- Legal Basis
- Circular 12/2022/TT-NHNN on guidelines for foreign exchange administration in respect of enterprise’s foreign borrowing and foreign debt repayment of enterprises (“Circular 12/2022/TT-NHNN”);
- Circular 12/2014/TT-NHNN requirements for taking foreign loans applied to companies not guaranteed by the government. (“Circular 12/2022/TT-NHNN”)
- Introduction
The demand for business financing in Vietnam is rapidly increasing, spurred by government policies aimed at economic recovery and growth. While domestic lending is a commonly practiced method of business financing, foreign loans often present a unique set of challenges. Concerns from lenders primarily revolve around the legal requirements for executing loan transactions, especially in cases involving foreign currency and lenders. Conversely, borrowers are often concerned about the tax implications of foreign loans. Typically, foreign loans are only extended to onshore borrowers, and it is exceptionally rare for onshore banks in Vietnam to facilitate loans to offshore entities. Furthermore, the foreign loans are subject to statutory limits based on their type, size, and purpose.
In August 2023, Vietnam introduced new regulations in Circular 08/2023/TT-NHNN, which detailed procedures and legal considerations for foreign loans. Many businesses are currently apprehensive about their funding prospects, and lenders are trying to comprehend the updated requirements. Therefore, a thorough understanding of the legal requirements and the nuances of the foreign loan legal framework in Vietnam is essential. This article aims to provide a comprehensive overview of these key considerations and outline the new legal developments to assist businesses in understanding their funding options.
- Overview of Legal Framework in Vietnam for Foreign Borrowing
Guidance provided under Circular 12/2022/TT-NHNN categorizes a foreign loan as either guaranteed or not guaranteed by the Government. This classification includes foreign borrowing through various contracts such as borrowing, deferred payment for imports, lending instruments, finance leasing, or debt instrument issuance on the international market.
These foreign loans are divided into two categories: 1) Short-term foreign loans, with a term not exceeding one year, and 2) Medium-term and long-term foreign loans, generally ranging from over one year to a maximum of ten years for a long-term loan. The loan term begins from the date of the first withdrawal under the agreement until the expected final repayment date.
Furthermore, Circular 12/2014/TT-NHNN and the newer Circular 08/2023/TT-NHNN impose certain limitations on these loans.
- Procedures for Taking Foreign Loans
- General
Formerly, Circular 12/2014/TT-NHNN set distinct borrowing conditions for Vietnamese borrowers, differentiating between credit institutions and incorporated companies (referred to as “Vietnamese Companies”). The loan agreement with an offshore lender must specify the loan's purpose and duration. A private company in Vietnam may only borrow from a foreign lender if it meets the general statutory requirements outlined in Circular 12/2014/TT-NHNN and the additional requirements for each offshore loan. These include registration with the State Bank of Vietnam (“SBV”) (if required), the agreement must be in written format, and compliance with additional stipulations under Article 10 of Circular 12/2014/TT-NHNN. Finally, the loan must not contravene Vietnamese law, and parties must verify if any international treaties to which Vietnam is a signatory apply to the transaction.
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- Loan Currency and Specific Purpose
The short-term offshore loan must be denominated in foreign currencies. However, this does not apply in certain circumstances, such as when a foreign-invested enterprise borrows distributed dividends from its foreign shareholders/members. For medium or long-term loans, Circular 12/2014’s stipulations mandate that the borrower cannot enter a short-term foreign loan agreement for medium or long-term purposes.
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- Application Procedure
When applying for foreign loans, the completion of a written offshore loan agreement is mandatory before loan disbursement. This requirement, however, is not applicable to credit institutions or branches of offshore banks when dealing with short-term loans.
The application process involves printing and filling out a form available online, which must then be signed and stamped by the applicant. In cases where the applicant fails to declare loan information on the website prior to submitting the written Loan Agreement, they are required to complete the form provided in Appendix 01 of Circular 12/2022/TT-NHNN. This process, as outlined in the circular, is predominantly manual and does not recognize digital loan agreements. The form submission is bound by specific deadlines, which vary depending on the loan type, the issuance of qualifying certificates to the applicant, and whether any funding has been withdrawn.
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- Loan Currency
Short-term offshore loans must be in foreign currencies. However, there are exceptions to this rule, such as when a foreign-invested enterprise borrows distributed dividends from its foreign shareholders or members. This stipulation ensures the appropriate categorization and management of loans based on their terms.
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- Specific Purpose of the Loan
Circular 12/2014 clearly outlines the intended use of short-term foreign loans, emphasizing that they should not be utilized for medium or long-term objectives. This provision ensures that the nature and duration of the loan align with its purpose, promoting transparency and regulatory compliance.
- New Points in Circular 08/2023/TT-NHNN
In response to the growing trend of foreign borrowing by non-banking enterprises, the State Bank of Vietnam (“SBV”) recently issued Circular 08/2023/TT-NHNN. This new regulation outlines the conditions for foreign borrowing without government guarantees, marking a significant shift in the Vietnamese financial landscape. This article delves into the key aspects of Circular 08/2023/TT-NHNN, compares it with previous regulations, and highlights the challenges and opportunities it presents.
- Foreign Loans under the Form of Deferred Payment for Imported Goods
Circular 08/2023/TT-NHNN offers clarity on the usage of foreign loans under deferred payment terms for imported goods. Borrowers are not bound by the conditions set in this Circular for such transactions. However, they must adhere to the foreign exchange management guidelines and relevant legal documents regarding borrowing and repayment.
- Elimination of Conditions Regarding Borrowing Costs
In a significant move, the Circular removes the requirement to restructure foreign debts without increasing borrowing costs. Though the costs associated with new and existing loans must still be detailed in the borrower's restructuring plan, this change simplifies the process and provides more flexibility in managing foreign debts.
- Change of Short-Term Borrowing Purposes
Circular 08/2023/TT-NHNN departs from its predecessor, Circular 12/2014/TT-NHNN, by allowing the use of short-term loans for medium and long-term objectives. This adjustment provides borrowers with greater versatility in restructuring their foreign loans, including those with longer maturities.
- Borrowing Party Permitted Temporary Utilization of Idle Capital from the Loan for Deposit
The Circular allows borrowers to deposit idle capital from disbursed loans with credit institutions or foreign bank branches in Vietnam. This flexibility, however, comes with a caveat: each deposit must not exceed a duration of one month, ensuring compliance with regulations and prescribed time limits.
In addition to these points, Circular 08/2023/TT-NHNN continues to streamline administrative procedures related to foreign loans in Vietnamese dong and maintains existing management methods for both short-term and medium-to-long-term foreign loans. The Circular's clear provisions are a positive step in supporting businesses in the rational mobilization of foreign loans for their production and business activities.
- Some Challenges in Circular 08/2023/TT-NHNN
- Foreign Loan for Projects in Subsidiaries
Circular 08/2023/TT-NHNN presents a noteworthy restriction: borrowers are prohibited from using foreign loans to finance production, business plans, or investment projects in their subsidiaries. This applies regardless of the method of investment, whether through shareholder loans, business cooperation contracts (“BCC”), or capital contributions to purchase newly issued shares in the subsidiaries. As such, loans registered for these purposes may not receive approval from the SBV, posing potential legal and financial risks. Borrowers must carefully consider these restrictions in the management and utilization of foreign loans.
- Foreign Loans in Merger and Acquisition Transactions
Unlike Circular 12/2014/TT-NHNN, Circular 08/2023/TT-NHNN does not explicitly address the use of foreign loans for capital contributions or share transfer payments in target companies. Historically, approvals for such transactions were evaluated on a case-by-case basis. The current Circular maintains this ambiguity, leaving the possibility of using foreign loans for these purposes unclear and subject to the SBV's discretion at different times. This ambiguity may pose challenges for borrowing parties, particularly in demonstrating their ability to repay based on their cash flow.
- Conclusion
In conclusion, Circular 08/2023/TT-NHNN represents a significant advancement in the regulatory framework for foreign borrowing by non-banking enterprises in Vietnam. It offers increased flexibility and simplifies certain processes, yet also introduces new challenges that enterprises must navigate. As the Vietnamese financial market continues to evolve, understanding and adapting to these regulations will be crucial for businesses seeking to leverage foreign borrowing effectively. By staying informed and compliant, enterprises can utilize these opportunities to enhance their growth and competitiveness in the global market.
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