Enterprises have many different options to raise capital when they need to implement investment projects or expand their business models. Among them, the use of loans in various forms is always a method chosen by many businesses. In addition to domestic loans, enterprises can access foreign loans when they meet certain conditions. So how can we understand what it means to loan capital from foreign companies and the related issues surrounding borrowing capital from foreign companies? Let's explore the current legal regulations related to this issue with NPLaw below.
Enterprises have many different options to raise capital when they need to implement investment projects or expand their business models. Among them, the use of loans in various forms is always a method chosen by many businesses. In addition to domestic loans, enterprises can access foreign loans when they meet certain conditions. So how can we understand what it means to loan capital from foreign companies and the related issues surrounding borrowing capital from foreign companies? Let's explore the current legal regulations related to this issue with NPLaw below.
I. The current demand for borrowing capital from foreign companies
Currently, the demand for borrowing capital from foreign companies can depend on various factors, including:
- Expanding business operations: Foreign companies may need to loan capital to expand their business operations, open new branches, purchase equipment, scale up production, or invest in new projects.
- Increasing charter capital: Sometimes foreign companies need to increase their charter capital to comply with legal regulations or to implement long-term development plans.
- Disbursement of projects: Foreign companies may need to loan capital to disburse ongoing projects, including construction works, infrastructure development, investment in new technologies, or the purchase of raw materials.
- Commercial financing: Foreign companies may need to borrow funds to finance commercial activities, including purchasing goods, settling export contracts, or providing financial services to customers.
- Debt restructuring: In some cases, foreign companies may need to borrow capital to restructure their current debt, reduce interest costs, or extend the repayment period.
In addition, the demand for borrowing capital from foreign companies can also be affected by the economic situation, the country's financial policies, interest rates, financial risks, and many other factors.
II. Legal regulations on borrowing capital from foreign companies
1. When do enterprises borrow capital from foreign companies? Is the foreign money loan in Vietnamese Dong or foreign currency?
*For an enterprise to loan capital from a foreign company, when the enterprise applies the principle of foreign borrowing conditions of enterprises, it is as follows:
The borrowing side and foreign loans must meet the general and specific conditions corresponding to each specific foreign loan.
The borrowing side is responsible for complying with the regulations of this Circular and other legal regulations when signing and executing this foreign loan.
The State Bank supervises the compliance with foreign borrowing conditions of enterprises through the confirmation of foreign loan registration. For loans that are not subject to registration with the State Bank, enterprises are responsible to the law for complying with the conditions of foreign capital loans.
*Pursuant to Article 7 of Circular 12/2014/TT-NHNN regulating foreign loan currency as follows:
1. Foreign money loans are foreign currency.
2. Foreign loans in Vietnamese Dong are only permitted in the following cases:
3. The borrowing side is a microfinance institution;
4. The borrowing side is an enterprise with direct foreign capital investment borrowing from the profit shared in Vietnamese Dong from the direct investment activities of the lender, who is a foreign investor contributing capital to the borrowing side;
5. Other cases are considered and approved by the Governor of the State Bank based on the actual situation and the necessity of each case.
Thus, foreign money loans are considered foreign currency. borrowing from abroad in Vietnamese dong is only allowed in three cases:
- The borrowing side is a microfinance institution;
- The borrowing side is an enterprise with direct foreign capital investment borrowing from the profit shared in Vietnamese Dong from the direct investment activities of the lender, who is a foreign investor contributing capital to the borrowing side;
- Other cases are considered and approved by the Governor of the State Bank based on the actual situation and the necessity of each case.
2. Conditions for enterprises to loan capital from foreign companies
The conditions for an enterprise to loan capital from a foreign company are as follows:
- Purpose: The borrowing side is permitted to loan from abroad for the following purposes:
- Execute the production and business plan and investment project using the foreign capital loan from the borrowing side;
- Execute the production and business plan and investment project using the foreign capital loan of the enterprise in which the borrowing side participates in direct investment (applicable to medium- and long-term foreign loans);
Note: In this case, the borrowing side's loan amount does not exceed the borrowing side's capital contribution ratio in the enterprise in which the borrowing side participates in capital contribution.
- Production and business plans and investment projects using foreign capital loans must be approved by the competent authority and must be consistent with the scope of the establishment license, enterprise registration certificate, business registration certificate, investment certificate, cooperative registration certificate, and cooperative groups registration certificate of the borrowing side or the enterprise in which the borrowing side directly invests.
- Restructuring the borrowing side's foreign debt without increasing borrowing costs.
3. Which subject is eligible to loan from foreign companies?
Pursuant to Article 14 of Circular 12/2022/TT-NHNN, it is regulated as follows:
Subjects that register, registering changes to the loan
The borrowing side registers, registering changes to the loan, including:
1. The borrowing side enters into a foreign loan agreement with a lender who is a non-resident.
2. The organization is responsible for repaying the debt directly to the principal in the case where the credit institution or foreign bank branch signs a contract receiving the authorization for on-borrowing with a principal who is a non-resident.
3. The party has the obligation to repay the debt according to the debt tool issued outside the territory of Vietnam to non-residents.
4. The lessee in the financial lease agreement with the lessor is a non-resident.
5. The organization inheriting the obligation to repay the foreign loan subject to registration, registering changes as regulated in this Circular, in the case where the borrowing side is executing the foreign loan, shall carry out division, separation, consolidation, or merger.
According to the above regulation, the 5 groups of subjects mentioned in the regulation are allowed to loan capital from foreign companies.
III. Some questions about borrowing capital from foreign company
1. Some risks when enterprises loan capital from foreign companies
In the course of business operations, many foreign-invested enterprises loan capital from their owners in the form of unguaranteed foreign loans. This is quite a convenient channel for capital mobilization for FDI enterprises. However, due to the frequent nature and relative ease of obtaining capital, many enterprises have been complacent, not thoroughly understanding the legal regulations regarding foreign capital loans, leading to the following legal risks:
- Unable to repay the loan to the owner.
- Interest expenses are not considered deductible expenses when settling enterprise income tax.
- Paying fines for violating regulations on unguaranteed foreign capital loans.
2. The current competent authority responsible for managing enterprises' borrowing capital from foreign companies
Pursuant to Article 20 of Circular 12/2022/TT-NHNN, it is regulated as follows:
Authority to confirm the register, registering changes to the loan
1. The Competent Authority for confirming the register, registering changes to foreign loans (hereinafter referred to as the Competent Authority in this Circular) is:
1. State Bank (Foreign Exchange Management Department): for loans with an amount exceeding 10 million USD (or other currencies of equivalent value);
2. The State Bank branch in the province or city where the borrowing side is headquartered: for loans amounting to up to 10 million USD (or other currencies of equivalent value), except for foreign loans in Vietnamese Dong, must be reviewed and approved by the Governor of the State Bank.
1. In the case of the changes increasing or decreasing the loan amount, changes in the loan currency, changes in the borrowing side's headquarters, or changes in the borrowing side to a business with its headquarters in a different province or city, resulting in changes to the Competent Authority responsible for confirming the registering changes to the loan:
1. The borrowing side submits the dossier to register changes to foreign loans to the most recent authority that confirms the register, registering changes to foreign loans.
2. The most recent authority that confirms the register, registering changes to the loan, serves as the focal point for receiving the borrowing side's dossier to register changes to loans. Within 07 working days from the date of receiving the dossier to register changes, the most recent authority that confirms the register, registering changes to loans, must transfer all original dossiers to register changes to loans and already executed copies of the dossiers that register, registering changes (if any) of the loan to the Competent Authority pursuant to Clause 1 of this Article for further processing.
1. In the case of foreign loans in Vietnamese Dong, they must be reviewed and approved by the Governor of the State Bank. The Foreign Exchange Management Department will act as the focal point, coordinating with relevant units of the State Bank to report to the Governor of the State Bank for consideration and decision-making within their authority.
2. The exchange rate used to determine the Competent Authority for confirming the register, registering changes to foreign loans is the accounting exchange rate announced by the Ministry of Finance, applicable at the time of signing the foreign loan agreements or the agreements for changes to the foreign loan related to the loan amount.
Thus, according to the above regulations, the competent authority responsible for managing enterprises borrowing capital from foreign companies is the State Bank and the State Bank branch in the province or city where the borrowing side is headquartered.
3. Is it possible to borrow capital from a foreign parent company at 0% interest?
Pursuant to Decree 132/2020/ND-CP regulating tax management for enterprises with associated transactions, for capital loan transactions between a company in Vietnam and its parent company abroad, the interest rate can be mutually agreed upon. However, this agreement must also be in line with the market interest rates. The method for determining the interest rate is detailed in Articles 6 and 7 of Decree 132/2020/ND-CP.
Regarding the issue of foreign contractor withholding tax on foreign loans, pursuant to Clause 3, Article 7 of Circular 103/2014/TT-BTC:
- Income arising in Vietnam of foreign contractors and foreign subcontractors is any income received in any form based on contractor contracts and subcontractor contracts (except in cases specified in Article 2, Chapter I), regardless of the location where the foreign contractors and foreign subcontractors conduct their business activities." Taxable income of foreign contractors and foreign subcontractors in specific cases as follows:
Accordingly, Income from Loan Interest: is the income of the Lender from loans in any form, whether or not the loan is secured by collateral, and whether or not the lender benefits from the borrower's profits; income from deposit interest (excluding deposit interest of foreign individuals and deposit interest arising from deposit accounts to maintain operation at Vietnam of diplomatic representative authority, international representative organizations, and non-governmental organizations in Vietnam), including any bonuses accompanying deposit interest (if any); income from deferred interest as regulated in contracts; income from bond interest, bond discount (excluding tax-exempt bonds), exchequer bills; income from certificate of deposit interest.
Thus, according to the above analysis, the 0% interest rate when borrowing capital from the foreign parent company must be in line with market conditions. If the loan is given at an interest rate of 0%, it may be subject to tax assessment pursuant to Clause 1, Article 50 of the Law on Tax Management 2019.
4. Can foreign capital borrowing exceed the total investment capital?
Pursuant to Article 5 of Circular 12/2014/TT-NHNN regulating the purpose of foreign borrowing as follows:
Article 5. Purpose of foreign borrowing
The borrowing side is permitted to borrow from abroad for the following purposes:
1. Execute the production, business plan, and investment project using a foreign capital loan from the following subjects:
1. Of the Borrowing Side;
2. Of the enterprise in which the borrowing side participates in direct investment (only applicable to medium- and long-term foreign loans). In this case, the borrowing limit for the borrowing side on the total loan turnover for the production and business plan or investment project shall not exceed the borrowing side's capital contribution ratio in the enterprise in which the borrowing side participates in the capital contribution.
Business production plans and investment projects using foreign loans as regulated in this Clause must be approved by the competent authority in accordance with relevant Vietnamese laws and be consistent with the scope of the establishment license, enterprise registration certificate, business registration certificate, investment certificate, cooperative registration certificate, and cooperative groups registration certificate of the borrowing side or the enterprise in which the borrowing side directly invests.
The appropriateness here is not limited to the total borrowing amount not exceeding the registered capital loan amount but also considers the business production plan of the enterprise. For example, even if the enterprise has borrowed the registered capital loan amount, if it later arises a need to borrow from abroad to repair and upgrade existing equipment and machinery (to execute the enterprise's investment), the enterprise can still loan capital (as long as the purpose of the loan aligns with the investment content the enterprise has registered).
IV. Legal consulting services related to borrowing capital from foreign companies
Here is all the detailed information that our NPLaw provides to assist customers with issues related to borrowing capital from foreign companies. In case you have any questions related to the aforementioned issue or other legal matters, please contact NPLaw immediately for our team to provide direct consultation and guidance.
