Parent-company loans are a common capital structure for FDI enterprises, but at a tax audit the same interest can be hit twice, independently: contractor withholding tax on the outbound interest, and disallowance of the portion exceeding the cap when computing corporate income tax. This article separates the two layers and shows how to restructure safely.
Why both apply: two independent tax layers
Layer one is contractor tax. Interest paid to a foreign organization is contractor-taxable income in Vietnam. The current framework: the foreign-contractor CIT portion follows the Law on Corporate Income Tax 67/2025/QH15, Decree 320/2025/ND-CP and Circular 20/2026/TT-BTC — the CIT portion of Circular 103/2014/TT-BTC was repealed from 12/3/2026 (point b.11, clause 1, Article 13). The contractor CIT rate on loan interest is 5% of taxable revenue under clause 3, Article 12 of Decree 320/2025/ND-CP. The Vietnamese payer must withhold and remit before transferring funds abroad.
Layer two is the deductible-expense side for the borrowing company itself. Under the related-party transaction rules in Decree 255/2026/ND-CP (replacing Decree 132/2020 from the 2026 CIT period), interest expense exceeding 30% of EBITDA is disallowed. The two layers are independent: having paid the 5% contractor tax does not mean the interest is automatically fully deductible for CIT.
What rate is safe and how to restructure the loan
There is no universally “safe” rate, but three control pillars exist. First, the rate must follow the arm’s-length principle in related-party dealings — an abnormally high rate versus the market is the first red flag. Second, total interest expense must stay within the 30% EBITDA cap; the excess is disallowed even at a reasonable rate. Third, documentation proving the loan serves business operations must be complete.
On restructuring: companies may consider converting part of the loan into equity (easing cap pressure but losing withdrawal flexibility), renegotiating the rate to a documented market level, or splitting the loan by project tenor to evidence clear use of funds. Any restructuring should be completed before the tax finalization period so it is properly reflected in the tax year.
Where to appeal the assessment
Penalty and recovery decisions on loan interest are administrative tax decisions, appealable within 90 days of receipt. The appeal should separate the two layers: for contractor tax, check whether the taxpayer identification and the withholding rate correctly follow clause 3, Article 12 of Decree 320/2025; for the disallowed expense, focus on proving the arm’s-length rate and the correctness of the EBITDA figures underlying the 30% cap. If the appeal fails, the company may file an administrative lawsuit in court.
Frequently asked questions
1. Why is parent loan interest hit with both withholding tax and disallowance?
Because these are two independent layers: 5% contractor tax on the foreign lender’s interest income (clause 3, Article 12 of Decree 320/2025), and the 30% EBITDA cap limiting the borrower’s deductible interest (Decree 255/2026). Paying one does not exempt the other.
2. What interest rate is safe?
No absolute figure exists; relative safety requires a documented arm’s-length rate, total interest within the 30% EBITDA cap, and complete purpose documentation. All three conditions must hold together.
3. How to restructure the loan to reduce risk?
Options include converting part of the loan to equity, renegotiating to a market rate, or splitting the loan by project to evidence fund usage. Restructuring should be completed before the year’s tax finalization.
4. Where to appeal an interest-related assessment?
Appeal within 90 days to the issuing tax authority or its direct superior, with separate arguments per layer (contractor tax vs. deductible expense). If unsatisfied, file an administrative lawsuit in court.
This article has been quality-reviewed by the FLAW AI Legal Council