Foreign investors in Vietnam are often required to accept loans from their overseas parent company in order to meet start up or operational costs. Therefore it is important for such investors to understand the different types of foreign loans, conditions and administrative procedures which are set out in Vietnamese law.
The key pieces of legislation in this area is Circular 09/2004/TT-NHNN of the State Bank of Vietnam dated 21 December 2004 which provides guidelines for the borrowing and repayment of foreign loans by enterprises that are operating in Vietnam ("Circular 09").
- Types of Loans
Circular 09 covers three different types of loans:
- Short term loans: up to 12 months;
- Medium term loans: from 12 to 36 months; and
- Long term loans: over 36 months.
The administration procedures and conditions for medium and the long term loans are very similar and will therefore be discussed together throughout this newsletter.
- Borrowing Conditions
Each type of loan must comply with the fol-lowing procedural rules and regulations.
- Short term foreign loans
A short term foreign loan can only be used for a small number of purposes, namely
- for working capital for production pur-poses; or
- Other activities related to the enter-prise's approved business lines.
It is forbidden to obtain a foreign short term loan for the purpose of repaying another preexisting loan.
The key terms of the loan can be freely agreed by the parties including duration, interest rate, fees, etc.
During the establishment period (e.g. factory and workshop construction, postlicensing stage etc), the balance of the enterprise's short, medium and long term loans (including domestic loans) must not exceed applicable loan limits or the total invested capital amount as stated in the investment licence.
Once the enterprise is fully operational there is no limit to the value of their short term loans.
Finally, a short term loan can be extended before its expiration date. However, if the total duration after extension amounts to more than 12 months then the medium and long term loan conditions will apply.
- Medium and long term foreign loans
The following paragraphs detail the condi-tions which apply to both medium and long term foreign loans.
The loan must be used for activities related to the enterprise's approved business lines.
The loan must be registered with the State Bank of Vietnam ("SBV"). The SBV will send a written approval to the enterprise within 15 days of the date the registration application is submitted.
At no time may the balance of the enterprise's short, medium and long term loans (including domestic loans) exceed applicable loan limits or the total invested capital as stated in the investment licence.
For example: Enterprise A's investment certificate states:
The current balance of Enterprise A's medium and long term loans are 50,000 USD
Enterprise A is therefore entitled to borrow and additional 50,000USD
(200,000 – 100,000 – 50,000 = 50,000)
If Enterprise A wants to borrow more than 50,000USD, then the investment license must be amended in order to increase the investment capital amount. The amendment procedure takes approximately 2 months.
Therefore the investor should carefully consider whether they may need to obtain a foreign loan in the future before setting the investment capital amount in the initial licensing application dossier.
- Registration with the SBV
As noted above medium and long term loans must be registered with the SBV. Short term loans do not have to be registered, which is why many enterprises prefer this type of loan.
The registration application file must include:
- A registration application;
- A notarized copy of the investment licence; and
- A copy and Vietnamese translation of the signed foreign loan agreement (confirmed by the head of the enterprise).
If an enterprise needs to change their registration (extension, change of secured prop-erty etc.), the application file must include:
- An application to change a loan registration;
- a copy of the signed agreement detailing the changes and a Vietnamese translation (confirmed by the head of the enterprises);
- A notarised copy of the investment license; and
- A written approval of the changes from the guarantor of the foreign loan in question (where such a guarantee exists).
If the medium or long term loan is not registered with the SBV then the authorised bank (see below) will not proceed with the remittance of money for any drawdown or repayment.
- Drawdown and Repayment of Foreign Loans
The borrowing, drawdown and repayment of foreign loans must be carried out through one Vietnam-based authorised bank.
There are 3 exceptions to this rule, a:
- drawdown for direct payment to a foreign beneficiary in respect of imported goods and services;
- drawdown and debt repayment through the enterprise's overseas accounts (if the enterprise is permitted to open overseas accounts); or
- drawdown in the form of the import of goods and services with deferred payments
- and debt repayments in the form of the export of goods and services.
In regards to a short term loan an enterprise cannot change from one authorised bank to another. In regards to a medium or long term loan an enterprise can change to a new authorised bank so long as the change is registered with the SBV.
In order to drawdown and/or repay a foreign loan the enterprise must present the following documents to the authorised bank:
- Upon drawdown: the loan agreement (short term loans) or the SBV original certification of registration (medium and long term loans).
- Upon repayment:
- original of the SBV registration of borrowing and repayment of the foreign loan (medium and long term loans);
- original signed foreign loan agreement (short, medium or long term); and
- original or copy source documents (confirmed by the head of the enterprise) which illustrate the original drawdown under the foreign loan agreement (short, medium or long term).
Further, the authorised bank has the right to request the presentation of any additional document which they feel is necessary. In practice, this is normally a financial statement.
If the original drawdown came under one of the exceptions mentioned above then the enterprise must notify the authorized bank where it intends to make the loan repayments of the date and amount of the said exempted drawdown. Such notification must be in writing and must occur within 5 days of the date of the drawdown.
Interest payments (or any other benefits) which are paid to the offshore parent company may be subject to foreign contractor tax under Vietnamese tax law. In such circumstances the borrower i.e. the Vietnamese registered enterprise must withhold and pay the applicable tax amount to the State.
However, this tax liability may be avoided or reduced by applying one of the Double Taxation Avoidance Agreements which Vietnam has signed. To date such agreements have been signed with more than 50 countries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.