Question:
Our company is a joint-stock company with a charter capital of 3 billion VND. We purchased land in an industrial zone to build a factory. The land lease cost is 11 billion VND for a lease term of 40 years. We have completed the construction of the factory and office building, with a total value of 11 billion VND. The shareholders have contributed enough capital to cover the entire cost, and the remaining amount was borrowed from a bank (4 billion VND) and from the company’s shareholders (15 billion VND). Since the company has not started operating from the time it borrowed money from the shareholders until now, the interest payments to the company’s shareholders have not been deducted or paid. The company plans to start its operations in early 2020 and will deduct the profits to pay the interest to the shareholders.
So, I’d like to ask: Can the company deduct the interest payments to its shareholders (up to a maximum of 150% of the interest rate prescribed by the State Bank) and capitalize this interest into the value of the factory and office buildings by the end of 2019 or as of December 31, 2019? Should the deduction occur before, or can it take place later, for example, when the company actually pays interest to the shareholders? Also, if the company hasn’t paid interest to the shareholders and hasn’t deducted 5% of the income from lending by the shareholders, does it mean that the interest expense can’t be capitalized into the value of tangible fixed assets (factory, office buildings) until the company starts operating? Finally, does the interest cost paid to shareholders who have contributed enough capital become restricted due to related party transactions?
Answer:
-Based on Circular No. 78/2014/TT-BTC dated June 18, 2014, issued by the Ministry of Finance, providing guidance on corporate income tax (CIT) (as amended and supplemented in Circular No. 96/2015/TT-BTC dated June 22, 2015, also issued by the Ministry of Finance).
-Based on Circular No. 111/2013/TT-BTC dated August 15, 2013, issued by the Ministry of Finance, providing guidance on personal income tax (PIT).
- In the case where the company has fully contributed charter capital and signed loan agreements with the company’s shareholders, who are individuals, and has deducted in advance the interest expenses payable in 2019 to these shareholders, this expense can be recognized as a deductible cost and capitalized into the value of assets, specifically for the investment in constructing facilities to serve the company’s production and business activities, provided that the expense in question is actually incurred in relation to the investment in construction of facilities for production and business, and it satisfies the conditions stipulated in Article 4 of Circular No. 96/2015/TT-BTC dated June 22, 2015, issued by the Ministry of Finance..
- Regarding personal income tax (PIT), when making interest payments to individuals, the company should withhold and declare PIT at a rate of 5% on the actual interest received by individuals.
