Procedure for converting subsidiary’s foreign loan into parent company’s charter capital

Date: 08 February 2021

Writer: Yen Le

For a loan that a subsidiary in Vietnam borrows from its parent company in oversea, the repayment of such loan could be as follows: (1) on the due date, the subsidiary repays the parent company both principal and interest amounts as agreed; (2) if cannot repay the loan, the subsidiary renewals the loan term; or (3) the parent company coverts the foreign loan into the contributed capital in the subsidiary. This article will provide some information about the method (3) of converting foreign loan into charter capital.

Method (3) has some features as follows:

1. The conversion leads to increase charter capital amount and the parent company’s capital contribution

Conversion of the foreign loan into capital contribution increases the charter capital of the subsidiary corresponding to that loan amount. The difference in comparison with capital contribution method is that parent company transferred the equity amount already. Depending on the type of enterprise that, it is necessary to obtain the approval of the General Meeting of Shareholders / Member’s Council or the owner before the loan conversion.

foreign loan to equity

2. Conditions for conversion

Some notable conditions include:

  • Proving the legality of the loan contract that both companies have signed;
  • If the foreign loan term is medium term or long term, the subsidiary must register with the State Bank of Vietnam (“SBV”). If it is a short-term loan, the subsidiary must notify to the SBV;
  • The foreign loan has been correctly transferred to the direct investment account of the subsidiary;
  • After conversion of the foreign loan, the ratio of the oversea parent company’s charter capital in the subsidiary shall comply with the extension by law.

3. Procedure steps for conversion

The subsidiary will proceed the followings:

  1. Adjusting the investment registration certificate issued to the subsidiary (Step 1).
  2. Notifying the subsidiary’s business registration information (Step 2).
  3. Notifying the cancellation of the foreign loan to the SBV (Step 3).

4. Notes on working with State authorities

Firstly, the parties should note the value of the loan amount to determine the competent authority for Step 3 above.

Secondly, although the laws have detailed and clear regulations on application dossier, procedures, orders, etc. but State authorities may require otherwise.

In sum, conversion of the foreign loan into charter capital is governed by several regulations of specialized law. This is also an activity bringing many benefits to domestic enterprises. However, during the conversion, enterprises should look for advice from experts in this field.

Should you have any questions about the above contents, please revert to BLawyers Vietnam at consult@blawyersvn.com.

Maybe you are interested in reading:

Challenges when enterprises register foreign loans in Vietnam

Capital mobilization forms for companies in Vietnam and some legal risks to be aware

Is it complex to proceed the procedure for foreign loan registration of normal enterprises?

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