Under foreign exchange control regulations, companies in Vietnam are allowed to enter into cross-border loan agreements with offshore, non-resident lenders in accordance with ‘self-borrowing and self-repayment’ principles.  In addition to equity and domestically-generated loans, the cross-border lending mechanism is a popular financing option that investors utilize to finance their investments in Vietnam.

In general, the movement of money in and out of Vietnam is strictly regulated by law and controlled by the banking regulators.  The purpose of this executive brief is to alert corporate leaders to key factors when considering ‘self-borrowing and self-repayment’ cross-border lending to fund their business in Vietnam.

Foreign loans subject to approval of the State Bank of Vietnam

Registration of foreign loans with the State Bank of Vietnam may be compulsory based on the maturity of the loan.  Foreign loans subject to this registration requirement include (i) foreign medium- and long-term loans (i.e., terms of more than one year), (ii) foreign short-term loans that have been extended to a total loan term of more than one year, and (iii) foreign short-term loans that are not extended but still have an outstanding principal on the first anniversary of the initial capital drawdown.

This registration process is akin to an approval process as the remittance banks will not release the foreign loan funds to the local borrower or handle repayments to the foreign lender if the State Bank of Vietnam has not approved such loan.  Failure to adhere to the registration requirements may subject the borrower to administrative penalties.  Subsequent amendments to the above foreign loans (e.g., repayment schedule, interest rate, head office address of the borrower) also require the borrower to register or notify such amendments with the State Bank of Vietnam.

Vietnamese law also requires local borrowers to prepare and submit quarterly reports on the status of implementation of their foreign short-, medium-, and long-term loans to the State Bank of Vietnam.

Limited purposes qualified for foreign loans

It is a common misunderstanding that local borrowers are permitted to obtain foreign loans for any purpose.  On the contrary, under the current regulations, the acquisition of foreign loans may only be obtained for limited purposes, including (i) implementation of business plans and investment projects of the borrower (or its investee company), or (ii) restructuring the foreign loans of the borrower without increasing the costs of borrowing.  Therefore, when drafting the loan agreement and registering the loan, the borrower is required to provide justification as to the purpose of the loan to the State Bank of Vietnam.

Borrowing limits of foreign loans

The total net amount of loan monies (loan monies actually received less principal repayments) of all foreign medium- and long-term loans made by Vietnamese entities within a year is subject to the annual debt ceiling approved by the Prime Minister of Vietnam.  Currently, the debt ceiling is USD 6.35 billion in 2021.

Additionally, domestic companies with foreign investment are also subject to the borrowing limits identified in their investment (registration) certificate.  Specifically, the total loans with terms of more than one year are not permitted to exceed the maximum loan capital recorded in this certificate.  If such loans exceed the maximum, the company may be required to register for an amendment of the investment (registration) certificate to reflect the new investment capital, specifically the loan capital.

Foreign loan currency and interest rate

Vietnamese law requires foreign loans to be disbursed in foreign currency (note that a VND loan is only permitted in limited circumstances, e.g., a foreign-invested company borrows money from its foreign shareholder’s profits which are distributed in VND).

Generally, there is no specific ceiling applied to the interest rate of a foreign loan.  However, in practice, when registering a medium- or long-term foreign loan, the State Bank of Vietnam might issue a warning if they believe that the interest rate is too high (as compared to a domestic loan).  If the loan is a short-term loan, it is unlikely that the State Bank of Vietnam will question the interest rate (as it is not required for registration with the State Bank of Vietnam).  However, there is a possibility that an unreasonably high interest rate on the loan may be flagged and challenged by the remittance bank.

If you have any questions or concerns regarding cross-border lending in Vietnam, our experienced corporate attorneys are always available at letran@corporatecounsels.vn

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