When it comes down to funding Vietnamese targets, advantages of loans, especially short-term ones, are obvious. A short-term loan would help to circumvent a time-consuming and, sometime, complicated process if the funding is arranged as a share sale.

Nevertheless, nothing comes without a price. The below note discusses major legal and practical issues faced by both sides of a loan agreement.

From a small, but not easy, case..

On a beautiful day late 2017, an electrician in Can Tho Province, Vietnam came to a neighboring jewelry shop to trade a $100 banknote.  Just after receiving the Vietnamese Dong equivalence, he was detained by local police for illegal exchange of foreign currency and finally requested to pay a VND90 million (US$4,000) monetary fine for such act. At that time, his monthly salary was just around $180 so he could not afford the penalty.

This case quickly attracted attention from the public and, later on, the media because many believe the penalty seems unreasonably high. When asked to comment on the case, a representative of the State Bank of Vietnam (SBV) generally explained that the laws on foreign exchange (FX) must be that tough so that future perpetrators must think twice before doing the wrong things. Deeper, the noisy incident epitomizes the Government of Vietnam’s zero tolerance against dollarization according to which any breaches of FX and foreign loan rules will be heavily penalized.

… to more serious legal issues

For founders of many Vietnamese startups (VietCo), the next big thing after an offshore domicile flip is to get capitalized. Typically, funds can be released to the VietCo via many routes but mainly via (a) increasing SingCo’s equity in or (b) granting loans to VietCo. The latter is often preferred if quick cash is needed. This is because the licensing process for equity increase may take weeks, if not months.

From a legal perspective, SingCo’s funds to VietCo via the lending route are treated as offshore (or foreign) loans. Receiving and repaying offshore loans are heavily regulated by Vietnamese law. In banking area, the rule of thumb is that ones can only do exactly what the laws say. Failing this would result in heavy monetary fine by the State Bank of Vietnam[1] and, even worse, a possibility of the loan being declared as invalid by a competent court of Vietnam for breaching prohibitory provisions of Vietnamese law.

How are foreign loans classified and for what purposes?

To avoid the above unexpected legal consequences, it is therefore critical to be mindful of how offshore loans are classified first and how such classification affect the funding.

In this regard, basically, foreign loans are categorized into 03 following groups:

  • Short-term loans i.e. – a loan term of which is 1 year or less;
  • Mid-term loan i.e. – a loan term of which is from 1 year to 5 years; and
  • Long-term loan i.e. – a loan term of which is from 5 years or more

Essentially, each category (short-term in one group and mid and long-term ones together in another) must met separate specific conditions and is subject to different registration requirements.

For example, loans of less than 1-year term (also known as ‘short term’ loan) is not subject to a mandatory registration with the SBV (albeit mandatorily notified) but must not be used for ‘mid or long-term” purposes.

On the contrary, mid and long-term loans i.e. -loans terms of which are from 1 to 5 year or from 5 years and more respectively, must be registered with the SBV but can be used for a wide range of purposes.

In the next post, we discuss lending conditions and how the tricky ‘short-term’ concept is interpreted and how the SBV deals with breaches of offshore loan regulations.



[1] Penalties in banking or FX area are often much higher than those stipulated in other sectors.

[2] “Loan expenses” include interests and other expenses relating to the offshore loans.



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