Debt-to-equity conversion is a solution increasingly adopted by enterprises to reduce financial pressure and restructure capital. However, alongside its benefits, such an approach also entails significant legal risks that enterprises should clearly identify before implementation.

I. Current situation relating to debt-to-equity conversion

In recent years, debt-to-equity conversion has increasingly been adopted by enterprises in Vietnam as a solution for handling financial pressure, particularly in the context of cash flow difficulties and limited debt repayment capacity. Such a method is not only applied by financially distressed enterprises but is also commonly used in corporate restructuring activities, attracting investors, or formalizing internal loans between shareholders/members and the company.

However, practical implementation shows that debt-to-equity conversion still involves numerous complications. Some enterprises fail to comply with regulations on capital contribution conditions, fail to clarify the legality of debts, or fail to adhere to valuation principles, thereby creating risks of rejection by competent authorities or internal disputes. In many cases, tax consequences arise or ownership structures change without adequate control measures.

II. Concept of debt-to-equity conversion

1. What is debt-to-equity conversion?

Debt-to-equity conversion refers to an arrangement between an enterprise and its creditor whereby a lawful debt is used to replace a payment obligation by converting such debt into contributed capital or shares in the enterprise. As a result, the creditor no longer retains the status of a party entitled to demand debt repayment, but instead becomes a member or shareholder of the company with rights and obligations corresponding to the converted capital portion.

It is considered a special form of capital contribution in which the “contributed asset” is neither cash nor tangible property, but rather the right to claim debt against the enterprise itself. Debt-to-equity conversion helps enterprises reduce financial pressure and improve capital structures while simultaneously enabling creditors to participate more deeply in the enterprise’s operations and long-term interests.

2. Which categories of debt may be converted into contributed capital within an enterprise?

Vietnamese law does not contain a specific provision expressly listing “categories of debts eligible for conversion”. However, debt-to-equity conversion is recognized and inferred from legal provisions governing contributed assets and contribution rights, specifically as follows:

  • Pursuant to Clause 1, Article 34 of the Law on Enterprise 2020 as amended and supplemented in 2025, assets used for capital contribution include Vietnam Dong, freely convertible foreign currencies, gold, land use rights, intellectual property rights, technologies, technical know-how, and other assets that can be valued in Vietnam Dong. Accordingly, debts (rights to claim debts) are regarded as property rights and may be used as contributed assets if capable of valuation.
  • Article 105 of the Civil Code 2015 provides that assets include objects, money, valuable papers, and property rights. Rights to claim debts are considered a type of property right and therefore may participate in capital contribution transactions. Furthermore, Article 115 of the Civil Code 2015 stipulates that property rights are rights with monetary value capable of transfer in civil transactions. It serves as the legal basis legitimizing the use of debts (rights to claim debts) as contributed assets.

III. Legal regulations relating to debt-to-equity conversion

1. What conditions must a debt satisfy to be used as a contributed asset?

For a debt to be used as a contributed asset in a debt-to-equity conversion transaction, the following conditions must be satisfied:

  • The debt must constitute a lawful property right capable of monetary valuation in accordance with Articles 105 and 115 of the Civil Code 2015. It ensures that the debt possesses economic value and may lawfully participate in transactions.
  • The creditor must be the lawful owner of the debt and have the right to use such property for capital contribution pursuant to Clause 2, Article 34 of the Law on Enterprise 2020 as amended and supplemented in 2025.

Accordingly, only debts constituting lawful property rights, owned by creditors, capable of valuation, and free from disputes are eligible for debt-to-equity conversion under applicable laws.

2. Which principles must be followed when valuing debts for debt-to-equity conversion?

The valuation of debts for debt-to-equity conversion must comply with the principles prescribed in Clause 2, Article 36 of the Law on Enterprise 2020 as amended and supplemented in 2025.

  • The debt must be valued according to its actual value at the time of capital contribution, based either on agreement among the parties or through an independent valuation organization. Where valuation is conducted by a valuation organization, the value of contributed assets must be approved by more than 50% of members or founding shareholders. Valuation must ensure honesty and objectivity.

Accordingly, when valuing debts for debt-to-equity conversion, enterprises must ensure that the valuation accurately reflects actual value, remains transparent, and that parties bear legal liability for inaccuracies in order to avoid future disputes and liabilities.

3. Procedures for debt-to-equity conversion

The procedures for debt-to-equity conversion generally include the following basic steps:

  • Identification and review of debts: The enterprise and creditor must examine the legality, value, and dispute status of the debt to ensure eligibility for capital contribution pursuant to Article 34 of the Law on Enterprise 2020 as amended and supplemented in 2025. The parties should execute a written agreement regarding debt-to-equity conversion, including conversion value, capital/shareholding ratios, and rights and obligations of the parties.
  • Debt valuation: The debt must be valued according to its actual value at the time of contribution, either through mutual agreement or by engaging an independent valuation organization. Valuation must be honest and objective; if incorrectly valued, founding members/shareholders may take liability under Clauses 2 and 3, Article 36 of the Law on Enterprise 2020 as amended and supplemented in 2025.
  • Approval of internal corporate resolutions: Acceptance of new members/shareholders and adjustment of charter capital must be approved by the competent corporate authority.
  • Registration of changes to enterprise registration contents: Where the conversion results in changes to charter capital, members/shareholders, or ownership structure, the enterprise must register such changes with the business registration authority in order to update legal information under Article 30 of the Law on Enterprise 2020 as amended and supplemented in 2025.

4. What common legal risks should enterprises be aware of when conducting debt-to-equity conversion?

When conducting debt-to-equity conversion, enterprises should pay attention to the following common legal risks:

  • Risks relating to the legality of debts: If debts are unlawful, disputed, or unconfirmed, the conversion may be rejected by competent authorities and may result in disputes with other creditors.
  • Risks of inaccurate valuation: Valuing debts above or below actual value may cause damage to either the enterprise or the creditor, while also creating legal liability for members/shareholders under Clauses 2 and 3, Article 36 of the Law on Enterprise 2020 as amended and supplemented in 2025.
  • Risks of changes to ownership structure: Debt-to-equity conversion alters ownership ratios and voting rights within the company. Without the consent of existing members/shareholders, internal disputes may arise.

IV. Questions regarding debt-to-equity conversion

1. Does debt-to-equity conversion lead to any tax obligations for the enterprise or the creditor?

Debt-to-equity conversion may lead to tax obligations for both the enterprise and the creditor in certain circumstances:

  • For the enterprise: If the conversion reduces liabilities and records the amount as contributed capital, the enterprise must consider corporate income tax obligations related to the difference between the book value of the debt and the value of the contributed capital under Point k Clause 2 Article 3 of the Law on Corporate Income Tax 2025.
  • For the creditor: Upon receiving contributed capital in place of debt repayment, if the value of the contributed capital exceeds the original value of the debt, the excess amount may be treated as taxable personal income or income derived from capital transfer under Point c Clause 4 Article 3 of the Law on Personal Income Tax 2025.

2. Must an enterprise adjust its charter capital when converting debt into contributed capital?

When implementing a debt-to-equity conversion, the enterprise is required to adjust its charter capital. Pursuant to Clause 34 Article 4 of the Law on Enterprise 2020 as amended in 2025, charter capital means the total value of assets contributed or committed to be contributed by members or owners upon establishment of a limited liability company or partnership, or the total par value of shares sold or subscribed for upon establishment of a joint-stock company. Therefore, converting debt into contributed capital changes the charter capital initially registered by the enterprise.

Any debt converted into contributed capital must be reflected in the charter capital to ensure legality, transparency, and protection of the lawful interests of the relevant parties. Accordingly, the enterprise must implement procedures to amend its charter capital.

3. Is an enterprise required to register changes to its enterprise registration contents after completing the conversion?

An enterprise may be required to register amendments to its enterprise registration contents after the conversion is completed. Pursuant to Clause 1 Article 30 of the Law on Enterprise 2020 as amended in 2025, enterprises must register with the business registration authority whenever there is any change to the contents of the Enterprise Registration Certificate. Such contents include charter capital for companies and investment capital for sole proprietorships, as prescribed in Clause 4 Article 28 of the same Law.

Accordingly, where the conversion of debt into contributed capital changes the enterprise’s capital contribution structure and results in amendments to the contents of the Enterprise Registration Certificate, the enterprise must register such changes in accordance with the law.

4. Does debt-to-equity conversion change ownership ratios and voting rights within the company?

Debt-to-equity conversion generally changes ownership ratios and voting rights within the company, because the creditor becomes a new member or shareholder holding contributed capital corresponding to the debt amount converted.

Therefore, enterprises should carefully assess the impact on the ownership structure and voting rights when implementing debt-to-equity conversion, and should fully notify and register any changes with the competent authorities to ensure legal compliance.

5. Is approval from all existing members/shareholders required for debt-to-equity conversion?

Debt-to-equity conversion does not necessarily require approval from all existing members or shareholders, but it must comply with the company’s internal decision-making mechanism. The admission of a new member/shareholder and the adjustment of charter capital must be approved by the Members’ Council or the General Meeting of Shareholders in accordance with the voting ratios prescribed in the company charter (Articles 59 and 138 of the Law on Enterprise 2020 as amended and supplemented in 2025).

Therefore, it is sufficient for the competent corporate body to approve the conversion in accordance with the company charter; unanimous consent from all existing members/shareholders is not mandatory. However, the applicable voting thresholds must be strictly complied with to ensure the legal validity of the conversion.

V. Why should you seek legal advice from NPLaw regarding debt-to-equity conversion?

When dealing with issues relating to debt-to-equity conversion, seeking legal advice from NPLaw helps enterprises ensure full compliance with applicable laws and avoid risks relating to taxation, charter capital, and ownership structure. In addition, NPLaw provides support in drafting agreements, valuing debt claims, and implementing enterprise registration procedures accurately and efficiently.

Debt-to-equity conversion enables enterprises to reduce debt pressure, improve capital structure, and lawfully restructure their finances. However, to ensure legal validity and protect the interests of all parties involved, enterprises must fully comply with legal requirements concerning the eligibility of debt claims, valuation procedures, internal approvals, registration of changes to charter capital, and ownership structure. Early identification of legal risks and proper implementation of procedural steps will help ensure that the conversion process is safe, transparent, and effective.

The above information is provided for reference purposes only. Should you require detailed advice for a specific case, please contact NPLaw Firm for prompt assistance.