Legal regulations allow businesses to convert legal foreign loans into investment capital. Enterprises need to carry out investment-related procedures (as prescribed by the investment law) and foreign exchange-related procedures (under the foreign exchange ordinance) to convert foreign loans into investment capital.
Legal basis
- Investment Law 2020 and guiding documents.
- Circular 03/2016/TT-NHNN guiding some contents of foreign exchange management for borrowing and paying foreign debts of enterprises.
- Circular 05/2016/TT-NHNN amending Circular 03/2016/TT-NHNN guiding the contents of foreign exchange management for foreign borrowing and repayment of enterprises by the Governor of the State Bank of Vietnam promulgate.
- Circular 05/2017/TT-NHNN amending Circular 03/2016/TT-NHNN guiding the management of foreign exchange for borrowing and paying foreign debts of enterprises issued by the Governor of the State Bank of Vietnam.
- Circular 12/2014/TT-NHNN on conditions for foreign loans of enterprises not guaranteed by the Government issued by the Governor of the State Bank of Vietnam.
According to Clause 2, Article 34 of Circular 03/2016/TT-NHNN guiding some contents of foreign exchange management for foreign borrowing and repayment of enterprises, foreign investors can completely transfer money to foreign investors. Debts borrowed to contribute capital in the enterprise:
“Article 34. Cases of capital withdrawal and debt repayment that are not made through a foreign loan and debt repayment account:
- a) Paying debts in the form of providing goods and services to the lender;
- b) Pay the debt with shares or capital contribution of the Borrower in accordance with the provisions of law;
- c) Repayment of medium- and long-term foreign loans through clearing and settlement of receivables directly with the lender;
- d) Payment of debt through the Borrower’s account opened abroad (in case the Borrower is allowed to open an account abroad to make foreign loans).”
Thus, for a loan that a subsidiary in Vietnam borrows from a parent company abroad, it can be resolved in the form that the parent company converts this loan into a capital contribution in the subsidiary.
The conversion increases the charter capital and the value of contributed capital of the parent company
Converting the loan into contributed capital increases the charter capital of the subsidiary corresponding to that loan. The difference with capital contribution is that the money transfer has been done before. At the same time, the value of contributed capital of the parent company will be changed. Depending on the type of business, it is necessary to obtain approval from the General Meeting of Shareholders/Board of Members or the owner before conducting the conversion.
Conditions for conversion
Some conditions to be aware of include:
- Prove the legitimacy of the loan contract signed by the two companies;
- If the foreign loan is a medium- or long-term loan, the enterprise must register the loan with the State Bank. If short-term loans must be reported to the State Bank;
- The loan is properly transferred to the subsidiary’s direct investment capital account;
- After the conversion, the capital contribution ratio of the foreign parent company must comply with the legal limit.
Steps to perform the conversion procedure
The subsidiary will carry out the following procedures:
Step 1: Adjust the investment registration certificate issued to the subsidiary.
Step 2: Notify the change of business registration contents of the subsidiary.
Step 3: Notify the cancellation of foreign loans to the State Bank.
Above is our consultancy about this issue. If you need more detailed advice and answers as well as how to access this service, please contact directly the Deputy Director of Sales: Lawyer Nhat Nam via hotline: 0912.35.65.75, 0912.35.53.53 or call the free legal consultation hotline 1900.6575 or send a service request via email: lienheluathongbang@gmail.com
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