In June 2020, the Government adopted Decree 68/2020 amending the rules on interest expense cap under Decree 20/2017. Under Decree 20/2017, the total interest expense which can be deductible for the purpose of calculating corporate income tax of a company must not exceed 20% of the company’s EBITDA. The restriction has caused massive objection from Vietnam enterprises since Decree 20/2017’s purpose is to regulate tax arising from related transactions but not to regulate corporate income tax in general. In addition, the Law on Corporate Income Tax does not contain an interest expenses cap.   

To address some of the complaints about Decree 20/2017, Decree 68/2020 introduces the following amendments, among other things:  

·       The interest expenses which is subject to the cap is based on the total net interest expenses. This means that a company is allowed to deduct interest income from the total interest expense before calculating the interest expenses cap.   

·       The cap is raised from 20% to 30%.   

·       Decree 68/2020 allows a company to carry forwards non-deductible interest expenses for five years.   

All of the above changes are consistent with provisions on interest expense deduction limitation of other jurisdictions such as US’s or EU’s. However, Decree 68/2020 still fails to provide reasonable explanation about the introduction of interest expenses cap without clear authorization under the Law on Corporate Income tax. Decree 68/2020 also does not allow applying the interest expenses cap on a consolidated basis which help to exclude interest expenses between affiliated companies.   

Written by Tran Thuy Tien and edited by Nguyen Quang Vu.