This note discusses possible impacts of employing intra-group ‘zero interest’ loans and respective solutions prefered by involved parties.

1. Debt Financing or Equity Financing?

When a foreign investor decides to invest in Vietnam, generally that investor will be required to register an investment project (or a business plan) with the Government of Vietnam (GoV). If the application file is deemed complete, the relevant licensing authority will issue an investment registration certificate (often abbreviated as the IRC).[1]

Notably, the investor must explain in the application file for the IRC on how the relevant ‘investment project’ is capitalized. From a funding’s perspective, an investment project consists of ‘contributed capital[2] (equity financing) plusloans’ (debt financing) as part of a broader concept of ‘total invested capital’. Put it differently, total invested capital is the estimate of full amount of money required to implement a specific project. 

Strictly speaking, loans taken by a company cannot exceed the difference between its total invested capital and contributed capital. It bears noting that though the current laws do not require minimum equity, the licensing authorities may well require a minimum ratio of 70:30 (loan:equity capital) for ‘feasibility’ of their  business plan (this was the old mandatory requirements).

Foreign investment practice in Vietnam shows that debt is often preferred to equity financing. This is because debt financing is generally cheaper; gives the lenders being the parent companies greater flexibility in synchronizing business of the group; is proven much less time-consuming[3] and; equally important, can be taken back at any time. This is critical because typically a Vietnamese company may borrow money without limit and from a variety of sources including its parent company.

In case of intra-group loans, it is not uncommon that interest rate is agreed to be very nominal, say for example, 0%. Then, a question arises as to whether it is legally possible to do so and, even if permissible, what should be taken into considerations.

2 – Is a zero interest loan legally possible?

Strictly speaking, Vietnamese law does not set any minimum rates. In other words, whether and how interest rate is charged is subject to parties’ contractual agreements.

Nevertheless, from a tax perspective, Vietnamese tax law states that tax liability may be imposed if the tax prayer, inte alias, ‘buys, sells, trades goods and record values thereof against their market prices’.

On such basis, the tax authority often argues that zero interest loans do not reflect the ‘market price’. It further assumes that the lender must have gained ‘some interest’ from the latter’s lending activities regardless of whether the lender actually receives such proceeds and requires parties involve to ‘re-calculate’ such market rate for tax purposes. Failing this would result in tax authority’s conducting a ‘tax imposition’ i.e. – the right to impose taxes on an interest rate the tax authority deems to be ‘market’.

3 – What is the market rate?

Without official ‘market price’ definition, the rule of thumb is to use the average lending rates offer by a commercial bank in Vietnam, especially the bank where the borrower opens its bank account or LIBOR (LIBOR + margin) depending on whether the lender is local or foreign entity. It is noteworthy that the tax authority ultimately has a discretion to impose what it thinks ‘market’ price (or rate).

4 – Who is taxed? 

First it should be the lender who is deemed to have gained loan interests. Nevertheless, if, for some reasons, the tax authority is not able to ‘catch’ the lender, then it is more likely that the borrower would be required to pay. This is more critical in case of offshore lenders because the GoV applies the ‘tax deducted at source’ approach which requires the borrower, as the ‘source’, to declare and pay tax to the GoV on behalf of the offshore lender(s).

5 – What are possible taxes and tax consequences? 

If tax is imposed, both the lender and the borrower are hit, namely:

(a) – The lender

Depending on nationality of the lender i.e. – foreign or Vietnamese entity, any of the foreign contractor tax, corporate income tax or even personal income tax may be imposed by the relevant tax authority.

  • Offshore lender: Foreign contractor tax, namely the deemed corporate income tax of 5%.
  • Vietnamese corporate lender: [general] corporate income tax
  • Vietnamese individual lender: Personal income tax

(b) – The borrower

For a borrower, its payment of tax may not be counted as deductible expenses for tax purposes. This would ultimately increase the tax burden of the borrowing entity when its tax is finalized at the year end.

6 – What is the take away?

In light of the above analysis on tax practice, pros and cons of a zero interest arrangement, we would recommend that parties agree on ‘market rate’, even at a nominal one. Such arrangement may help parties to minimize the risks of being imposed by the tax authority. Then, parties may consider the ‘practical’ rates mentioned in point 3 above for their lending arrangements.


[1] This requirement is not applied if the foreign investor seeks to acquire shares in existing local companies. Rather, it needs an ad-hoc approval for such approval only.

[2] For new projects, contributed capital is simply the pocket money (or paid-up equity) that the investor would  contribute to the local subsidiary.

[3] Especially with respect to short-term loans which is not subject to any registration with the State Bank of Vietnam.



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