Short-term loans from foreign parent companies: unforeseen consequences

In the context of economic integration and the increasing flow of foreign investment, the use of short-term loans from foreign parent companies has become more common among Vietnamese enterprises. However, alongside financial benefits, businesses also face significant legal risks if they fail to comply with applicable regulations.

One of the key legal issues is administrative penalties related to the improper use of foreign loans. Additionally, the misuse of foreign loans may result in the State Bank refusing to grant approval for enterprises to register foreign loans when required by law. Given the strict legal framework governing foreign exchange management and foreign borrowing, violations can lead to severe sanctions, including high penalties and aggravating circumstances for repeated offenses. Therefore, businesses must fully understand the applicable regulations to avoid undesirable legal consequences.  

This article continues to analyze the administrative penalties applicable to foreign borrowing and debt repayment, with a focus on sanctions for misusing loan funds and repeated violations and some key compliance issues and applicable penalties related to short-term foreign loans.

1. General regulations on handling administrative violations  

1.1 Pursuant to Article 2.5 of Law On Handling Administrative Violations 2012 (“LOHAV 2012”): “The repeated offences are in case individuals, organizations who had been handled administrative violations but it is not expired time limit which is deemed to be having not been handled administrative violation, they committed acts of administrative violations which had been handled again.” 

Assume violation 1 had been found out and handled, after the time of handling the violation 2, the company committed violation 2. Violation 2 will be considered as “the repeated offences”. 

1.2 Pursuant to Article 2.6 of LOHAV 2012: “The repeated administrative violations are cases of individuals, organizations who committed acts of administrative violations which before that they have committed same acts without being sanctioned and within statute of limitations for handling.” 

If violation 1 had not been found out and handled, and the company committed violation 2. Afterwards, both violations are found out and handled, this violation 2 will be regarded as “repeated administrative violations”.  

1.3 Pursuant to Article 3.2 (d) LOHAV 2012, amended by Article 1.2 of LOHAV 2020 regarding principles of handling administrative violations: 

“c) Administrative penalties must be based on the nature, extent, and consequences of the violation, the objects of violation, as well as mitigating or aggravating circumstances; 

d) Administrative penalties are imposed only when there is an administrative violation as stipulated by law. An administrative violation shall only be penalized once. If multiple individuals/enterprises commit the same administrative violation, each violator will be penalized for that violation. If an individual/enterprise commits multiple administrative violations or repeatedly violates the law, they will be penalized for each violation, except in cases where repeated violations are considered aggravating circumstances as stipulated by the Government.

Accordingly, in a specific administrative field, if the penalties for administrative violations in such field are not regulated by the Government to consider “repeated administrative violations” is the aggravating circumstance for the basis of raising the fine, the repeated administrative violation will be separately sanctioned for each violation.(1) 

1.4 Based on Article 9.2 and Article 10.1(b) of the LOHAV 2012, the repeated administrative violations and the repeated offences are both considered aggravating circumstances. Additionally, if the violator voluntarily discloses the violation, shows genuine remorse, and actively assists the authorities in detecting and handling the violation, these actions will be regarded as mitigating circumstances.

1.5 Pursuant to Article 23.4 of LOHAV 2012, amended by Article 9.1 (b) of LOHAV 2020: “A specific fine on an administrative violation shall be the average amount of the penalty frame prescribed for such violation; if there are mitigating circumstances, the fine may be reduced but not lower than the minimum of the penalty frame; if there are aggravating circumstances, the fine may be increased but not exceeding the maximum of the penalty range”. Moreover, if a violation has both aggravating and mitigating circumstances, the aggravating circumstances will be reduced based on the principle of offsetting one mitigating circumstance against one aggravating circumstance.(2)

2. Legal consequences for improper use of foreign short-term loans 

2.1 Penalties for violations in the use of the short-term foreign loan for unlawful purposes 

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.  

Essentially, the improper use of foreign loans is considered a violation of regulations on foreign borrowing and debt repayment under Circular 08/2023/TT-NHNN. According to Article 3.3(b) and Article 23.7(a) of Decree 88/2019, non-compliance with regulations on foreign borrowing and debt repayment (except for specific violations listed below) is subject to administrative penalties ranging from VND 150,000,000 to VND 200,000,000 for individual violators and from VND 300,000,000 to VND 400,000,000 for violating 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. 

For example: The company has committed improper use of Loan No. 2 and Loan No. 3 (hereinafter referred to as “Violation 1” and “Violation 2”). In the latest inspection period, the company has been discovered and fined by the Inspection Authority (“IA”) for Violation 1, Violation 2 has not yet been discovered. Later, if the IA finds out Violation 2, how will the company be handled for this violation? 

As analyzed in Section 1.3 regarding the principles of handling administrative violations and in comparison with the penalties for the act of using the foreign loan with unlawful purpose stipulated in Article 23.7 (a) of Decree 88/2019, the Government does not stipulate that repeated administrative violations are an aggravating circumstance for this type of violation. Furthermore, penalties for administrative violations must be based on the specific violation object. In this case, for this case, the objects of violation include Loan No. 2 and Loan No. 3. Therefore, although the violations are considered “repeated administrative violations,” the IA has grounds to issue separate sanction decisions for Violation 1 and Violation 2 (each separate violation).

Accordingly, the company shall be applied the equal penalties of average amount as VND 350,000,000 for Violation 1. If the IA discovers Violation 2, the company could be subject to a maximum penalty of VND 400,000,000 because Violation 2 is considered the repeated administrative violation of Violation 1, which is an aggravating circumstance as analyzed in Sections 3.1.2 and 3.1.

Please note that our legal advice is based on an objective analysis of the current laws and regulations in Vietnam. However, we do not take responsibility for ensuring that the relevant authorities will have the same perspective as us. 

2.2 It is not possible to register for an extension of the principal repayment period for short-term foreign loans

The foreign loans subject to registration with the State Bank of Vietnam (“SBV”) include:(3)

(i) Medium-term and long-term foreign loans. 

(ii) Short-term loans whose principal repayment period is renewed which have more than 01 (one) year of maturity term. 

(iii) Short-term loans which are not covered by any loan renewal contract but remain the outstanding principal (including outstanding interest included in principal) on the one-year anniversary of the date of the first withdrawal of loan proceeds, except in cases where the borrower has fully repaid the principal debt within 30 working days after the one-year anniversary of the first withdrawal. 

Thus, short-term foreign loans with a term of less than one year are not subject to loan registration with the State Bank of Vietnam (SBV). However, if these short-term loans are extended for principal repayment or still have outstanding principal after one year, the company must complete the loan registration procedures with the SBV in accordance with legal regulations. 

If the company misuses foreign loans, the SBV may refuse to issue loan registration confirmation due to non-eligibility. In this case, the lender will be required to open a offshore account in Vietnamese Dong at a commercial bank in Vietnam, and the company must make debt repayments from its loan account/direct investment capital account into this offshore account of the lender.  

3. Registration of foreign loans 

In addition to complying with the conditions regarding the permitted use of short-term foreign loans, the borrower is also responsible for fulfilling the foreign loan registration requirements. Accordingly, the following foreign loans must be registered with the State Bank of Vietnam (“SBV”):(4)

(i) Medium-term and long-term foreign loans with loan term of over 01 year (5); 

(ii) Short-term loans whose principal repayment period is renewed which have more than 01 (one) year of maturity term;

(iii) Short-term loans which are not covered by any loan renewal contract but remain the outstanding principal (including outstanding interest included in principal) on the one-year anniversary of the date of the first withdrawal of loan proceeds, except in cases where the borrower has fully repaid the principal debt within 30 working days after the one-year anniversary of the first withdrawal. 

Therefore, short-term foreign loans with a term of less than one year that do not fall under the cases required to be registered with the SBV as mentioned above are not subject to registration with the SBV by the borrower. 

Loan term for determining the obligation to register a foreign loan with the SBV is specified as follows (6):  

• For loans specified in Section 1(i) above, the loan term is determined from the expected first disbursement date to the expected final principal repayment date, based on the provisions of the foreign loan agreement. 
• For loans specified in Section 1(ii) above, the loan term is determined from the actual first disbursement date to the expected final principal repayment date, based on the provisions of the foreign loan agreement and the foreign loan extension agreement.
• For loans specified in Section 1(iii) above, the loan term is determined from the actual first disbursement date to the expected final principal repayment date.

The disbursement date is considered the date on which the funds are credited to the borrower’s account for loans disbursed in cash. 

Note: For foreign loans subject to registration with the State Bank of Vietnam (SBV), the borrower may only disburse and repay (principal and interest) the foreign loan after the SBV has issued a confirmation of loan registration or loan registration amendment, except for the following cases: (7) 

• disbursement and repayment (principal and interest) in the first year for short-term loans that are not subject to registration; and 
• disbursement of loans arising from foreign loan agreements for the purpose of converting funds used for investment preparation into foreign loans. 

In the event that the company fails to comply with the legal regulations regarding the registration of foreign loans or the registration of amendment to foreign loans, it may face a fine ranging from VND 40,000,000 to VND 60,000,000. (8)

4. Opening and use of the foreign loan and repayment account  

According to the definition in Circular 12/2022/TT-NHNN, a foreign loan and repayment account is a payment account opened by the borrower at a bank providing account services, used for disbursing and repaying foreign loans. (9) If the borrower is not a commercial bank or a foreign bank branch, all fund transfer transactions (disbursement and repayment) related to a foreign loan must be conducted through the borrower;s foreign loan and repayment account, except for the cases in which disbursement and repayment are not required to be made through such account as stipulated in Article 34 of Circular No. 12/2022/TT-NHNN.(10) 

In case the borrower is not a foreign-invested enterprise, it must open a separate foreign loan and repayment account (distinct from the company’s current account) at a bank to conduct fund transfer transactions related to the foreign loan (disbursement, principal repayment, and interest payment).(11)

If the borrower is a foreign-invested enterprise, then: (12)

• For medium- or long-term loans, the loan must be transferred into the enterprise’s Direct Investment Capital Account (“DICA”), and from there can be disbursed into the enterprise’s payment account to make payments for loan purposes. In case the loan currency differs from the currency of the DICA, the borrower may open a separate foreign loan and repayment account at the bank where the DICA is maintained to perform the foreign loan transactions. The borrower may use one account for one or multiple foreign loans.
• For short-term loans, the loan may either be transferred into the DICA as mentioned above or into a foreign loan and repayment account (other than the DICA) of the foreign-invested enterprise. Each short-term loan must be conducted through only one account service provider bank. The borrower may use one account for one or multiple short-term foreign loans.  
• For short-term loans with outstanding principal at the time of reaching exactly one year from the disbursement date, and if the borrower repays the loan within 30 working days from that one-year anniversary date, repayment shall be made through foreign loan and repayment account currently used for that loan.  

If the company fails to comply with the requirement to open and use the foreign loan and repayment account as specified, the company may face a fine ranging from VND 60,000,000 to VND 100,000,000. (13)

Strict compliance with legal regulations on foreign borrowing and repayment plays a critical role in protecting the interests of businesses against potential legal risks. Through this article, we hope to provide your business with clearer insights into the obligations to be fulfilled as well as the penalties that may arise in case of non-compliance. In our upcoming articles, we will continue to analyze additional legal issues related to short-term foreign borrowing to better support businesses in managing and executing loan transactions effectively and safely. 

(1) Refer to Article 5.3 of Decree 125/2020/ND-CP on penalties for administrative violations in taxation and invoicing, regarding cases where the Government stipulates that “repeated administrative violations” constitute the aggravating circumstance, and violators are not penalized for each violation separately: 

“b) In cases where, at the same time, a taxpayer is late in submitting multiple tax returns for multiple tax periods but for the same type of tax, they shall only be penalized for the act of late submission of the tax return with the highest monetary penalty among the violations committed as stipulated in this Decree, and the aggravating circumstance of repeated violations will be applied. 

(2) Article 9.1 of Decree 118/2021 

(3) Article 11 Circular 12/2022 

(4) Article 11 Circular 12/2022/TT-NHH 

(5) Article 2.2 Circular 08/2023/TT-NHNN  

(6) Article 12 Circular 12/2022/TT-NHH 

(7) Article 32.2 Circular 12/2022/TT-NHNN 

(8) Article 23.3 (g) Decree 88/2019/ND-CP 

(9) Article 26.1 Circular 12/2022/TT-NHNN 

(10) Article 31.1 Circular 12/2022/TT-NHNN 

(11) Article 26.3 Circular 12/2022/TT-NHNN 

(12) Article 26.2 Circular 12/2022/TT-NHNN 

(13) Article 23.4 (d) and Article 3.3 (b) Decree 88/2019/ND-CP 

See more:

1/ Vietnamese enterprises obtain short-term foreign loans

2/ Some solutions to handling overdue short-term foreign loans of enterprises in Vietnam

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

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