Decree No. 68/2020/NĐ-CP introducing favourable and retrospective changes to the cap on interest deductibility

On the 24th of June 2020, the Vietnamese Government released Decree No. 68/2020/NĐ-CP amending decree No. 20/2017/NĐ-CP “Providing tax administration applicable to enterprises having controlled transactions”.

This new Decree took effect as it was signed and it introduced favourable and retrospective changes to the cap on interest deductibility. Therefore, a more generous cap can be applied retrospectively, which will result in significant tax savings for many companies with debt financing. More of that, it also must be underlined that this an additional positive gesture towards Vietnamese businesses in the face of the difficult economic situation caused by the Covid-19 pandemic.

Key changes in the increase of the cap

The most important point of Decree No. 68 is increase of the cap on tax deductibility of interest from 20% to 30% of EBITDA. It is important to note that this cap applies to net interest expense (i.e. interest income is offset against interest expense before comparing with the cap).

Carry forward of non-deductible interest

In terms of non-deductible, it should be noted that it can now be carried forward to following tax years and then deducted in the situation if the net interest expense/EBITDA ratio remains below 30% during those years. The time limit for such carry forward operations is five years maximum.

Additional cases now not subject to the cap

From now on certain types of financing shall not be subject to the cap, such as official development assistance (“ODA”) loans, various preferential loans made by the government, and loans made for implementing national programs and state social benefit policies.

Retrospective application and opportunities for tax savings

The new Decree took effect at its signature and can be applied to cases dating back from FY 2019.

Nonetheless, the cap changes can apply retrospectively to 2017 and 2018, therefore companies with debt financing can be eligible for those tax savings.

Companies eligible for revised CIT returns, that want to apply for the amended cap need to submit their dossier to the tax authorities until the 1st January 2021. Resulting tax overpayments arising from such amendments can be offset against CIT due in subsequent years.

If the prior years have already been tax audited, companies can still benefit from this retrospective application for a more advantageous cap.

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