Foreign borrowing costs of enterprises without Government guarantee

Since 2019, the impact of the COVID-19 pandemic and global economic fluctuations in Vietnam and around the world have created additional challenges for production and operational activities of enterprises. This has led to an increased demand for foreign capital as companies seek to leverage lower international interest rates (1) to sustain their operations. However, the increasing foreign debt of enterprises over recent years has potential implications for the national foreign debt safety indicators, which, in turn, could affect the country’s overall economic and financial stability.

To date, Vietnam’s legal framework includes several regulations governing foreign borrowing by enterprises without government guarantee. Specifically, Decree No. 219/2013/ND-CP, issued on December 26, 2013, prescribing management of enterprises’ foreign borrowing and repayment of foreign loans without government guarantee. Additionally, Circular No. 12/2022/TT-NHNN, issued by the State Bank of Vietnam on September 30, 2022, on guidelines for foreign exchange administration in respect of foreign borrowing and foreign debt repayment of enterprises. Most recently, Circular No. 08/2023/TT-NHNN, issued on June 30, 2023, on eligibility requirements for foreign loans without the Government’s guarantee (“Circular 08”), and Circular No. 19/2024/TT-NHNN, issued on June 28, 2024, amends and supplements several provisions of Circular No. 08/2023/TT-NHNN. Together, these regulations have further refined the conditions enterprises must meet when seeking foreign loans.  

Nonetheless, certain ambiguities and gaps remain, presenting challenges for enterprises in interpreting and applying these regulations in practice. This article will analyze key regulations on foreign borrowing cost and provide recommendations to improve the legal framework for foreign borrowing by enterprises without government guarantee.  

I. LEGAL REGULATIONS 

Foreign borrowing costs means the total amount of costs converted by the annual proportion to the loan amount that the borrower is obliged to repay to the lender and other relevant parties. These costs include foreign borrowing interest rate, insurance rate and other costs that are not part of the principal amount of the foreign loan (2).  

Article 12 of Circular 08 stipulates the conditions regarding foreign borrowing costs as follows: “The borrower and relevant parties shall comply with current law regulations on foreign borrowing interest rate and other costs associated with the foreign loan when reaching agreements on foreign borrowing costs”. 

The conditions regarding foreign borrowing costs are discretionary and only apply when the parties agree that the borrower must pay additional amounts beyond the principal debt, such as interest rates, loan insurance fees, guarantee costs, etc., to the lender and related parties. In such cases, the borrower must adhere to the agreed-upon conditions. 

Considering a specific example, Finance Leasing Company C entered into a foreign loan agreement in 2022 with multiple lenders, which are foreign institutions, for a total amount of USD 90,000,000. To facilitate this transaction, the parties agreed to appoint two members which are companies in Taiwan to arrange and manage the loan. Consequently, the borrower, in addition to the interest on the loan, is required to pay a loan arrangement fee of USD 450,000 and an agency fee of USD 5,000 per year. It can be concluded that the agreement on the loan arrangement fee and agency fee between the parties is not contrary to legal provisions, and these fees are regarded as borrowing costs as stipulated in Circular 08 mentioned above.   

In the process of managing foreign borrowing, to control and manage the cash flow and foreign borrowing limits of enterprises that engage in self-borrowing and are solely responsible for repayment without government guarantee, the Governor of the State Bank of Vietnam (“SBV”) will review and specifically decide on the conditions related to foreign borrowing costs, including the ceiling level of foreign borrowing costs at each point in time to align with the financial and monetary situation and policies (3). In practice, the SBV has not yet implemented the measure of setting a ceiling level of foreign borrowing costs. 

 II. PRACTICE AND RECOMMENDATIONS 

1. Establishing a ceiling level of foreign borrowing costs 

As previously mentioned, the foreign borrowing costs are not currently regulated; they are to be calculated based on specific fees that the borrower must pay to the lender and related parties, such as guarantors and insurers, etc. Consequently, when negotiating the terms for foreign borrowing, it becomes challenging for the borrower to determine which expenses qualify as borrowing costs and which do not. For instance, it is unclear whether late payment interest, early repayment penalties, and fees for not drawing down the funds would be included. 

This situation has dual implications. On the positive side, it grants the parties the freedom to negotiate the types of fees considered as borrowing costs, allowing them to agree on these expenses without restrictions. This flexibility could encourage additional opportunities for foreign borrowing when there is a genuine need.  

However, on the downside, the lack of a ceiling level of foreign borrowing costs could lead to transfer pricing. In such cases, the borrower may be a subsidiary or part of the same group as the lender, allowing for the negotiation of various high-cost borrowing fees. Consequently, borrowers in Vietnam might transfer substantial fees to foreign lenders, potentially incurring losses as reflected in their financial statements and may not be liable for corporate income tax due to these losses, the lenders still remit a significant amount of money abroad. 

On May 12, 2022, SBV released a draft circular on conditions for enterprises’ foreign loans without government guarantee (“Draft Circular”) imposing a ceiling level of borrowing costs as follows: 

• For foreign loans denominated in foreign currency:  

• • In case the reference rate is used (interest rates calculated and publicly listed by one or more international organizations): Reference rate + 8% per annum. 

• • In case the reference rate is not used (fixed interest rate, floating interest rate referenced to costs calculated independently by the lender, etc): SOFR Term Rate (4)4 + 8% per annum. 

• For foreign loans denominated in Vietnamese Dong: Vietnamese Government bond interest rate + 8% per annum. 

The Draft Circular was not officially approved. However, SBV proposed this provision not only based on international practices but also by considering the average borrowing costs of foreign loans already registered with SBV, as well as the average domestic lending interest rates for USD and VND. Furthermore, Vietnam’s gradual adoption of new external debt management methods in alignment with recommendations from international organizations, particularly the International Monetary Fund (IMF), is essential. Hence, SBV, enterprises, credit institutions, and related associations are encouraged to research and propose specific regulations on borrowing costs or contribute additional feedback to improve the regulation on the ceiling level of borrowing costs. 

2. Supplementing regulations on foreign borrowing interest rate 

In addition, legal regulations on foreign borrowing by enterprises without government guarantee do not set a minimum interest rate that the parties must agree upon, nor a maximum interest rate that they may agree upon.  

Regarding the minimum interest rate, there are currently many cases where enterprises borrow from their parent companies at an interest rate of 0%. According to regulations, when interest income arises from lending activities, the lender, whether an individual or a foreign organization, is required to pay contractor taxes. However, in the case of a 0% interest rate, the lender does not generate any interest income and is exempt from contractor taxes on that amount.

On the other hand, Article 50 of Law on Tax Administration 2019 stipulates that transactions not conducted at their market prices may be subject to tax imposition. If there is evidence to suggest that a 0% interest rate is not in line with typical market value, tax authorities may impose taxes accordingly. Therefore, foreign borrowing regulations could benefit from additional guidance specifying which scenarios are not permitted to agree on a 0% interest rate, enabling borrowers to better understand and negotiate appropriate terms. 

Regarding the maximum interest rate, current legislation on foreign borrowing allows lenders and borrowers the freedom to negotiate interest rates without any restrictions on the maximum level. 

However, Article 4 of Circular 96/2015/TT-BTC issued by the Ministry of Finance, which provides guidance on corporate income tax, stipulates that if an enterprise borrows from a lender that is not a credit institution or an economic organization in Vietnam, any interest paid on loans serving business operation that exceeds 150% of basic interest rate announced by the State Bank of Vietnam will not be deductible when calculating corporate income tax. 

Additionally, Clause 3 of Article 16 of Decree 132/2020/ND-CP issued by the Government, which regulates tax administration for enterprises having related party transactions, stipulates the deductibility of interest expenses for related party transactions as follows: 

Total deductible interest cost – Deposit Interests/ Lending Interests ≤ 30% * EBITDA (5) 

Where: EBITDA = Total net profit + Loan Interest Costs – Deposit Interests/ Lending Interests + Depreciation expense 

Thus, SBV could explore relevant regulations in other related fields as mentioned above to supplement specific guidelines regarding the maximum interest rates applicable for foreign loans that parties may apply. 

When applying in practice the regulations regarding foreign borrowing for enterprises not guaranteed by the Government, they still have unclear points that need to be adjusted and supplemented for borrowers to easily understand, and apply in operations, thereby avoiding risks of administrative violations in the field of foreign borrowing. Adjusting these regulations will also assist state management agencies in effectively managing the flow of foreign loans and repayments, as well as the operational efficiency of enterprises. This includes providing specific guidance on which items are considered borrowing costs, supplementing regulations on the maximum foreign borrowing interest rates that parties can apply and adding circumstances under which borrowing at a 0% interest rate is prohibited. 

(1) Dao Vu (2022), State Bank sets up fences to prevent short-term foreign loans from pouring into stocks and real estate, accessed on October 29, 2024, <https://vneconomy.vn/ngan-hang-nha-nuoc-lap-rao-ngan-von-vay-nuoc-ngoai-ngan-han-do-vao-chung-khoan-bat-dong-san.htm> 

(2) Clause 5 Article 3 Circular 08/2023/TT-NHNN 

(3) Clause 2 Article 12 Circular 08/2023/TT-NHNN 

(4) The SOFR Term rate for a 6-month period, as published by CME Group on its official electronic information page, is determined at the closest point in time before the signing of the foreign loan agreement and any related amendments concerning borrowing costs. The SOFR Term rate is calculated based on the SOFR rate published by the Federal Reserve Bank of New York and is recommended by the Alternative Reference Rates Committee (ARRC) under the Federal Reserve, ensuring that the cost ceiling aligns closely with fluctuations in international market interest rates. 

(5) Total loan interest cost arising after deducting deposit interests and lending interests within a specific taxable period which is deducted during the process of determination of income subject to the corporate income tax is not 30% more than the net profit generated from business activities within the taxable period plus loan interest costs arising after deducting deposit interests and lending interests arising within the taxable period plus depreciation/amortization expenses arising within that period of a taxpayer.

See more:

1/ Noteworthy issues regarding foreign loans

2/ Vietnamese enterprises obtain short-term foreign loans

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