Introduction

The Ordinance on Foreign Exchange Control allows economic organisations to extend outbound loans and furnish guarantees to non-residents, provided they secure permission from the prime minister. However, the absence of a comprehensive legal framework has led to a case-by-case approval system, causing challenges for both businesses and authorities. Notably, since the amendments to the Ordinance in 2013, the government has sanctioned only a minimal number of applications (ie, 8 for foreign lending and two for non-resident guarantees), highlighting the scarcity of such approvals. In response to these challenges, a pivotal solution is on the horizon: the impending finalisation of the prime minister's draft decision, which aims to streamline processes and eliminate hindrances faced by organisations and governmental bodies alike.

Criteria for approval of offshore lending and guarantee for non-residents

Criteria for economic organisations to be approved for offshore lending and guarantee for non-residents vary depending on whether:

- these lending and guarantee activities are associated with investment projects; and

- these lending and guarantee activities are subject to investment policy approval.

The general requirement is that economic organisations take responsibility for the effectiveness and risks connected with offshore lending and non-resident guarantees.(1) The varying criteria for lenders, guarantors, borrowers, obligors and source of capital are specified below.

Who can be offshore lenders, guarantors for non-residents, borrowers and obligors?

Subjects of the outbound lending and non-resident guarantee must satisfy certain criteria under the draft decision.

Loan or guarantee non-associated with foreign investment projects

Offshore lenders and guarantors for non-residents must:

- be economic organisations other than credit institutions or foreign bank branches;(2)

- have been incorporated under the law of Vietnam and operated for at least five years;(3)

- have profitable business outcomes, no bad debt with the banking system and no overdue international debt for the preceding two years;(4)

- have no tax debt for the preceding two years;(5)

- have a plan for outbound lending or non-resident guarantee that has been approved by the competent authority. This is necessary state-owned corporations.(6)

These regulations aim to establish the requirement for economic organisations to demonstrate their ability to carry out lending or guarantee activities without affecting state budget revenues. The regulations also make it the organisation's responsibility whether to implement lending or guarantee activities.

Overly strict criteria (ie, having no tax debt, no bad debt, having had profit in the two years before registration and being established for at least five years) will limit the large number of businesses that can carry out foreign lending or non-resident guarantee activities.

Borrowers and obligors must be either the parent company or member companies in foreign countries of the lender, the guarantor or a foreign government or organisation guaranteed by a foreign government.(7)

This regulation only allows offshore lending and offshore guarantees for a group of enterprises that have a capital linkage relationship. Enterprises without capital linkages will not be able to lend or guarantee offshore. However, the regulations need to specify the applicable law to determine the criteria for the relationship between parent company, subsidiary or member company in the same system because there will be at least two in offshore lending. The governing legal system are:

- the laws of Vietnam regarding lenders or guarantors; and

- the foreign law of the borrowers or guarantees.

Loan or guarantee associated with foreign investment projects

Offshore lenders and guarantors for non-residents must:

- be Vietnamese investors who contribute capital to or purchase shares of an overseas economic organisation to participate in the management of such business organisation,(8)

- have the plan for outbound lending or non-resident guarantee that has been approved by the competent authority,(9)

- have the plan to balance foreign currency sources in compliance with the law.(10)

Borrowers and obligors are the overseas economic organisation that the lender or guarantor establish, contribute capital to or through which they buy shares.(11)

What are the criteria for capital for offshore lending and guarantee for non-residents?

Capital for loans or guarantees that are related to a foreign investment project must originate from the economic organisation's equity and/or after-tax profits.(12) Foreign currency utilised for lending or guarantees must be self-generated through production and business operations and cannot be purchased from credit institutions or borrowed locally or internationally.(13) Such provisions are in line with article 70 of Decree 31/2021/ND-CP, which aim to ensure that offshore lending and guarantee for non-residents do not cause a negative impact on the domestic business activities and state budget revenue.

Capital for loans or guarantees that are related to a foreign investment project is included in the outward investment capital recorded in the outward investment certificate for that project. The draft decision makes no additional requirements for capital for loans or guarantees related to a foreign investment project. This is because, as an integral component of foreign investment capital, this capital has already been regulated in article 69.3 of Decree 31/2021/ND-CP and will be assessed during the issuance of the outbound investment certificate.

Responsibilities of economic​ organisations

As a principle set out under the draft decision,(14) the economic organisation is responsible for the effectiveness and risks associated with foreign lending and guarantee activities. There is a separate article under the draft decision(15) which specifies the responsibility of the lender and guarantor. This can be broken down into three essential aspects:

- Independent decision-making and sole accountability – economic organisations are solely responsible for:

o the economic capacity of the borrowers and obligor;

o the feasibility of the lending and guarantee and the ability to recover debts;

o the effectiveness and the legal and economic risks arising from the execution of these transactions; and

o the arrangement of foreign currency sources.

- Compliance with the law – economic organisations must ensure compliance with the law of Vietnam and the law of the borrower's or obligor's country throughout the implementation of the lending or guarantee procedure. This includes, but is not limited to, regulations on foreign exchange management of the State Bank of Vietnam.

- Specific provisions for state-owned enterprises – in the case of state-owned enterprises serving as the lender or guarantor, regulations governing the management and utilisation of state investment capital during the lending and guarantee, the decision-making state for the economic plan and the approval processes must be strictly adhered to.

Appraisal and approval authority

Under the Ordinance on Foreign Exchange Control,(16) the prime minister has the authority to approve the economic organisations' foreign lending or guarantee for non-residents. The draft decision states the same but provides for an exception: the prime minister assigns the minister of planning and investment the task of approving the lending or guarantee associated with investment projects that are not subject to the approval of investment policies.(17)

The draft decision(18) also provides for the scope of appraisal by four ministries and cross-sectoral agencies, including:

- the State Bank of Vietnam;

- the Ministry of Planning and Investment;

- the Ministry of Finance; and

- the Ministry of Foreign Affairs.

The relevant ministries' opinions focus on their respective management areas, providing comprehensive information to compile the appraisal report for the prime minister's review and approval. Specifically, the Ministry of Planning and Investment take care of loans or guarantees associated with foreign investment projects,(19) while the State Bank of Vietnam takes care of loans or guarantees non-associated with foreign investment projects.(20)

This regulation will make the approval process for foreign lending registration or offshore guarantee much faster than if all applications were submitted to the prime minister.

In addition, the draft decision also provides the detailed dossier and procedure for the application of foreign lending or guarantee for non-residents.

Comment

From the perspective of a lender or guarantor, the Draft Decree's prerequisites for engaging in foreign lending and non-resident guarantees may initially appear quite demanding. These criteria collectively create a threshold that could potentially curtail the participation of numerous enterprises in foreign lending and guarantee endeavors.

Further, the need for clarity regarding the applicable jurisdiction's laws to assess the linkage relationship between borrowers and lenders, as well as guarantors and guarantee recipients, adds another layer of intricacy, potentially posing challenges during the registration process.

However, the draft decision offers a silver lining for lenders and guarantors. It not only outlines explicit criteria for a economic organisation's decision-making processes, but it also establishes a lucid procedure for the application of foreign lending or guarantee for non-residents, thereby potentially streamlining their path.

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‍*Disclaimer: This Briefing is for information purposesonly. Its contents do not constitute legal advice and should not be regarded asdetailed advice in individual cases. For legal advice, please contact ourPartners.

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Endnotes

(1) Article 3.2 of the draft decision.

(2) Article 2.1 of the draft decision.

(3) Article 6.2.a of the draft decision.

(4) Article 6.2.b of the draft decision.

(5) Article 6.2.c of the draft decision.

(6) Article 6.2.d of the draft decision.

(7) Article 6.3 of the draft decision.

(8) Article 10.3.a of the draft decision and article 52.1.c of the Law on Investment 2020.

(9) Article 10.3.b of the draft decision.

(10) Article 10.3.c of the draft decision.

(11) Article 10.2.a of the draft decision.

(12) Articles 6.4.a and 5.2 of the draft decision.

(13) Article 6.4.b of the draft decision.

(14) Article 3.2 of the draft decision.

(15) Article 18 of the draft decision.

(16) Article 19.2 of the (consolidated) Ordinance on Foreign Exchange Control.

(17) Articles 4.2 and 12 of the draft decision.

(18) Article 15 of the draft decision.

(19) Articles 16, 11 and 14 of the draft decision.

(20) Articles 16 and 8 of the draft decision.