Legal Issues Regarding Foreign Capital Loans And Method Of Money Transfer

In recent years, there have been positive changes in the country’s economy, together with the increased demand for mobilizing and using the capital of enterprises. Nonetheless, not all enterprises have available capital to continue investing and developing; hence, taking loans from different sources is always an effective solution for enterprises’ financial management. Nowadays, besides borrowing capital from domestic banks, enterprises often seek ways to approach and borrow foreign capital in light of manufacturing expansion, development of business activities and investment projects as well. Within the framework of the Vietnam government’s foreign debt management and current regulations, enterprises borrowing foreign loans, repaying foreign debts must comply with the conditions on the borrowing of foreign loans and repayment of foreign debts; make loan registration, open and use accounts, withdrawal capital, and transfer money, report on loan performance in accordance with regulations of the State Bank. Although most enterprises have strictly complied with the regulations on the borrowing of foreign loans and repayment of foreign debts when borrowing, there are still some that have not yet been carefully searched while implementing leading to the misunderstanding of the regulations and, eventually, unfortunate consequences. Thus, within the scope of this article, acknowledging this issue allows us to highlight certain remarks that the Borrower needs to duly understand and follow to limit faults and violations with respect to the borrowing of foreign loans and repayment of foreign debts without a government guarantee.

To begin with, what is a foreign loan without a government guarantee?

In accordance with Clause 2 Article 3 Decree No. 219/2013/ND-CP, a foreign loan without a government guarantee, also known as “borrowing a foreign loan by the mode of self-borrowing and self-payment), is a loan taken by a borrower by the mode of self-borrowing and self-responsibility for payment to the foreign creditors (“Foreign Loans”).

Thus, a company duly incorporated and operating in Vietnam (including foreign-invested companies) (“the Borrower”) is allowed to borrow capital from foreign organizations, individuals (“the Creditor”) to meet its capital demand, such loan by the Borrower and the Creditor is also deemed to be Foreign Loans and must satisfy the conditions under the law of Vietnam on the borrowing of foreign loans and repayment of foreign debts.

However, regarding a loan whose Creditor is a foreign individual allowed to reside in Vietnam for a duration of 12 months or more (for instance, an individual who has been granted a temporary residence card for a period of 12 months or more), such a loan is not deemed a foreign loan and is not subject to relevant regulations on borrowing foreign loans and repayment of foreign debts.

Remarks on basic legal issues on Foreign Loans

• Registering with the State Bank

Loans being subject to make or not to make registration with the State Bank include:

• Short-term foreign loans (“Short-term Loans”) with a maturity not exceeding one year are not subject to registration with the State Bank (except for renewed short-term loans having more than one year of maturity term or non-renewed short-term loans but remain the outstanding principal owed after the tenth day from the date of first fund withdrawal in a full one year).

• Mid-term and long-term foreign loans (“Mid-term or Long-term Loans”) with the maturities longer than one year or renewed short-term loans or loans remaining the outstanding principal owed after the maturity term ends as above, the Borrower shall carry out the procedures for foreign loan registration with the State Bank.

• Nonetheless, regarding Mid-term and Long-term Loans made in the form of deferred payment for import of goods, there is no need to register such loans with the State Bank.

The Borrower must submit dossiers to apply for loan registration to the State Bank of Vietnam within 30 days since:

• The parties enter into an agreement on the renewal of Short-term Loans into Mid-term or Long-term Loans;

• The anniversary of the date of first fund withdrawal in full one year concerning Short-term Loans not having renewal contract but remaining the outstanding principal owed at the time of the anniversary of the date of first fund withdrawal; or

• The parties enter into a mid-term or long-term loans contract or a fund withdrawal agreement (if the parties have already entered into a framework contract on mid-term or long-term loans).

The Borrower needs to remark in case there is any change in contents relating to Foreign Loans referred to in the confirmation of foreign loan registration given by the State Bank, the Borrower shall be obligated to make a registration for changes of Foreign Loans with the State Bank, except for some cases in which the Borrower is only responsible for notifying the State Bank in writing, including Plan for fund withdrawal, debt repayment and fee remittance changed within 10 days as against the ones previously approved by the State Bank; Change of the Borrower’s address in the city or province where the Borrower’s head office is located; Change of the Creditor, related information about such Creditor or change of the commercial transaction name of the account service provider.

The Borrower must apply for registration/ notifying of change within 30 days from the date of change or receipt of notification of modification. In case the Borrower fails to carry out such procedures for Foreign Loans change at the State Bank of Vietnam, the Borrower may be subject to an administrative fine up to 60.000.000 VND.

• Loan receive accounts

In accordance with Clause 1 Article 24 Circular No. 03/2016/TT-NHNN: Foreign borrowing and foreign debt repayment account refers to the payment account that the Borrower opens at an account service provider to withdraw funds and repay debts incurred from Foreign Loans and other money transfer activities relating to foreign borrowing and foreign debt repayment and foreign loan guarantee (“Loan Account ”).

Based on the provisions on loan receive accounts in accordance with the law on foreign exchange, there can be two subjects classified as follows: 

• The Borrower is a Foreign Direct Investment enterprise; and

• The Borrower is not a Foreign Direct Investment enterprise.

Foreign Direct Investment enterprises including:

• Enterprises established in the form of investment of establishing a business organization whose members or shareholders are foreign investors and granted the Investment Registration Certificate under the law on investment; or

• Enterprises other than those prescribed in point a of this clause and at least 51% of charter capital of which is owned by foreign investors as follows:

1. 1. Enterprises operating in conditional business lines or without conditions applicable to foreign investors and at least 51% of charter capital of which is held by foreign investors through contribution purchase of shares/stakes;
   2. Enterprises derived from division, acquisition, consolidation whose 51% of charter capital is owned by foreign investors after such events;
   3. New enterprises are established by relevant laws.

• Project enterprises established by foreign investors to implement PPP projects in accordance with the law on investment.

Hence, with respect to the Borrower being a Foreign Direct Investment enterprise:

• Regarding Mid-term or Long-term Loans, such loans must be transferred to the Direct Investment Capital Account of enterprises (“DICA”) and then from DICA, such loans shall be disbursed to the enterprises’ payment account to pay for borrowing purposes;

• Regarding Short-term Loans, such loans can be transferred to DICA analog to the aforementioned case or to Loan Account of FDI enterprises not being DICA and used only for the purpose of loan receive, debt repayment relating to short-term foreign loans. Each Short-term Loan shall merely be allowed to open its account at one account service provider. The Borrower may use one account for one or more short-term foreign loans.

With respect to the Borrower not being a Foreign Direct Investment enterprise: foreign loans (regardless of Short-term, Mid-term, or Long-term Loans) are all transferred to Loan Account. Each Foreign Loan shall merely be allowed to open its account at one account service provider and the Borrower may also use one account for one or more short-term foreign loans.

If the Creditor is a foreign individual allowed to reside in Vietnam for a duration of 12 months or more having a need to lend the Borrower money, how would the law be applied?

With respect to the Creditor being a foreign individual who is allowed to reside in Vietnam for 12 months or more: In accordance with Clause 1 Article 3 Decree No. 219/2013/ND-CP, borrowing of a foreign loan means the Borrower is receiving a credit amount of a non-resident through signing and implementing a foreign loan agreement in the form of a loan contract, contract on goods purchase and sale on deferred payment, loan provision entrustment contract, financial leasing contract, or issuance by the Borrower of debt instruments. In case the Creditor is a foreign individual allowed to reside in Vietnam for a duration of 12 months or more, the loan is not deemed to be  Foreign Loans and is not subject to relevant regulations on the borrowing of foreign loans and repayment of foreign debts. Hence:

• If such a loan is made in a legal source of income in Vietnam: The parties are free to enter into a loan agreement under the provisions of civil law and are not subject to regulations on the borrowing of foreign loans and repayment of foreign debts.

• If such a loan is made in a legal source of income in foreign countries: It is not deemed to be Foreign Loans and not subject to regulations on the borrowing of foreign loans and repayment of foreign debts. However, Vietnamese law has not yet had any legal regulated framework and duly specified it. Therefore, in fact, in order that the Borrower receives a loan from the Creditor, some banks have instructed to transfer money via DICA or Loan Account as prescribed on Foreign Loans above.

If the parties fail to comply with the aforementioned provisions relating to the loan receive, they may be subject to an administrative fine for violations as follows:

• Failing to comply with law regulations on opening, closing and use of accounts in Vietnam for conducting one of the following operations: Foreign investments in Vietnam; Vietnam’s outward investments; foreign borrowing and foreign debt payment…, with an administrative fine up to 100.000.000 VND;

• Carrying out fund withdrawal or repayment of foreign debt against law regulations, with an administrative fine up to 100.000.000 VND;

• Failing to comply with law regulations on foreign borrowing and foreign debt repayment (except for violations mentioned above), with an administrative fine up to 400.000.000 VND;

• Lending in the form of cash payment, with an administrative fine up to 400.000.000 VND, and being enforced transfer of benefits illegally obtained from any violations and prohibited to expand the operating scope, scale and regions until remedial measures against such violation are completed.

Additionally, the Creditor may be subject to enterprise income tax/personal income tax from the interest obtained and it must be kept by the Borrower to declare and pay tax to the competent tax authorities in accordance with the law.

Here are some legal issues relating to foreign loans without government guarantee in which the Borrower needs to duly acknowledge and comply with to properly perform, limit fault leading to unwanted consequences.

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