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When contributed capital is not enough for the early stage, many Vietnamese subsidiaries borrow from their parent company. This is a foreign loan to an FDI company that must be managed closely, as it falls under the State Bank of Vietnam's (SBV – Ngân hàng Nhà nước) foreign exchange controls and the tax rules on interest expense. This article summarizes how to classify the loan, the procedures required and the points accountants should check so that interest is not disallowed at year-end finalization. Based on the accounting experience of ACCA Consulting Vietnam.
1. Classifying foreign loans: short-term or medium/long-term
Procedures differ mainly by loan term. The dividing line between short-term and medium/long-term loans is set by current foreign exchange regulations; accountants should also read carefully the rules on extending short-term loans, because an extension can bring the loan within the scope of mandatory registration.
| Criterion | Short-term loan | Medium/long-term loan |
|---|---|---|
| Typical purpose | Temporary working capital needs | Investment projects, asset purchases, production expansion |
| Registration with the SBV | Usually not required, except where extended/rolled over as specified in the regulations | The loan must be registered before drawdown |
| Limit | Must be used for the purpose permitted by the regulations | Usually within the difference between total investment capital and contributed capital stated on the IRC |
| Monitoring | Contract, repayment schedule, transfer documents | As for short-term loans + loan implementation reports as required |
A key point for medium/long-term loans: borrowed funds form part of the project's total investment capital. If the Investment Registration Certificate (IRC – Giấy chứng nhận đăng ký đầu tư) states total investment capital equal to contributed capital, the borrowing "room" is effectively zero and the company may first need to amend the IRC.
2. Foreign loan procedures for FDI companies, step by step
- 1Check the borrowing room
Compare total investment capital and contributed capital on the IRC with existing loan balances.
- 2Internal approval
The members' council/owner approves the loan in accordance with the charter.
- 3Sign the loan agreement
State the amount, currency, interest rate, term, repayment schedule and fees.
- 4Choose the account
Determine the account for receiving funds and repaying the loan as instructed by the servicing bank.
- 5Register (if required)
File the medium/long-term loan registration before drawdown.
- 6Draw down and record
Record at the actual exchange rate on the date funds are received and set up a ledger tracking principal and interest.
On accounts: FDI companies usually draw down and repay through the direct investment capital account (DICA) or a foreign loan account, depending on current regulations and the bank. Agree with the bank before signing the agreement so the correct account number is stated.
3. Conditions for interest expense to be deductible
Interest on a parent company loan is a significant cost and is likely to be scrutinized by the tax authority because it is a related-party transaction. Basic checkpoints:
- A loan agreement and complete documents for receipt of funds and interest payments, matching the registered account
- Medium/long-term loans registered with the SBV before drawdown (where required)
- Charter capital fully contributed on time; interest corresponding to any unpaid capital is not deductible
- An interest rate in line with the market, supported by documentation under the arm's length principle
- Total related-party interest expense checked against the cap under current regulations
- Foreign contractor tax (FCT) declared on interest paid to the foreign lender (where applicable)
4. Example: interest disallowed when capital is not fully contributed
Company Y has committed charter capital of VND 10 billion (≈ USD 392,000, approximate, at a reference rate of VND 25,500/USD) but by year-end has contributed only VND 9 billion. During the year it borrows VND 5 billion from its parent company at an assumed interest rate of 6% per year, for the full year. The interest corresponding to the VND 1 billion of unpaid capital is not deductible.
Illustrative example with assumed figures. The remaining amount must still be tested against the related-party interest cap under current regulations.
View as table
| Total annual interest | 300,000,000 VND |
| Interest on unpaid capital | 60,000,000 VND |
| Remaining interest for further review | 240,000,000 VND |
| Additional CIT (20%) | 12,000,000 VND |
Additional tax of VND 12 million looks small, but if it is discovered in an inspection several years later, the company must also pay late-payment interest of 0.03% per day on the underpaid tax. The simplest solution is to contribute capital in full and on time before borrowing.
5. Loan tracking schedules every accountant should keep
- A schedule of drawdowns and principal and interest repayments, contractual and actual, including currency and exchange rate.
- A month-end interest accrual schedule to record interest in the correct period.
- A year-end foreign exchange revaluation of foreign-currency principal balances.
- A quarterly reconciliation of balances with the parent company, confirmed by both parties.
FAQ
Is it a problem to take a short-term loan from the parent and extend it several times?
It may bring the loan within the registration requirement that applies to medium/long-term loans under foreign exchange regulations. Check before signing an extension addendum.
If the loan is not registered, is the interest still deductible?
This is a major risk: a loan that does not comply with foreign exchange regulations is likely to have its interest disallowed by the tax authority, and foreign exchange penalties may also apply.
Do we need documentation to support the interest rate on a parent company loan?
Yes, it is advisable. Because this is a related-party transaction, the company needs documentation showing the interest rate was in line with the market at the time of borrowing.
Review your parent company loan before year-end finalization
ACCA Consulting Vietnam reviews loan agreements, documents and interest expense so FDI companies are prepared ahead of finalization. Get advice on our accounting services.
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