During their business operations, many foreign-invested enterprises borrow capital from their owners in the form of unsecured foreign loans. This is a relatively convenient channel for raising capital for FDI enterprises. However, due to the frequent nature and ease of obtaining these loans, many businesses have become complacent and failed to thoroughly understand the legal regulations regarding foreign loans, leading to the following legal risks:
1. Unable to repay the loan to the owner.
2. Interest expense is not considered a deductible expense when settling corporate income tax.
3. Pay fines for violating regulations on unsecured foreign loans.
So what are the causes, how should it be handled, and what legal basis will be used?
1. Causes of legal risks associated with foreign loans
- Do not apply for medium- and long-term loans, or short-term loans with repayment extensions exceeding one year;
- Not using the correct type of account when borrowing from abroad, specifically:
- The borrower is a foreign-invested enterprise: medium-term and long-term loans utilize the foreign direct investment capital account; short-term loans utilize the foreign direct investment capital account or other foreign loan and debt repayment accounts.
- The borrower, if not a foreign-invested enterprise, must open a foreign loan and debt repayment account at a bank providing account services to carry out foreign borrowing and debt repayment.
- Failure to comply with, or improper compliance with, reporting requirements regarding short-term, medium-term, and long-term loans to the State Bank of Vietnam.
- Interest rates on loans from partners other than credit institutions or economic organizations exceed 150% of the basic interest rate announced by the State Bank of Vietnam at the time of borrowing.
- The loan lacked sufficient legal documentation as required by law and the loan repayment was not processed.
2. Legal basis to be complied with for foreign loans.
- Government Decree No. 219/2013/ND-CP dated December 26, 2013, on the management of foreign borrowing and debt repayment by enterprises not guaranteed by the Government;
- Circular 03/2016/TT-NHNN dated February 26, 2016, issued by the Governor of the State Bank of Vietnam, provides guidance on some aspects of foreign exchange management regarding foreign borrowing and debt repayment by enterprises;
- Decree 88/2019/ND-CP dated November 14, 2019, of the Government on administrative sanctions for violations in the monetary and banking sector.
According to Points d and g of Clause 4 and Point a of Clause 7 of Article 23 and Clause 2 of Article 24 of Decree 88/2019/ND-CP dated November 14, 2019 of the Prime Minister, it is stipulated that:
4. A fine of VND 30.000.000 to VND 50.000.000 shall be imposed for any of the following violations:
d) Failure to comply with legal regulations regarding the opening, closing, and use of accounts in Vietnam for any of the following activities: foreign investment in Vietnam; Vietnamese investment abroad; borrowing and repaying foreign debt; lending and recovering foreign debt; issuing securities abroad by resident organizations; issuing securities in Vietnam by non-resident organizations; and other capital transactions;
g) Carrying out capital withdrawals and debt repayments for foreign loans; disbursing and recovering debts for loans to foreign countries; recovering guaranteed debts for non-residents; transferring funds for foreign investment in Vietnam and Vietnamese investment abroad in violation of the law;
7. A fine of between VND 150.000.000 and VND 200.000.000 shall be imposed on one of the following acts of violation:
a) Failure to comply with legal regulations on foreign borrowing and debt repayment; foreign lending and debt recovery; guarantees for non-residents and other capital transactions, except as stipulated in points g of clause 3, points d and g of clause 4 and point b of clause 5 of this Article;”
3. Solutions for businesses to prevent and overcome
- Correct any errors (if any) mentioned in the section "Causes of legal risks of foreign loans".
- Gather all original documents regarding the loan, loan disbursement transactions, and loan extension agreements and commitments.
- Provide full and accurate explanations to the State Bank of Vietnam's questions when approving the loan.
- We request assistance from the bank where our loan account is held to provide advice and support for adjustments.
- We have a team of experienced staff with expertise in corporate law, investment, foreign exchange, tax law, and accounting.
- Seek advice from a team of experienced experts on foreign loans.
- Utilize the professional consulting services of a reputable and experienced consulting firm.