Thin Capitalization in Vietnam: Interest Deduction Limits

Thin capitalization is the quiet tax cost behind many foreign-funded projects in Vietnam. When a company is financed mostly by loans rather than equity, the tax authority no longer asks how high its debt-to-equity ratio is. It asks whether net interest exceeds 30% of EBITDA, and under Decree 132/2020/ND-CP everything above that line is non-deductible for corporate income tax in the current year.

This guide explains the thin capitalization rules, how net interest is measured, how related-party and third-party debt are treated, how disallowed interest is carried forward, and how to plan around the cap while staying aligned with foreign-loan registration and global minimum tax developments.

Why Thin Capitalization Matters to Investors in Vietnam

Foreign investors routinely fund a Vietnamese subsidiary with a modest charter capital and a larger shareholder or group loan. The logic is familiar: interest is deductible, dividends are not, and loans can be repaid more flexibly than capital can be returned. Thin capitalization rules exist to stop that logic from eroding the local tax base. Thin capitalization rules do not prohibit debt. They limit how much of the interest on that debt can reduce taxable profit.

Under thin capitalization rules, for a project company in real estate, manufacturing, renewable energy or logistics, interest can be the largest single cost line during the ramp-up years, precisely when EBITDA is thin. That is why the interest deduction cap bites hardest on capital-intensive start-ups, and why financing structure should be settled before a loan is drawn rather than after the first tax finalization.

This article deals only with interest limitation. How the interest rate itself is benchmarked between related parties is a transfer pricing question covered separately in our guidance on arm’s-length pricing.

The Legal Framework: From Debt-to-Equity Ratios to an EBITDA Test

The position before 2017

Historically, Vietnamese thin capitalization guidance leaned on ratio-style and rate-style controls rather than an earnings-based test. Interest on loans from non-credit-institution lenders was capped by reference to a multiple of the State Bank of Vietnam (SBV) base rate, later aligned with the 20% annual ceiling in the Civil Code 2015, and interest attributable to unpaid charter capital was disallowed.

Debt-to-equity concepts, commonly discussed as a 3:1 benchmark for related-party funding, informed audit practice more than statute. These older instruments should be verified individually for any historic year still open to inspection.

The move to EBITDA: Decrees 20/2017, 68/2020 and 132/2020

Decree 20/2017/ND-CP introduced the earnings-based thin capitalization rule at 20% of EBITDA, without any carry-forward. Decree 68/2020/ND-CP raised the ceiling to 30% and added a five-year carry-forward. Decree 132/2020/ND-CP, effective from the 2020 tax period, consolidated the regime in Article 16 and replaced Decree 20/2017. Detailed guidance followed in Circular 45/2021/TT-BTC (verify current status), and the General Department of Taxation publishes the operative texts.

As at the date of this article, Decree 132/2020 remains the core reference, but the Law on Corporate Income Tax No. 67/2025/QH15 (effective for tax periods from 2025), Decree 20/2025/ND-CP amending parts of Decree 132, and later CIT guiding decrees may have adjusted or restated provisions. Confirm the operative text for the relevant tax period before relying on any figure below.

How the 30% of EBITDA Interest Deduction Cap Works

The thin capitalization formula

The thin capitalization cap applies to a taxpayer that has related-party transactions during the tax period. For such a taxpayer, total deductible net interest expense may not exceed 30% of EBITDA. EBITDA is calculated as net profit from production and business activities, plus net interest expense, plus depreciation and amortization expense.

Two features deserve emphasis. First, the test is triggered by the existence of any related-party transaction, not only by a related-party loan. A company that borrows solely from local banks but also pays a management fee to its parent is in scope. Second, the cap operates on the aggregate of all interest, so third-party debt competes for the same 30% allowance as shareholder debt.

A simple illustration

Assume, purely for illustration, that a company has EBITDA of VND 200 billion, interest expense of VND 90 billion and interest income of VND 10 billion. Net interest expense is VND 80 billion. The cap is 30% of EBITDA, or VND 60 billion. VND 60 billion is deductible this year and VND 20 billion is disallowed and carried forward.

If EBITDA were negative, the allowable amount would be nil and the entire net interest would be carried forward, although it would also add to the tax loss position in a way that should be modeled with the loss carry-forward rules.

What Counts as Net Interest Expense

The thin capitalization test is applied to net interest expense, not gross interest. Under Article 16, net interest expense is total interest expense minus total interest income from deposits and loans in the same period. The netting is the first planning lever: a group treasury function that leaves surplus cash on deposit in the same entity that borrows will see its net figure fall.

Practical points that regularly arise in tax finalizations include the following.

• Interest expense generally covers interest on bank loans, shareholder and intra-group loans, bonds and similar financing, and financing-related fees that are treated as interest-like in nature. Whether a given fee is interest for this purpose is a classification point to verify against the guidance.
• Capitalized interest that is added to the cost of a qualifying asset during construction is generally not charged to profit and loss in that period. Whether and how it enters the net interest expense computation should be confirmed (verify), because it affects both the base and the timing of the deduction.
• Foreign exchange differences on loans are not interest and are dealt with under separate rules, although a poorly structured loan can blur the line.
• Interest on unpaid charter capital is disallowed under the general deductibility conditions in any case, before the cap is even computed.

The general conditions for deductibility still apply on top of the cap. Interest must relate to production and business, be supported by valid documents, and, for loans from non-credit-institution lenders, respect the interest ceiling in the Civil Code. Passing the EBITDA test does not rescue an expense that fails these conditions.

Related-Party Loans Versus Third-Party Debt Under Thin Capitalization

Many clients assume thin capitalization is aimed only at related-party loans. It is not. Once the taxpayer has any related-party transaction, the 30% limit is applied to the whole net interest figure, including interest paid to Vietnamese banks. The practical distinction between the two sources of debt lies elsewhere, as the comparison below shows.

Feature	Related-party loans	Third-party debt
Counted in the 30% cap	Yes, in full	Yes, in full once any related-party transaction exists
Arm’s-length interest rate review	Yes, under transfer pricing rules	Generally not, apart from the Civil Code ceiling for non-bank lenders
Disclosure in related-party forms	Yes, in the annual transfer pricing declaration	Only where a related party guarantees or backs the loan (verify)
Withholding on interest paid abroad	Foreign contractor tax may apply; treaty relief possible	Same if the lender is a non-resident
Typical audit focus	Purpose, repayment terms, rate, evidence of real funding	Documentation of use of proceeds

Two consequences follow. First, replacing a shareholder loan with a bank loan does not by itself escape thin capitalization limits, so long as the borrower keeps other related-party dealings. Second, back-to-back and guaranteed structures, in which a bank lends against a parent guarantee or deposit, invite scrutiny because the economic lender may be the related party. Documentation should show who bears the credit risk.

Withholding tax is a separate cost layer. Interest paid to a non-resident lender is generally subject to foreign contractor tax, with a 5% corporate income tax component under Circular 103/2014/TT-BTC and no VAT on interest (verify current rates), subject to treaty relief. A disallowed interest amount is still taxable in the hands of the lender, which is why the true cost of excess debt is a double burden.

Carry-Forward of Disallowed Interest and Exemptions

The five-year carry-forward

Disallowed net interest is not lost immediately. Under Article 16 as introduced by Decree 68/2020, the excess can be carried into subsequent tax periods and used when the following years leave headroom under the 30% ceiling. The carry-forward period is a maximum of five consecutive years starting from the year after the excess arises (verify against the current text). The carried-forward amount competes with the current year’s interest for the same capacity.

Under thin capitalization rules, companies whose EBITDA is expected to stay low should treat the carry-forward as a limited asset, not a guarantee.

Exemptions and scope limits

The thin capitalization rule is not universal in scope. As we read Decree 132/2020, the principal exclusions are credit institutions and insurance businesses, which have their own prudential capital rules. The cap also depends on the taxpayer having related-party transactions in the first place, and the transfer pricing declaration exemptions in Decree 132 for certain domestic related-party situations should be checked to see whether they also relieve the cap (verify).

Newer rules since 2025 may have changed the thin capitalization list, so each client situation requires a confirmation against the operative text.

Notably, Vietnam’s rule as we understand it contains no optional group-ratio escape and no stand-alone de minimis threshold, which many other jurisdictions provide. If a client expects such relief, verify the point before modeling it.

Vietnam Against OECD BEPS Action 4

Vietnam’s EBITDA-based thin capitalization approach follows the direction of the OECD’s recommendation in BEPS Action 4, which favors a fixed ratio rule linked to earnings, supplemented by optional elements. The table sets out how the two compare in broad terms.

Element	OECD BEPS Action 4 (best practice)	Vietnam (Decree 132/2020)
Core test	Fixed ratio of net interest to tax EBITDA	Net interest to EBITDA
Benchmark ratio	Corridor of 10% to 30%	30%, at the top of the corridor
Group ratio rule	Optional, based on group net interest to EBITDA	None identified (verify)
De minimis threshold	Optional carve-out for low-risk entities	None identified (verify)
Carry-forward	Optional, interest and unused capacity	Five years for disallowed interest
Scope	All entities, or those in a multinational group	Taxpayers with related-party transactions
Excluded sectors	Possible special rules for banks and insurers	Credit institutions and insurers excluded

The most important difference is the absence of a group-ratio relief. Under Vietnamese thin capitalization rules, a highly leveraged group with a profitable Vietnamese subsidiary does not get the benefit of group-wide gearing, and a loss-making local entity cannot rely on a de minimis allowance. In transactions with a Singapore, Korean or Japanese parent, that difference should be priced into the funding model at the term-sheet stage.

Planning Around Thin Capitalization

The goal of thin capitalization planning is not to remove debt but to keep the total interest cost deductible and the funding documents defensible.

Equity injections and debt-to-equity conversion

Raising charter capital reduces future interest and therefore thin capitalization pressure. A shareholder loan can be converted to charter capital, provided the investment registration, business registration and, where a foreign investor is involved, capital account formalities are completed.

Third-party debt, capitalization and sequencing

Local bank financing is more predictable on documentation, but it counts toward the same thin capitalization limit. The better lever is sequencing. Interest incurred during construction of a qualifying asset may be capitalized rather than expensed, which defers the deduction to the depreciation period when EBITDA is higher. This is valuable for projects with long pre-revenue phases, subject to accounting standards and tax confirmation.

A thin capitalization planning checklist

• For thin capitalization purposes, model EBITDA, net interest and the 30% ceiling for each of the next five years before the loan is signed.
• Confirm whether any related-party transaction exists, since that triggers the cap for all debt.
• Test whether capitalizing interest during construction improves the deduction profile.
• Reserve carry-forward capacity realistically, within the five-year window.
• Reconcile the loan terms with the investment registration certificate, the SBV registration and the transfer pricing file.
• Review tax treaty relief for interest paid to the lender and the withholding mechanics.

SBV Loan Registration and Pillar Two Interaction

Foreign loan registration with the SBV

Borrowing from an offshore lender, including a parent, brings foreign exchange controls into play. Under Circular 03/2016/TT-NHNN and its amendments, a medium- or long-term foreign loan generally needs to be registered with the SBV branch before the first drawdown, and short-term loans that are extended into medium-term obligations are also caught (verify the current instrument and thresholds).

For foreign-invested enterprises, the permitted loan amount is tied to the gap between total investment capital and charter capital on the investment registration certificate (verify). Thin capitalization and SBV registration therefore operate side by side: a loan that is perfectly deductible can still be an unlawful remittance if it was not registered, and a registered loan can still produce disallowed interest. Both files should match on amount, tenor and interest terms.

Pillar Two and the domestic top-up tax

Vietnam implemented the global minimum tax through National Assembly Resolution 107/2023/QH15, effective from 1 January 2024, and implementing Decree 236/2025/ND-CP (verify) for multinational groups with consolidated revenue of at least EUR 750 million. The regime includes a qualified domestic minimum top-up tax, together with the income inclusion rule and the undertaxed profits rule, the latter in stages (verify the dates).

The interaction between thin capitalization and Pillar Two runs in two directions. Pillar Two starts from accounting profit, so interest disallowed for local tax purposes raises the Vietnamese covered tax relative to GloBE income and generally improves the effective tax rate.

Conversely, the interest deduction cap does not interact with the minimum rate as a substitute: a group whose Vietnamese entity benefits from investment incentives can still face a top-up tax even where interest is fully deductible. Treasury, tax and legal teams should model both together.

Frequently Asked Questions

What is thin capitalization in Vietnam?

Thin capitalization is the tax rule limiting deductible net interest to 30% of EBITDA for taxpayers with related-party transactions under Decree 132/2020. Excess interest is non-deductible in the year and may be carried forward.

Does thin capitalization apply to bank loans too?

Yes. Once the taxpayer has any related-party transaction, the 30% limit applies to total net interest, including interest on loans from Vietnamese or foreign banks, not only shareholder loans.

How long can disallowed interest be carried forward?

Disallowed interest can generally be carried into later tax periods for up to five consecutive years after the year it arises, using available headroom under the cap. Verify against the current text.

Are any taxpayers exempt?

Credit institutions and insurance businesses are generally outside the rule. Other relief depends on the related-party transaction scope and on current amendments, so confirm the position for each tax period.

Does converting a loan into equity help?

Often yes. Conversion reduces future interest, but it requires registration steps and a review of tax, foreign exchange and withholding effects on both borrower and lender before completion.

Thin capitalization rules reward early modeling, so the practical next step is to build a five-year EBITDA and net interest projection for your Vietnamese entity before any loan is signed or drawn, and compare it with the 30% ceiling and the SBV registration requirements.

Disclaimer: This article provides general information only and does not constitute legal, tax or financial advice. Regulations change, and you should obtain advice on your specific circumstances before acting.