Compliance with foreign loan regulations in Vietnam is an important consideration for international investors, as it has a direct impact on cash-flows, structural considerations and the commercial position of their business.
In this article we cover recent regulatory updates and guidelines for foreign loan compliance under Circular No. 12/2022/TT-NHNN dated 30 September 2022 in respect to foreign borrowing and foreign debt repayments and with Circular No. 08/2023/TT-NHNN dated 20 June 2023 covering eligibility requirements for foreign loans without Government guarantees.
Preparation of Foreign Loan Agreements, and loan classification
In Vietnam, Foreign loans are defined as foreign borrowings through loan agreements, deferred payment contracts for imported of goods, lending instrument contracts, contracts for finance leasing or debt instrument issuance on an international market.
Before commencing funding procedures, borrowers and lenders need to take several steps in preparation for the foreign loan agreement. This document not only reflects the key provisions for the two parties engaging in the loan, but also requires involvement (and, often, acceptance) of Vietnamese authorities through the State Bank of Vietnam (SBV), the local Department of Planning and Investment (DPI), the local Tax Authority and the Commercial Banks where the borrower opens a bank account to receive the loan.
The permitted purposes for loan usage is divided into 3 main groups:
- For the implementation of an investment project under an Investment Registration Certificate (IRC), and/or the written approval of the investment policies (IPD),
- For the implementation of production or business operational plans, and/or
- For restructuring foreign loans of the borrower
Previously, the restructuring of the foreign loans lacked regulations which caused significant obstacles for enforcement by the authorities, thus the restructuring of foreign loans by borrowers was not officially acknowledged previously. However, as this mechanism has now been updated with clearer guidelines within Circular 12 and Circular 8, it helps both engaging parties and the relevant authorities to apply the restructuring regulatory provisions according to clear rules and processes.
Loan term. The Vietnamese authorities classify and manage foreign loans into 2 broad types:
- Short-term foreign loans – foreign loans usually with a term of less than 1 year, and
- Medium–term and long-term foreign loan – foreign loans usually with a term of over 1 year. In practice, a medium-term loan is from over 1 year to 5 years from 5 years to 10 years represents a long-term loan.
The loan term will commence from the first withdrawal date under the agreement to the expected date of the final principal repayment.
Limits on foreign loans
The principal is that a foreign medium or long-term loan must not exceed either the borrowing limit in the IRC or IPD of the investment project. or the total loan requirement in the foreign loan use plan approved by authorities. The former limit is the difference between the total investment capital of the investment project and the total contributed capital of the investor recorded in the IRC (i.e., share/charter capital). To ensure that foreign loans are within this limit, both the total investment capital and the share/charter capital of the investment project must be increased before registering further loans with SBV that exceed these limits.
Another limit for foreign loans that are to be used for restructuring a borrower’s foreign debts is that it must not exceed the sum of outstanding principal, unpaid interest, relevant expenses of the existing foreign loan, along with the expenses associated with the new loan determined when restructuring its foreign debts. If the new foreign loan is a medium or long-term foreign loan, the borrower must repay its existing foreign loan debts within 5 working days from the disbursement date.
In general, the above limits are not new in practice for Vietnam, but they were not clearly mentioned previously in laws or guided in various specialized regulations. This did lead to concerns and confusion among engaging parties and the authorities in the past when applying the law. However, Circular 08, issued in 2023, provides far more consistency for the interpretation of these limits.
Interest rates, currency, and disbursement
Under Vietnamese laws, parties can agree on a fixed or floating interest rate, but this rate must not exceed 20% per year. If parties agree that interest will be payable but fail to specify an interest rate, or if there is a dispute regarding the interest rate, the default interest rate for the duration of the loan will be considered 10% per year. It is important to note that although there is no specific regulation allowing both parties to select no interest or waive interest, the tax authorities generally seek to impose a reasonable or deemed market interest rate where interest free loans arise.
There are no specific requirements for the currency of foreign loans in regulations, however, the exchange rate and implications with movements in future rates should be considered for the loan when documenting or drafting the rights and obligations related to foreign loans.
Foreign loans can be disbursed through a Direct Investment Capital Account (DICA) if the company has one. This is a specific bank account opened by FDI companies to receive initial registered contribution capital, for foreign loans and dividend disbursement. For enterprises that do not have or are not entitled to open a DICA, companies can receive foreign loans via an Overseas (or offshore) Loan Account (OLA) opened at their chosen bank.
After finalizing the terms and conditions, both parties can sign the agreement and affix their company stamp. Loan agreements are not specifically required to be prepared in the Vietnamese language, however it is recommended to do so for submission to authorities (and often, with banks) to make processes more predictable. In addition, it is recommended to submit draft loan agreements with the commercial bank where the borrower opens a DICA or OLA to ensure that there are no challenges from the bank when the loan is credited to the borrower’s account, as the bank is the initial conduit for interpreting SBV regulations for receiving foreign loan funds.
Implementation of the loan agreement and reporting
Short-term foreign loans are not required to be registered with SBV according to Vietnamese regulations. Accordingly, it is common for parties to firstly prepare a loan agreement with terms and conditions consistent with requirements as detailed above. Then, the parties execute the agreement by signing, before the lender disburses loans through the DICA or OLA of the borrower.
However, medium and long-term loans are required be registered with the authorities/SBV before implementation. Generally, there are two steps in the registration process:
|Increasing the total investment capital/charter capital in the IRC to ensure these are within borrowing limits (if required)
|Registering the medium and long-term loans with the State Bank of Vietnam (SBV)
|15 working days
In practice, the second step often takes an extended period, commonly 2 to 3 months, where the State Bank of Vietnam reviews and assess dossiers for approval. After loan registration is granted, the borrower and lender are required to comply with the registered plan that they submit to the SBV. Any changes to these loans need to be immediately updated with the SBV to avoid penalties and future complications.
Foreign lenders can encounter issues such as required transaction descriptions with agreements, and the failure for income tax to be declared and paid (withholding taxes). Borrowers, on the other hand, can have difficulty specifying, distinguishing, and providing evidence for their intended loan usage purpose. These questions and issues are part of the scrutinization by the State Bank of Vietnam that can result in prolonged licensing procedures.
Borrowers can select their preferred method to repay foreign loans:
- Paying back the loan on the due date as agreed with the lender from cash reserves
- Restructuring the loan by utilising another loan
- Extending the repayment period with SBV
- Capitalising the loan to equity in the name of the Borrower for offsetting the loan
Specific requirements and processes exist and should be followed for these repatriation or rollover options.
The State Bank of Vietnam (SBV) enforces regulations on foreign loans and investors dealing with loans are advised to ensure a full compliance when dealing with foreign loans. In the event of overdue repayment, the borrower may be subject to penalties. If the borrower fails to comply with regulations on foreign loans, administrative penalties may be imposed, and repatriation issues can also arise.
The information provided above is general in nature and is intended to provide a practical framework for understanding the regulations on lending and repaying foreign loans. As legal regulations are constantly being updated, borrowers are advised to seek expert advice on the regulations and strict conditions before entering into any loan agreement with a lender. It is important to ensure compliance with all relevant regulations to avoid potential penalties.
If you need any assistance with these or any other matters in managing foreign loan compliance in Vietnam, to ensure you are compliant and protected in the market, our experts are ready to support.
Tran Thi Thuy Duong – Senior Associate, Market Entry and Licensing – firstname.lastname@example.org
Matthew Lourey – Managing Partner – email@example.com