that documentation never addressed the interest-expense cap computation. Transfer pricing documentation substantiates the price of transactions; the 30% cap controls the scale of interest expense. Two different layers of control — missing one leaves the risk intact.

Lesson 4 — The 05-year carryforward mechanism only has value with a deleveraging plan. If the financial plan shows the enterprise will keep breaching the cap for years to come, the carried-forward interest expense is in substance an expense that will never be deductible. The structural remedy is then to restructure capital (increase owner capital, convert part of the loan into equity) rather than relying on carryforward.

Lesson 5 — Errors stretching over multiple years let late-payment interest "eat into" profits. 0.03%/day is roughly 11%/year — over 3–4 years, late-payment interest can reach 30–40% of the back-taxed amount. Early detection and voluntary supplementary declaration are always cheaper than waiting for an audit.

6. Recommendations: an interest-expense control checklist for enterprises with related-party transactions

1. Check status: determine whether the enterprise has related-party transactions in the tax year (the 25% capital threshold, control relationships, borrowing/lending transactions with managing individuals…). A single "yes" brings all interest expense for the year within the adjustment scope.
2. Build a periodic 30% EBITDA computation (quarterly/annually): net profit from business operations + net interest expense + depreciation; compare against total net interest expense arising.
3. Keep the two layers of testing separate: (a) whether each loan's interest rate satisfies the arm's-length principle; (b) whether total net interest expense is within the 30% EBITDA cap. Record both results in the internal file.
4. Model before every new borrowing decision: how much additional borrowing would push the enterprise over the cap? Is there an equity alternative?
5. Track carried-forward interest expense: maintain a separate register for each year of origin, the remaining portion of the 05-year term, and each subsequent year's headroom — so nothing expires unused.
6. Align with the current rules: from the 2026 CIT tax year, apply Decree 255/2026/ND-CP (Nghị định 255/2026/ND-CP) (Article 16(3)) instead of Decree 132/2020/ND-CP (Nghị định 132/2020/ND-CP); update the related-party transaction appendix template at finalization.
7. When an audit notice arrives: have the per-year EBITDA computations, loan agreements, interest-expense vouchers and transfer pricing documentation ready; consider consulting counsel or a tax adviser before engaging with the audit team.

7. Frequently asked questions

Does the 30% EBITDA cap apply to all of an enterprise's borrowings, or only to loans from related parties?

It applies to the total interest expense of an enterprise that has related-party transactions in the tax year — regardless of whether the loan comes from a related party or an independent bank. Once the enterprise has related-party transactions in the year, all interest expense (after deducting deposit interest and lending interest arising in the year) must go into the 30% EBITDA cap computation.

If the loan's interest rate has been proven arm's-length, does the 30% cap fall away?

No. The 30% EBITDA cap is a mechanical threshold, independent of proving the interest rate under the arm's-length principle. A loan carrying a fully reasonable interest rate still has its excess expense disallowed in determining taxable CIT income.

Is the excess interest expense above the cap lost forever?

Not lost immediately: the excess may be carried forward to the following tax year where headroom remains under the 30% cap, for a maximum of 05 consecutive years from the year following the year in which it arose. However, if the enterprise maintains high leverage for a prolonged period, subsequent years will have no headroom either, and the carried-forward amount may never be usable.

Which instrument currently contains the 30% EBITDA cap rule?

Currently Article 16(3) of Decree 255/2026/ND-CP (Nghị định 255/2026/ND-CP) (effective 01/7/2026, applicable from the 2026 CIT tax year), carrying forward verbatim the rule in Article 16(3) of Decree 132/2020/ND-CP (Nghị định 132/2020/ND-CP). Before that, Decree 20/2017/ND-CP (Nghị định 20/2017/ND-CP) capped at 20%.

Which enterprises are exempt from the interest-expense cap?

Taxpayers that are credit institutions or insurance businesses; official development assistance (ODA) loans, preferential Government loans on-lent to enterprises; and loans implementing national target programs.

8. Next steps

The 30% EBITDA cap is one of the most expensive "traps" for FDI enterprises using parent or related-party borrowing — not because the rule is complex, but because it is easy to overlook until the audit team puts its computation on the table. A 30% computation run periodically, plus a capital structure designed with this threshold in mind from the outset, is usually far cheaper than an assessment decision.

If your enterprise has a loan from its parent or a related party, is planning to increase borrowings, or has just received an audit notice on related-party transactions, FLAT Law Firm can assist in reviewing the EBITDA computation, assessing cap-breach risk, and building an appropriate capital restructuring plan. Contact our hotline 0988424851 for advice tailored to your situation.

Disclaimer: this article analyzes legal rules based on an illustrative case study, is for general information only, and does not constitute legal advice for any specific case. Tax rules apply depending on each enterprise's actual figures and circumstances; you should consult counsel or a tax specialist before making decisions.

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