Short-Term Borrowing from Foreign Parent Companies: Legal Opportunities and Challenges for Vietnamese Enterprises (Part 1)

In the context of international economic integration, leveraging foreign borrowing has become one of the key solutions to help Vietnamese enterprises enhance their financial capacity and improve competitiveness in the market. Notably, Vietnamese subsidiaries often turn to short-term foreign loans from parent companies or other affiliates within the same group as a flexible measure to supplement funding, address financial allocation difficulties, or support business development projects. However, alongside financial benefits, this form of borrowing presents various complex legal issues that must be addressed to ensure compliance with regulations and optimize the effective use of capital. This article outlines some fundamental legal aspects that Vietnamese enterprises need to understand and adhere to. 

1. Legal provisions on short-term foreign loans 

Under current regulations, foreign borrowing is defined as “the act of the borrower receiving credit from a non-resident through the execution and performance of foreign loan agreements in the form of loan contracts, deferred payment sales contracts, entrusted loan agreements, financial leasing agreements, or the issuance of debt instruments by the borrower.” (1) 

So, who qualifies as a “non-resident”? Pursuant to Article 4.3 of Ordinance on Foreign Exchange 2005 (amended in 2013), a “non-resident” is any entity not classified as a “resident” under Article 4.2 of this Ordinance.(2) Accordingly, foreign-established companies, including parent companies or other affiliates within the same group, are not classified as residents. Therefore, loans received by Vietnamese enterprises from such entities through loan agreements are considered foreign loans. 

As defined in Circular No. 12/2014/TT-NHNN (“Circular 12/2014”), a short-term foreign loan refers to a foreign loan with a maturity period of up to one year.(3) This definition remains unchanged in Circular No. 08/2023/TT-NHNN (“Circular 08/2023”), effective from August 15, 2023. Consequently, in practice, Vietnamese enterprises typically structure loan agreements with a term not exceeding 365 days to meet the criteria for short-term foreign loans.(4) 

However, foreign borrowing involves more than just compliance with loan term requirements. Vietnamese enterprises must strictly adhere to relevant legal regulations, including the purpose of loan utilization, borrowing and repayment conditions, registration and reporting obligations, and other legal considerations. 

2. Purpose of using short-term foreign loan 

In principle, the borrower is fully responsible for using the foreign loans in accordance with lawful purposes as prescribed by Vietnamese law.(5) Here are the details of the permitted purposes of use as prescribed by law during each period: 

a. Purpose of using loans as prescribed in Circular 12/2014(6):  

The borrower is allowed to use short-term foreign loans for the following purposes:(7) 

(i) implement the production and business plans or projects of investment funded by foreign loan of the borrow. Accordingly, the production and business plans, as well as investment projects that utilize foreign loans, must be approved by the competent authorities in accordance with the relevant regulations of Vietnamese law and must align with the scope of the establishment license, the enterprise registration certificate, the business registration certificate, the investment registration certificate, etc.  

(ii) restructure the foreign debts of the borrower without increasing the loan expense.

b. Purpose of using loans as prescribed in Circular 08/2023(8):  

The borrower is not allowed to use short-term foreign loans to implement the business plans or investment projects as stipulated in Circular 12/2014. The borrower is only allowed to use short-term foreign loans for the following purposes:(9)

(i) restructuring its foreign debts; 

(ii) paying its short-term debts payable in cash by the borrower (excluding the principal of domestic loans). These short-term payable debts are those incurred during its execution of investment projects, business plans, or other projects of the borrower. The short-term payable debts will be determined based on current legal regulations guiding the enterprise accounting regime. The use of foreign loans must align with the scope of the establishment license, the enterprise registration certificate, the business registration certificate, and the investment registration certificate, etc. 

Please note that the borrower is responsible for properly maintaining all documents and evidence related to the use of foreign loans in accordance with the stated purpose, as well as any documents related to changes in the capital use plan (if any) as required by Circular 08/2023. The borrower must present these documents in full to facilitate inspections and audits by the competent authorities concerning the use of foreign loans.(10)

Thus, Vietnamese enterprises borrowing short-term foreign loans from parent companies must ensure compliance with the purposes of loan use as stipulated in Circular 08/2023 mentioned above and maintain complete documentation, records, and evidence proving the use of foreign loan proceeds in accordance with the lawful purposes. 

3. Penalties for violations in the use of the short-term foreign loan for an unlawful purpose  

Currently, penalties for administrative violations related to the use of foreign loans and foreign exchange activities are prescribed in Decree No. 88/2019/ND-CP (“Decree 88/2019”). However, Decree 88/2019 does not clearly and specifically stipulate penalties for using foreign loans for unlawful purposes.  

In essence, using foreign loans for unlawful purposes is one of the violations of the regulations on foreign borrowing and debt repayment as stipulated in Circular 12/2014 and Circular 08/2023. Under Article 3.3 (b) and Article 23.7 (a) of Decree 88/2019, for non-compliance with the legal regulations on foreign borrowing and debt repayment, except for the violations listed below, the administrative fines imposed range from VND 150,000,000 to VND 200,000,000 for individuals and from VND 300,000,000 to VND 400,000,000 for organizations. 

(i) Failure to comply with legal regulations regarding administrative procedures for registering foreign loans and registering changes to foreign loans; 

(ii) Failure to comply with legal regulations regarding the opening, closing, and use of accounts in Vietnam for foreign borrowing and debt repayment; 

(iii) Improperly withdrawing funds or repaying foreign loans in violation of legal regulations. 

As a result, Vietnamese enterprises may face fines ranging from VND 300,000,000 to VND 400,000,000 for non-compliance with legal regulations on foreign borrowing and debt repayment, including using foreign loans for unlawful purposes. 

The above are some key considerations regarding the proper use of short-term foreign loans. In our upcoming articles, we will address additional issues related to short-term foreign loans that require compliance, as well as applicable penalties for violations. 

(1) Article 3.1 of Decree 219/2013 

(2) Article 4.2 of Ordinance on Foreign Exchange 2005 (amended in 2013) 

(3) Article 2.1 of Circular 12/2014 

(4) Article 146.1 (a) of Civil Code 2015  

(5) Article 6.1 of Circular 08/2023 

(6) Circular 12/2014 takes effect from May 15th, 2014 to August 14th, 2023 

(7) Article 5 of Circular 12/2014 

(8) Circular 08/2023 takes effect from August 15th, 2023 

(9) Article 17.1 of Circular 08/2023 

(10) Article 19.4 Circular 08/2023 

See more: 

1/ Vietnamese enterprises obtain short-term foreign loans

2/ P2P lending activities under the draft decree on the controlled trial mechanism for financial technology activities in the banking sector

3/ Trends to stricter control for short-term foreign loan purpose

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