In parent–subsidiary relationships, a foreign parent “forgiving” debt owed by its Vietnamese subsidiary — forgiving loan interest or the principal itself — is not merely an internal accounting entry: it triggers tax obligations in Vietnam. The treatment differs at both ends (parent and subsidiary) and between interest forgiveness and principal forgiveness. This article analyzes the issue under tax-authority guidance and the current legal framework (CIT Law 67/2025/QH15, Circular 89/2026/TT-BTC, Decree 255/2026/ND-CP).
1. Case (a): interest forgiveness — official guidance exists
1.1. Parent (foreign) side: no foreign contractor tax in Vietnam
Under Official Letter 3602/TCT-CS dated 15/8/2024 of the General Department of Taxation (the Vina Eco Board case): foreign contractor tax arises only where the foreign contractor earns CIT-taxable income from the loan in Vietnam. When the parent forgives the loan interest — i.e., no longer earns income from the loan — the subsidiary is not required to declare or pay foreign contractor tax on its behalf for the forgiven interest. The letter was issued under the old legal framework, but its principle carries over into the new framework; companies should still cross-check when applying it to specific cases.
1.2. Subsidiary (Vietnam) side: accrued interest booked to other income
Interest expenses the subsidiary has accrued annually, corresponding to the forgiven portion, must be booked to other income in determining taxable income — because these are recorded expenses that will in fact never be paid.
2. Case (b): principal forgiveness
2.1. Subsidiary side: the forgiven debt is other income subject to CIT
As a matter of principle, a payable debt determined to be non-payable is credited to account 711 (other income) under the accounting regime (Circular 200/2014/TT-BTC), and is treated as other income subject to CIT at the 20% rate. Legal basis: Article 3.2 of Law 67/2025 lists other income items, including unidentifiable-creditor payables (point g), sponsorship and donations (point i), and other income (point o); detailed at points m and n of Decree 320/2025/ND-CP. A word of caution: no dedicated official letter exists yet for principal forgiveness, so the precise sub-point classification should be confirmed by a tax lawyer for each case — this article presents the principle-level treatment.
Official Letter 10118/CT-TTHT confirms: forgiven loan principal and interest constitute other income; such other income may be offset against losses of other business activities in the year and carried-forward losses (loss carry-forward for no more than 5 consecutive years).
2.2. Parent side: no foreign contractor tax
The parent earns no Vietnam-sourced income from the forgiven debt → no foreign contractor tax arises (reasoning analogous to the interest-forgiveness case).
3. The critical boundary: debt forgiveness vs debt-to-equity conversion
If the parent converts the debt into equity (increasing the subsidiary’s charter/investment capital), this is a capital contribution — not taxable income of the subsidiary — with entirely different tax consequences from forgiveness. Companies must choose the right structure up front: forgiveness → other income taxed at 20%; conversion to equity → no taxable income, but license amendment procedures (Investment Registration Certificate / Enterprise Registration) are required.
4. VAT and the transfer-pricing angle
- VAT: debt forgiveness involves no supply of goods or services → no VAT arises;
- Transfer pricing: parent and subsidiary are related parties; a forgiveness policy may be examined from a transfer-pricing perspective under Decree 255/2026/ND-CP (effective 01/7/2026, replacing Decree 132/2020). Recommendation: keep a written debt-forgiveness agreement and documentation evidencing the transaction’s substance. This article offers recommendations only, not conclusions in place of the tax authority;
- Foreign contractor tax — current framework: Circular 89/2026/TT-BTC (effective 01/7/2026) replaces Circular 103/2014 in full — consult the new framework; do not cite the expired Circular 103/2014 as authority;
- Double tax treaties (DTA): companies should check the bilateral treaty between Vietnam and the parent’s home jurisdiction — this article does not go into that detail.
5. Common risks and recommendations
- Not declaring other income at the subsidiary: forgiven debt/interest remains taxable income — omission leads to reassessment;
- Withholding contractor tax on forgiven interest: per Official Letter 3602, no such obligation arises — wrong withholding harms the parent;
- Confusing forgiveness with capital contribution: two structures, two entirely different tax outcomes;
- No written forgiveness agreement: exposure when the tax authority reviews related-party transactions;
- Recommendations: put the forgiveness in writing, specifying interest vs principal; book correctly to other income; review the applicable DTA; keep transfer-pricing documentation under Decree 255/2026.
6. Frequently asked questions
If a foreign parent forgives loan interest for its Vietnamese subsidiary, must the subsidiary pay contractor tax on its behalf?
No. Under tax-authority guidance (Official Letter 3602/TCT-CS), forgiven interest means the parent earns no income from the loan, so no contractor tax arises; the subsidiary need not declare or pay on its behalf.
Is forgiven loan principal subject to CIT?
Yes. As a matter of principle, forgiven debt is treated as other income subject to CIT at 20% (basis: Article 3.2 of Law 67/2025 and accounting principles).
Can other income from debt forgiveness offset losses?
Yes — per Official Letter 10118/CT-TTHT, it may offset losses of other business activities in the year and prior years’ losses (carry-forward up to 5 years).
Does debt forgiveness trigger VAT?
No, because there is no supply of goods or services.
Does converting debt into equity trigger CIT?
No — it is a capital contribution, not taxable income of the subsidiary; but license amendment procedures are required.
Sources
- Official Letter 3602/TCT-CS (General Department of Taxation, 15/8/2024): interest forgiveness — no contractor tax at the parent; subsidiary books corresponding accrued interest to other income (tax-authority guidance; cross-check under the new framework);
- CIT Law 67/2025/QH15 — effective 01/10/2025: Article 3.2 (other income: points g, i, o);
- Decree 320/2025/ND-CP — effective 15/12/2025: points m, n on other income (sponsorship, donations; money, assets and material benefits received under agreements, contracts);
- Official Letter 10118/CT-TTHT: forgiven loan principal and interest are other income; may offset losses;
- Circular 89/2026/TT-BTC — effective 01/7/2026: current foreign contractor tax framework (replacing Circular 103/2014 in full);
- Decree 255/2026/ND-CP — effective 01/7/2026: transfer pricing (replacing Decree 132/2020).
For reference only; not legal advice. This article was drafted by AI and quality-checked by the AI Legal Council of FLAT Law Firm; it has not been reviewed or approved by a human lawyer. Regulations may change; please check the current legal texts before applying.
Does your company have intra-group transactions with a foreign parent that need a tax review? Contact FLAT Law Firm for advice.