Practical notes on the procedure for converting a loan from an oversea parent company into a contributed capital to subsidiary

For a loan borrowed by a subsidiary in Vietnam from an overseas parent company, usually, there are some options for repaying the loan as follows: (1) The subsidiary shall repay the parent company both original and interest amount according to the loan agreement; if the loan can’t be repaid to the parent company, the subsidiary company may extend the repayment term; or (2) The parent company converts the loan into a contributed capital to the subsidiary. Through this article, BLawyers Vietnam will summarize the main regulation about option (2) – Converting the foreign loan into contributed capital.

Through our practical experience, BLawyers Vietnam found that option (2) has some matters as follows:

1. Legal basis for converting a loan into the contributed capital

According to the current Investment laws, as a foreign investor, beside of the right to establish an economic organization (subsidiary in Vietnam), the parent company can also contribute more capital to its subsidiary.

According to the current Enterprises laws, as the owner of a single-member LLC, the parent company can increase the charter capital of its subsidiary by contributing more capital. In which, the parent company may decide on the form and level of increase of the charter capital.

In addition, Vietnamese laws have not have a complete regulation on the method of converting a loan into a contributed capital.

2. The conversion increases the charter capital of the subsidiary and the value of the parent company’s contributed capital

When converting the parent company’s loan into contributed capital in the subsidiary, the subsidiary’s charter capital will increase in proportion to that loan. In essence, converting the loan versus the parent company contributing more capital to the subsidiary has the same purpose of increasing the subsidiary’s charter capital. However, the difference between them is that the additional contribution has been transferred to the subsidiary. At the same time, there is no cash flow going through the foreign loan repayment account.

3. Conditions for converting the loan into contributed capital

To be able to convert the parent company’s loan into contributed capital in the subsidiary, some conditions should be noted including:

  • The loan agreement signed between the parent company and its subsidiary must ensure the legality as prescribed;
  • If the foreign loan is a medium- or long-term loan, the subsidiary must register the loan with the State Bank (“SBV”). If short-term loans it must be reported to the SBV;
  • The loan is transferred to the subsidiary’s foreign loan repayment account;
  • After the conversion, the capital contribution ratio of the foreign parent company must comply with the law.

4. Steps for the conversion procedure

To convert the parent company’s loan into contributed capital in the subsidiary, the procedures to be performed include:

(i) Step 1: Register for changing foreign loan to the SBV.

According to regulations, the subsidiary needs to submit the application dossier for Step 1 within 30 days from the date the parent company and the subsidiary sign an agreement changing the loan into contributed capital. In addition, only after completing Step 1 and receiving approval from the SBV, the subsidiary continues to proceed to Step 2.

(ii) Step 2: Notifications for the changes in contents of the subsidiary’s registration.

According to the Enterprises law, when there is a change of the charter capital, the subsidiary must conduct the procedure for notification of changes in the contents of the subsidiary’s registration. The subsidiary must notify within 10 days of making the change.

(iii) Step 3: Register for adjustment of the investment project.

With changes in investment capital, specifically an increase in the contributed capital of the subsidiary, the subsidiary must conduct procedures for amending the investment project with the investment registration management agency for a new investment registration certificate.

5. Notes when working with State Agencies

Per our experience, the corporate/investment management agency might not accept the parent company contributing capital to its subsidiary by converting a loan. This problem occurred because the corporate/investment management agency does not manage the form of capital increase. According to the guidelines of the corporate/investment management agency, the application dossiers for Step 2 and Step 3 above will only be stated that the parent company will contribute capital equal to the loan amount to the subsidiary instead of recognizing the capital contribution by converting the loan.

Converting a loan into a contributed capital of a foreign invested company is managed by at least two agencies (the SBV and the corporate/investment management agency). Which leads to the procedures are not consistent. At the same time, the documents provided for this are also inconsistent.

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

Date: 16 March 2023

Writer: BLawyers Vietnam

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