Changes were released earlier this year, affecting the recording and processing of foreign sourced loans by Vietnamese companies. This Client Update looks at what these changes mean to Vietnamese entities, and what business managers/owners need to be aware of when undertaking loans from abroad.
Utilising foreign loans
Accessing foreign loans for funding is common practice for companies in Vietnam.
Foreign invested companies are usually funded by part capital and part debt, with the debt provided most commonly from their parent entities. As foreign invested companies expand in Vietnam, debt is often (initially) the primary means to do so, again usually through parent entity loans from abroad. Locally owned companies also access foreign loans for a wide range of funding and expansion purposes.
Traditionally, loan proceeds would be paid straight into a Current Bank Account for a locally owned company, and into the Capital Bank Account for a foreign owned company. However, bank account requirements for receiving loan funds, along with documentation and registration requirements, have changed.
Now, companies are required to establish and utilise Offshore Loan Accounts (“OLA”) for receipt of most loans, with resulting changes in registration with the State Bank of Vietnam (“SBV”).
Offshore loan accounts
Although not completely new to Vietnam, OLA’s have now been made mandatory by the SBV for all companies (other than for foreign invested companies), to receive and repay all foreign loans.
Specifically, Circulars 3 & 5 issued by the SBV and effective 15 April 2016 (Circular 03/2106/TT-NHNN and Circular 05/2016/TT-NHNN) state that:
- All disbursements and repayments from, or in relation to, a foreign loan must be made through an OLA;
- Foreign invested companies must continue to use their Capital Bank Account for receiving and disbursing foreign loans, although they may now optionally use an OLA for short-term loans (terms of less than 12 months).
- Companies can open and maintain multiple OLA’s at different banks.
Although short-term loans do not need to be registered with the SBV, the above changes do place new additional requirements on banks at which OLA’s are opened to receive and retain sufficient supporting documents for every loan transaction. This can result in additional delays in releasing funds from OLA’s into Current Bank Accounts where the bank does not believe the documentation received is sufficient.
Registration of foreign loans
Circulars 3 & 5 have updated the registration process for foreign loans. All medium and long-term loans (ie, those longer than 12 months) must still be registered with the SBV, however changes have been made as follows:
- Foreign loan registration and reports can now be undertaken by (i) online registration and lodgement via web site www.sbv.gov.vn or www.qlnh-sbv.cic.org.vn, or (ii) traditional paper lodgements; However, if the online method is chose, the company can no longer utilise the paper lodgement method;
- Relaxations to registration of changes have been implemented, with changes of headquarter addresses within province/city of the borrower, changes of commercial names of bank services providers, etc are no longer required for re-registration, only a written notification is required by the SBV instead; and
- Timeframes for SBV processing of loan registrations has been decreased from 20 days to 12 days (online) and 15 days (paper).
Recommendations & discussion
Given these changes listed above, it is imperative that companies which utilise foreign loans ensure these are received through OLA’s (or their Capital Bank Account, if foreign invested). In addition, all loans should be documented prior to disbursement, including short-term loans, otherwise there is the likelihood that the receiving bank will not release the funds until sufficient supporting documents are provided.
Companies that do not use OLA’s (or Capital Bank Accounts) correctly when receiving foreign loans run the risk of not-being able to remit the loan principal or interest when they fall due. There may also be tax consequences arising if loans do not follow the necessary procedures.