How to Borrow Funds from Outside Vietnam into a Vietnamese Entity

Lending funds from outside Vietnam to a Vietnamese entity is subject to numerous regulations, including foreign exchange control, registration procedures, and tax treatment. This article, written by a Vietnamese attorney, explains in detail the legal characteristics of a "loan" as distinct from a capital contribution, and its practical advantages and disadvantages. It is intended to help Japanese companies broaden the range of fundraising methods available to them. NEXORA LAW FIRM has extensive experience supporting intercompany loans and lending to Vietnamese local subsidiaries by Japanese companies, providing one-stop support covering SBV registration, contract review, and interest-rate setting, with particular strength in practice that comprehensively takes into account tax, legal, and foreign investment considerations.

After establishing operations in Vietnam, companies are often pressed to raise funds for working capital or business expansion. Japanese companies frequently raise such funds from their Japanese parent or affiliated companies, or from Japanese-affiliated financial institutions. Borrowing from outside Vietnam in this way requires attention to a number of legal points. In particular, the State Bank of Vietnam ("SBV") strictly monitors the purpose for which borrowed funds are used. Accordingly, when drafting a loan agreement, the stated purpose of the funds must genuinely match how they will actually be used, and this stated purpose—as reported to the SBV—must be adhered to when the loan agreement is executed. If the purpose of use of the funds changes, the registration and reporting information must be updated accordingly.

01 - General Points to Note

1-1
Purpose of the Loan

The single most important point is that borrowed funds must be used lawfully and for the stated purpose (details below). A loan agreement with a lender from outside Vietnam must clearly state the purpose of the funds, and the funds must be used accordingly. If funds are received under the loan agreement but there is no immediate need to use them, they may be held on deposit at a domestic financial institution or a foreign bank branch in Vietnam for up to one month.

1-2
Loan Currency

Funds borrowed from outside Vietnam must be denominated in a foreign currency (e.g. US dollars or Japanese yen). Borrowing in Vietnamese dong from outside Vietnam is possible, but only in exceptional cases. Repayment is also generally made in the same currency in which the loan was drawn.

1-3
Foreign Contractor Tax

Interest received by a lender from outside Vietnam is subject to a 5% foreign contractor tax. In general, both the lender and the borrower agree that all payments, including interest, will be made on a net basis—"without deduction," "tax-exclusive," or "without set-off" for foreign contractor tax—and the borrower, at its own expense, files and pays the foreign contractor tax on the lender's behalf when making interest payments.

1-4
Loans Between Related Parties

Where the lender from outside Vietnam is a shareholder, member (capital contributor), owner, or other related party (such as a party holding a controlling interest) of the borrower, the borrower must complete the internal approval procedures for related-party transactions required under Vietnam's Law on Enterprises.

02 - Regulations Applicable to Medium- and Long-Term Loans (Where the Period from the First Drawdown to the Final Principal Repayment Date Is One Year or More)

2-1
Permitted Purposes

Medium- and long-term loans may be drawn down only for the following purposes:

(i) To implement the borrower's investment project

(ii) To implement the borrower's production plan, business plan, or other business-related project

(iii) To refinance existing debt

2-2
Loan Amount Caps

There are caps on the loan amount. The following limits must be strictly observed:

(i) The borrowing limit registered in the company's Investment Registration Certificate (IRC)—i.e., the difference between the project's total investment capital and its equity (capital contribution)—applies where the loan is for implementation of an investment project.

*Where funding needs exceed the borrowing limit stated in the IRC, the borrowing limit in the IRC must be amended. However, updating the IRC takes time. Given fundraising schedule constraints, it is possible to draw down a short-term loan in parallel while the IRC is being updated, in order to secure early access to funds, and subsequently convert it into a medium- or long-term loan.

(ii) The total amount of funds raised must remain within the plan for the use of foreign borrowing approved by the competent authority, where the loan is for the borrower's production plan, business plan, or other business-related project.

(iii) The total outstanding principal, unpaid interest, and fees on existing foreign borrowings, plus the fees on the new loan, must remain within the applicable limit, where the loan is for refinancing existing foreign borrowing.

2-3
Accounts for Receiving Funds and Making Repayments

(i) Where the borrower is a company established through foreign direct investment (whether wholly or jointly established), funds must be received and repaid through a direct investment capital account.

*A company established through foreign direct investment must open a direct investment capital account in order to receive capital contributions; loans from abroad must also be conducted through that same account.

(ii) Where the borrower is not a company established through foreign direct investment (i.e., a domestic company, or a company that became foreign-invested through M&A), funds must be received and repaid through a foreign-borrowing account.

*Where the borrower is not a company established through foreign direct investment, it does not hold a direct investment capital account, and must therefore open a new foreign-borrowing account for the purpose of receiving and repaying the loan from abroad.

2-4
Registration of the Loan with the State Bank of Vietnam (SBV)

(i) Medium- and long-term borrowing from abroad must be registered with the SBV. The specific registration authority is as follows:

Where the loan amount is USD 10 million or more (or the equivalent in another foreign currency): the SBV's Foreign Exchange Management Department
Where the loan amount is less than USD 10 million (or the equivalent in another foreign currency): the local SBV branch

(ii) As a general rule, unless the initial registration or an updated registration procedure has been completed with the SBV, the borrower may not draw down the loan, or make any partial repayment of principal or interest in advance. In addition, as with short-term loans, the borrower must periodically report the status of drawdowns and repayments on the foreign borrowing.

(iii) Registration with the SBV must be completed within 30 days of executing the loan agreement.

03 - Regulations Applicable to Short-Term Loans (Where the Period from the First Drawdown Date to the Final Principal Repayment Date Is Less Than One Year)

*If a loan initially intended as short-term cannot be repaid due to a shortfall of funds or similar reasons and the repayment period ends up exceeding one year, this must be reflected in a new loan agreement. In addition, registration with the SBV as a change from a short-term to a medium/long-term loan must be completed within 30 days of executing the loan-extension agreement.

3-1
Permitted Purposes

Short-term borrowing may be drawn down for the following purposes:

(i) Refinancing the borrower's existing debt

(ii) Making cash payments on short-term liabilities (excluding the principal of domestic borrowings)

3-2
Loan Amount Caps

Unlike medium- and long-term loans, there is no cap on the amount of a short-term loan. However, the purpose of use of the funds and the repayment plan must be explained and submitted to the bank (not the SBV, but the commercial bank handling the remittance). Consequently, if the stated purpose or repayment plan is inadequate, or if the remittance is suspected of being related to money laundering, the bank may refuse to remit the loan proceeds.

3-3
Accounts for Receiving Funds and Making Repayments

Regardless of whether the borrower was established through foreign direct investment, a short-term loan may be drawn down and repaid through a foreign-borrowing account. Even a borrower that holds a direct investment capital account, having been established through foreign direct investment, is permitted to open a foreign-borrowing account and draw down a short-term loan through that account.

3-4
Registration of the Loan with the SBV

Unlike medium- and long-term foreign borrowing, short-term borrowing does not need to be registered with the SBV. However, periodic reporting on the drawdown and repayment status of the loan is required. Monthly reports must be submitted, by the 5th day of the month following the reporting month, either through the online portal (https://qlnh-sbv.cic.org.vn/qlnh/) or by mail in paper form. If the report cannot be submitted through the online portal (due to a technical error or similar issue), a paper report must be mailed to the local SBV branch where the borrower's head office is located. Failure to report will result in a fine.