Conditions for Deducting Interest Expenses on Loans for Corporate Income Tax Purposes

What are the conditions for interest expenses on loans to be considered legitimate and deductible when calculating Corporate Income Tax (CIT)? Here’s a guide on how to incorporate loan interest costs into deductible expenses.

Conditions for Deducting Loan Interest Expenses:

1. Adequate Charter Capital: The business must have sufficient charter capital as per its business registration certificate.

2. Loan from Individuals (Not a Financial Institution or Economic Organization): The interest rate should not exceed 150% of the basic interest rate announced by the State Bank of Vietnam at the time the loan is made.

3. Loan Agreement: There must be a formal loan agreement.

4. Non-Cash Payment Documents: Documents for non-cash payments (for loans, lending, and repayment of loans).

5. Personal Income Tax Deduction: If borrowing from an individual, 5% tax on personal income should be withheld when paying loan interest.

6. VAT Invoice for Loan Interest: When borrowing from a business (not a financial institution), the business must issue a VAT invoice for the loan interest.

1. How to Determine Interest Rate and Charter Capital Contribution:

Some expenses are not deductible when calculating CIT, including:

• Article 2.17: Interest expenses on loans from non-financial institutions that exceed 150% of the basic interest rate set by the State Bank of Vietnam.

• Article 2.18: Interest payments related to charter capital (or investment capital in the case of a sole proprietorship) that is still missing based on the business's capital contribution schedule. Even if the business is already operating, interest on loans tied to investments or capital contributions is not deductible if not compliant with regulations.

(As per Article 2, Clause 6 of Circular 78/2014/TT-BTC, dated June 18, 2014, by the Ministry of Finance)

2. Requirement for Non-Cash Payment Documents:

• If a business (not a financial institution) conducts lending, borrowing, or loan repayment transactions, it must use the following non-cash payment methods:

  • Payment by check.

  • Payment via bank transfer (via bank order).

  • Other appropriate non-cash payment methods as per current regulations.

(According to Article 4 of Circular 09/2015/TT-BTC, dated January 29, 2015)

In summary, when your company borrows or lends money, payments should be made via bank transfer or other non-cash methods.

3. Requirement for VAT Invoices or Tax Withholding Documents:

• For loans from businesses (not financial institutions): When paying interest, request the lending company to issue a VAT invoice for the loan interest.

• For loans from individuals: When paying interest to an individual, a 5% withholding tax for Personal Income Tax (PIT) should be deducted and paid.

(According to Clause 3, Article 2 of Circular 111/2013/TT-BTC: This is considered income from capital investment, taxed at 5%.)

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