During tax inspections and audits of enterprises engaged in related party transactions (RPTs), interest expenses and intra-group service expenses are among the costs most likely to be disallowed. Determining which expenses are actually deductible for corporate income tax (CIT) purposes directly affects an enterprise’s cash flow and tax liabilities. Article 16 of Decree No. 255/2026/ND-CP establishes a clear but stringent legal framework, setting out detailed principles for excluding inappropriate expenses, tightening conditions for related-party services, and maintaining the cap on deductible interest expenses at 30% of EBITDA.
To help enterprises avoid a passive position or the risk of tax assessment (under Article 21), this article provides further clarification on costs arising from related party transactions.
1. General Principles on Non-Deductible Expenses (Clause 1, Article 16)
Decree No. 255 provides that expenses arising from related party transactions that are inconsistent with the substance of an arm’s-length transaction or do not contribute to generating revenue or income from the taxpayer’s business activities shall not be treated as deductible expenses when determining taxable CIT income for the relevant tax period. Specifically, the following expenses are excluded:
- Payments to related parties with no business operations: Payments made to a related party that does not conduct any production or business activities relevant to the taxpayer’s business lines or activities, or that has no relevant rights or responsibilities concerning the assets, goods, or services provided to the taxpayer.
- Payments to related parties with disproportionate scale: Payments made to a related party that conducts business activities but whose asset scale, number of employees, and production or business functions are not commensurate with the value of the transactions received from the taxpayer.
- Payments to related parties in a “tax haven”: Expenses paid to a related party that is a resident of a country or territory that does not levy CIT, where such payment does not contribute to generating revenue or added value for the taxpayer’s production or business activities.
2. Service Expenses between Related Parties (Clause 2, Article 16)
For intra-group service expenses to be accepted as deductible reasonable expenses, the Decree imposes stringent conditions governing both the positive requirements for deductibility and the expenses subject to exclusion:
Mandatory conditions for deductibility:
- The services provided must have commercial, financial, or economic value and directly serve the taxpayer’s business activities.
- The services must be determined to have been provided under conditions and circumstances similar to those under which independent parties would make payment.
- Service fees must be paid based on the arm’s-length principle, and the transfer pricing method (or fee allocation method) must be applied consistently throughout the group for similar types of services.
- The enterprise must provide complete contracts, supporting documents, invoices, and information on the calculation method, allocation factors, and the group’s pricing policy.
- Where specialized centers and group value-creation synergies are involved, the taxpayer must determine the total value created and allocate profits appropriately based on the contribution of the coordinating related party.
Non-deductible service expenses:
- Services incurred solely to serve the interests of or create value for other related parties.
- Services that directly serve the interests of the related party’s shareholders.
- Duplicated service charges arising where multiple related parties provide the same type of service and no specific added value to the taxpayer can be identified.
- Services that, in substance, merely constitute benefits received by the taxpayer by virtue of being a member of the group.
- The markup charged by a related party for services provided by a third party through the related-party intermediary, where the intermediary does not contribute additional value to the services.
3. Cap on Deductible Interest Expenses (Clause 3, Article 16)
Decree No. 255 retains and further refines the mechanism for capping interest expenses to prevent profit shifting through thin capitalization:
30% EBITDA cap: The taxpayer’s total interest expenses incurred during the tax period, after deducting interest on deposits and lending interest income, shall be deductible only up to 30% of the total net profit from production and business activities, plus interest expenses (after deducting interest on deposits and lending interest income), plus depreciation expenses incurred during the tax period.
Carry-forward mechanism for excess interest expenses: Interest expenses that are non-deductible in the relevant tax period may be carried forward to subsequent tax periods for continuous deduction for a period not exceeding 05 years from the year following the year in which they arise (applicable to subsequent periods in which total interest expenses are below the 30% EBITDA cap).
Excluded entities and loans not subject to the cap: The interest expense cap does not apply to:
- Credit institutions operating under the Law on Credit Institutions and insurance businesses operating under the Law on Insurance Business.
- Official Development Assistance (ODA) loans and concessional government loans provided under an on-lending arrangement.
- Loans used to implement national target programs.
- Loans for investment in programs or projects implementing the State’s social welfare policies (including resettlement housing, housing for workers and students, social housing, and other public welfare projects).
- Taxpayers are required to declare this interest expense ratio using the form prescribed in Appendix I attached thereto.
About the Author & Ecosystem: The article is legally supported by CDLAF and by the expertise of CFT Solutions – a company specializing in Finance – Tax – Accounting. We provide comprehensive management solutions that help enterprises control risks and optimize resources.
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