1. Permitted purposes for short-term offshore loan
Circular 08 regulates the following specific permitted purposes for short-term offshore loans:
(i) Payment of short-term liabilities in cash (principal of onshore loans excluded) of the borrower. Short-term liabilities are determined in accordance with Vietnam accounting system; or
(ii) Refinancing of the borrower’s existing offshore loan.
Under Circular 12, short-term offshore loans must not be used for medium to long term purposes. However, there is no definition of medium to long term purposes. Therefore, in practice, it is quite common for the borrower to use short-term for financing M&A purposes (e.g. purchasing shares or contributing capital in other companies) due to no explicit restriction. This approach no longer works under Circular 08, which limits the permitted purposes for short-term loans. The financing of M&A purposes is not classified as short-term liability under Vietnam accounting system.
With respect to the use of short-term offshore loans for refinancing purpose, Circular 08 is silent on whether the refinanced offshore loan is short-term or medium to long-term loan. This is currently interpreted to mean that a short-term offshore loan can be used to refinance all types of the borrower's offshore loans (short-term or medium to long-term). This interpretation seems to make sense in the context that Circular 08 no longer includes a restriction on using short-term loans for medium to long term purposes.
2. Permitted purposes for medium to long-term offshore loan
Circular 08 no longer allows a parent entity to use offshore borrowings for business plan and investment projects of its subsidiary. So, currently Circular 08 only allows using medium to long-term offshore loans for the following purposes:
(i) Implementation of the borrower’s licensed investment project (which is issued with an investment registration certificate, investment certificate, or investment in-principle approval;
(ii) Implementation of the borrower’s production and business plan, and other projects (which is not required to be licensed; or
(iii) Refinancing of the borrower’s offshore loans.
Circular 08 is unclear as to whether medium to long-term offshore loans used for M&A purposes (e.g. shares purchase, or capital contribution in other companies) is treated as implementing production and business plan, or implementing other projects of the borrower. This may need further interpretation from the SBV.
3. Loan caps
Generally, the loan cap in case of implementation of an investment project (‘Investment Cap’) and implementation of production and business plan, or other projects (‘Loan Utilisation Cap’) under Circular 08 remain the same as those provided under Circular 12.
However, Circular 08 provides clearer caps on offshore loan for refinancing as follows:
- The loan amount cannot exceed the aggregate unpaid principal, interest, fees of the existing loan and the loan fees of the new loan; and
- Only applicable to medium to long-term loans, the new loan must be used for the repayment of the existing loans within 5 working days from the drawdown date to ensure that the Investment Cap or Loan Utilisation Cap is met after the repayment.
4. Document justifying loan purposes
Under Circular 08, the following documents are used to justify the permitted loan purposes:
- Payment of short-term liabilities: Loan utilisation plan, and statement of capital needs (in the form attached to Circular 08)
- Implementation of investment projects: Investment licenses
- Implementation of production and business plan, or other projects: Loan utilisation plan
- Refinancing: Refinancing plan
Circular 08 requires the borrower to prepare documents to justify the loan purpose of short-term offshore loans, while Circular 12 did not require the borrower to do so. As such, although the borrower does not have to register short-term offshore loans with the SBV, it must prepare and submit the loan utilisation plan/refinancing plan to the credit institution where the DICA or the offshore loan service account of the borrower is opened.
In addition, Circular 08 sets out compulsory contents that must be included in the loan utilisation plan (previously in Circular 12, business plan) and refinancing plan.
5. Loan currency
In principle, offshore loans can be denominated in any foreign currency. However, Circular 08 contemplates the following scenarios where VND-denominated loans are allowed:
- the borrowers are microfinance institutions;
- foreign owned companies borrowing the distributed dividends of their parent company; or
- drawdown and repayment of offshore loan in foreign currency, but the relevant indebtedness being recorded in VND.
6. Other notable changes
The borrower can place bank deposits from idle offshore loan proceeds (i.e., funds drawdown but temporarily unused) at local credit institution. Each deposit term cannot exceed one month.