Foreign loans and conversion into equity in a Vietnamese company: 3 key considerations for foreign investors

In the practice of M&A and investment restructuring in Vietnam, some foreign investors choose foreign loan structures with asset-backed guarantees and a mechanism to convert the loan into equity in a Vietnamese company as an indirect investment approach. This structure is often considered when:

• Direct investment or equity acquisition may face limitations on market access conditions;
• Foreign investors are limited in terms of equity ownership in the Vietnamese company; or
• The company requires foreign investment capital first but is not yet ready to fulfill the procedural requirements or obtain necessary approvals for investment.

However, based on consulting experience and practical implementation, BLawyers Vietnam observes that the greatest risk in this structure does not lie in the transaction concept itself but in the registration, execution, and interaction with business regulators and the State Bank of Vietnam.

In this article, BLawyers Vietnam highlights 03 important points that foreign investors and Vietnamese businesses should be aware of.

1. Registering the foreign loan with the state bank of Vietnam: risks from “minor oversights”

According to foreign exchange regulations, businesses must complete the procedure for registering foreign loans with the State Bank of Vietnam in the following cases:

1. Medium- and long-term foreign loans, except for loans arising from letters of credit issued by credit institutions or foreign bank branches;
2. Short-term foreign loans that are extended, resulting in the loan term exceeding one year; and
3. Short-term foreign loans without an extension agreement but are still outstanding (including interest capitalized into the principal, if applicable) one year after the initial withdrawal, unless the business has fully repaid the principal within 30 days from the one-year mark.

In practice, some Vietnamese businesses borrow from abroad but fail to register the loan properly with the State Bank of Vietnam due to deficiencies in the legal procedure review. This leads to risks of administrative penalties and complications when the business repays the loan or takes further steps in the transaction.

In addition to the registration obligation, businesses should particularly pay attention to the loan’s purpose when preparing the registration file. The purpose must comply with legal regulations and the business’s scope of operations and must be supported by corresponding documentation (e.g., a capital utilization plan for business operations, investment project financing, or debt restructuring plan). If the loan’s purpose is unclear or inappropriate, the registration dossier may be challenged for clarification, causing delays in processing and increasing the risk of not completing the transaction as planned.

BLawyers Vietnam’s practical experience: In many transactions, loan registration is not just a “post-check” procedure; it directly impacts the feasibility of implementing the entire investment structure later on.

2. Foreign loan agreement: the “backbone” of the transaction

In the foreign loan structure, the loan agreement not only establishes the financial obligations between the parties but also serves as a crucial document for loan registration, working with the State Bank/ commercial banks, and providing the legal foundation for converting the loan into equity later. Therefore, the loan agreement should be drafted carefully to ensure compliance with foreign exchange regulations and the practical application in Vietnam. The parties need to consider the following issues when drafting the loan agreement:

1. The foreign loan agreement must be in writing, either in one or more documents confirming the agreement between the parties, and must be signed before or at the time of loan withdrawal. If the agreement is in electronic data form, it must comply with the laws on electronic transactions.
2. Certain fundamental terms should be clearly stipulated, including: the parties’ information; the loan amount; the purpose of the loan; interest rate and borrowing costs; tenor and repayment method; currency of the loan; security measures (if any); disbursement conditions; events of default and remedies; as well as the governing law and dispute resolution mechanism.
   • In cases where the loan can be converted into equity in the Vietnamese company, Vietnamese law is usually preferred to ensure compatibility with business registration and investment procedures.
3. Regarding loan currency, the general principle is that foreign loans must be in foreign currency. Loans in Vietnamese Dong are only allowed in limited cases as regulated. Therefore, the choice of loan currency and payment mechanisms should be considered from the outset to avoid the risk of not having the transaction approved by the bank.
4. Regarding interest rates and loan costs, current law does not specify a cap for foreign loans on a self-borrowing basis. However, the parties should consider the reasonableness of the interest rate and fees to mitigate tax risks, especially in cases where the transaction seems inconsistent with the market level.

In practice, excessively low or zero interest rates may be scrutinized by tax authorities, requiring adjustments, while very high rates may result in the non-deductibility of interest expenses when calculating corporate income tax.

Additionally, loan fees can only be deducted for tax purposes if they meet the business purpose condition, valid documentation, and a non-cash payment method as regulated. Designing the loan cost structure needs to be considered from both a legal and tax perspective.

BLawyers Vietnam’s practical experience: The foreign loan agreement must be constructed not only to meet immediate financial needs but also to ensure the registration, execution, and conversion of the loan into equity in the next phase, especially as the State Bank of Vietnam tightly controls foreign loan transactions.

3. Loan guarantees and converting loans into equity: the greatest bottleneck lies in execution

3.1. Real estate guarantee mechanism in Vietnam

In principle, Vietnamese law allows foreign loans to be secured by assets as per collateral transaction and foreign exchange management regulations. The handling of collateral and the transfer of the proceeds from the sale of the collateral to repay the loan must be done through a bank following procedures set by the State Bank of Vietnam.

However, foreign investors do not have the legal ability to directly receive mortgage rights over land use or real estate in Vietnam. Therefore, direct property guarantees are generally not feasible for foreign lenders.

Some foreign investors seek indirect guarantees through an intermediary model, where a Vietnamese bank holds the collateral based on a tripartite agreement (for example, by creating a domestic loan), and when the Vietnamese business defaults on the loan, the bank holding the collateral will liquidate the property and prioritize the repayment of the domestic loan, with the remaining value being allocated to settle the foreign loan. This model can only be implemented with the consent and active involvement of the Vietnamese bank.

However, in practice, Vietnamese banks are usually cautious or unwilling to implement this mechanism. The main reason is the lack of specific guidelines from the State Bank on handling collateral to recover foreign debts and because this mechanism does not align with Vietnamese banks’ internal credit risk management practices. In many cases, the collateral is only seen as a backup measure for domestic loans, not as the primary source for recovering foreign debt obligations.

BLawyers Vietnam’s practical experience: In most foreign loan transactions, using Vietnamese business property as collateral is not an effective tool for recovering foreign loan debt.

3.2. Converting foreign loans into equity in a Vietnamese company

The law allows Vietnamese companies to repay foreign loans by converting the outstanding loan into equity in the borrowing company. The implementation procedure typically includes:

1. Agreement on converting the loan into equity;
2. Completing the capital increase procedure and adjusting the foreign investor’s ownership ratio at the business registration authority, while also obtaining investment approval if required;
3. Registering the change of debt repayment plan with the State Bank; and
4. Notifying the commercial bank servicing the loan account and submitting evidence that the loan has been settled through conversion.

In carrying out this procedure, the following points should be noted:

1. The business registration authority may not directly recognize “loan conversion into equity” and may require the file to be presented as a capital increase through cash, leading to the risk of inconsistency between the registration documents and the transaction materials;
2. For businesses owning land-use rights, the investment approval procedure from foreign parties may take longer due to the need to consider defense and security conditions;
3. Since converting a foreign loan into equity does not generate cash flow for capital contribution as reflected in the investment registration documents, profit distribution to the foreign investor must be carefully considered.

BLawyers Vietnam’s practical experience: If the bank is not consulted early and the foreign loan file is not consistently designed from the start, the loan conversion may be delayed at the final stage, even after the commercial agreement has been reached.

How BLawyers Vietnam supports businesses

BLawyers Vietnam assists businesses and foreign investors throughout the process of designing and implementing foreign loans, including:

• Advising on loan structure in accordance with foreign exchange, investment, and business regulations in Vietnam;
• Reviewing and drafting loan agreements, conversion agreements, and related transaction documents to ensure consistency between legal files, registration documents, and banking practices;
• Assisting with foreign loan registration procedures and registering changes with the State Bank, as well as capital increase procedures and ownership ratio adjustments at the business registration authority;
• Working with commercial banks to resolve issues related to loan accounts, investment capital accounts, and recording conversion transactions.

The above is not official advice from BLawyers Vietnam. If you have any questions or suggestions about the above, please contact us at info@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 18 March 2026

Writer: Chau Dang