Conversion of Short-Term Foreign Loans into Equity Contribution: Implementation Procedures and Key Considerations
As discussed in the article “Short-term Loans from Foreign Parent Companies: Options for Handling Outstanding Loans”, where a short-term foreign loan reaches its maturity (i.e., one (01) year from the first drawdown) and the company is unable to repay or may become subject to loan registration requirements with the State Bank of Vietnam, selecting an appropriate solution is critical to mitigate potential legal risks. Among the legally permissible options, the conversion of a short-term foreign loan into equity contribution held by the foreign investor in the Vietnamese company is a commonly adopted approach. However, in practice, many enterprises have yet to fully understand the legal procedures required to implement such conversion in a compliant manner.
This article analyzes the legal nature of such transactions and provides a detailed guide on the procedures that enterprises need to prepare when converting a foreign loan into equity in accordance with applicable laws.
In essence, the conversion of a loan into equity involves transforming a repayment obligation into an ownership interest in the enterprise, thereby changing the company’s financial structure from debt to equity and increasing its charter capital in Vietnam. Accordingly, repayment is effected through an agreement to convert the outstanding debt (including principal and/or interest) into equity or shares of the borrower, without requiring any actual remittance abroad. This form of repayment is recognized under Vietnamese law as a repayment not made through the foreign loan and repayment account, pursuant to Article 34.2 of Circular No. 12/2022/TT-NHNN.
In addition, current regulations provide that within 30 working days from the date marking one (01) year from the first drawdown under the loan agreement, the company may convert the entire outstanding balance into equity or shares of the lender in the borrower without being required to carry out loan registration procedures. This applies to short-term loans without extension agreements that still have outstanding principal (including capitalized interest) at the one-year milestone from the first drawdown.1
To convert a foreign loan into equity, the company must undertake procedures in compliance with regulations on investment, enterprises, and foreign exchange control. Accordingly, the implementation process for converting a short-term foreign loan into equity generally includes the following steps:
First, for companies receiving capital with foreign elements, it is essential to review and ensure compliance with applicable investment conditions and business conditions under Vietnamese law as well as relevant bilateral and multilateral treaties to which Vietnam is a party. This is to ensure that the foreign investor fully satisfies the prescribed conditions and that the company remains eligible to conduct its business activities. In particular: (i) certain business sectors may impose foreign ownership caps or require specific conditions relating to capital, operational requirements, or sub-licenses for conducting business; and (ii) the conversion may result in changes to the ownership structure, potentially leading to a change in the company’s legal status.
Second, the parties must complete the necessary internal corporate approvals to adopt and approve the conversion of the loan into equity, the increase of charter capital, the admission of new members/shareholders (if any), and the adjustment of ownership ratios among existing members/shareholders.
Third, the parties should enter into a written loan-to-equity conversion agreement or contract, based on the executed loan agreement. This document serves as a key legal basis for the entire implementation process. It should clearly specify the conversion date, the amount to be converted, the treatment of principal, interest, and any late payment interest (if applicable), the ownership percentage that the lender will hold in the company upon completion of the conversion, as well as the rights and obligations of the parties.
Fourth, the parties must carry out the relevant administrative procedures with competent authorities to increase the charter capital and record the new foreign investor as a member/shareholder (if applicable), as follows:
Step 1: Obtaining approval for capital contribution/share acquisition by the foreign investor at the Department of Finance or the Industrial Zone Authority where the company is headquartered
This procedure is required if the conversion of the loan into equity or shares results in the foreign investor holding more than 50% of the company’s charter capital, or falls within the cases prescribed under Article 21 of the Investment Law 2025.
Upon receipt and review of the application dossier, if the company and the lender satisfy all conditions under applicable laws and relevant international treaties to which Vietnam is a party, the Department of Finance or the Industrial Zone Authority (as applicable) will issue a written approval confirming that the foreign investor is eligible to contribute capital or acquire shares/capital contribution. This approval will specify the projected charter capital after the increase, as well as the value and ownership ratio of the lender following the conversion.
Step 2: Amendment of the Enterprise Registration Certificate
The company must carry out procedures to amend the Enterprise Registration Certificate and/or notify changes to its enterprise registration contents, including adjustments to charter capital, ownership ratios, and information of foreign members/shareholders at the Business Registration Division under the Department of Finance where the company is headquartered.
Within 10 working days from the completion of the loan-to-equity conversion and the increase of charter capital, the Company must carry out the procedures to amend its Enterprise Registration Certificate with the Department of Finance where the Company is headquartered.
In practice, the Department of Finance does not verify, nor is it obligated to examine, the source of the increased charter capital. Therefore, the issuance of an amended Enterprise Registration Certificate reflecting the new charter capital does not necessarily mean that the capital contribution or loan conversion has fully complied with all applicable legal requirements.
Step 3: Amendment of the Investment Registration Certificate (if applicable)
The company must carry out procedures to amend its Investment Registration Certificate (if any), including adjustments to the project’s investment capital and updates to the foreign investor’s information at the Department of Finance or the Industrial Zone Authority where the company is located.
The current Law on Enterprises and Law on Investment do not prescribe a mandatory sequence for amending the Investment Registration Certificate or the Enterprise Registration Certificate first. Accordingly, the procedures for increasing the project’s investment capital and updating the foreign investor’s information in the IRC may be carried out either after the amendment of the Enterprise Registration Certificate or vice versa, depending on the specific circumstances and the parties’ agreement on the completion date of the loan-to-equity conversion and the capital increase.
In addition, the company must ensure full compliance with its investment reporting obligations (including reports on project implementation and periodic investment supervision and evaluation reports) in accordance with the Investment Law prior to submitting the Investment Registration Certificate amendment dossier. If such reporting obligations have not been fulfilled, in practice, the application may not be accepted for processing or considered for the issuance of the amended Investment Registration Certificate. Furthermore, the receiving authority may refer the case to the inspection division for further review, thereby exposing the Company to potential administrative penalties if any violations of relevant laws are identified.
Step 4: Notification of repayment by shares/capital contribution to the State Bank of Vietnam
For short-term foreign loans, the company is required to report to the State Bank of Vietnam on the conversion of the loan into equity investment, either through the prescribed online system or by written submission in accordance with applicable regulations.
In addition, the enterprise is responsible for notifying the bank and providing supporting documents evidencing that the repayment has been made in a form not through the foreign loan and repayment account, so that the bank can continue monitoring the borrower’s foreign loan. Such notification must be made within 05 working days from the repayment date.2
In practice, competent authorities may require additional documentation depending on local regulations and administrative practices. Therefore, to ensure a smooth implementation process and minimize potential risks, enterprises are advised to proactively consult with the relevant authorities or seek professional advice to ensure the completeness and feasibility of the application dossier. It should also be noted that the conversion must be implemented in a consistent manner, ensuring compliance with the laws on investment, enterprises, and foreign exchange management.
It can be seen that the conversion of short-term foreign loans into equity contribution is an effective solution to reduce financial pressure, improve capital structure, and enhance the financial capacity of enterprises. However, this is a relatively complex legal process that requires careful preparation and close coordination across multiple procedures. Accordingly, enterprises should establish a clear implementation roadmap, thoroughly review all relevant legal conditions, and consider seeking professional advice from the outset to ensure compliance, mitigate risks, and achieve optimal efficiency in corporate governance and operations.
(1) Article 11.3 of Circular 12/2022/TT-NHNN and Article 4 of Circular 80/2025/TT-NHNN
(2) Article 34.2 of Circular 12/2022/TT-NHNN
Related posts
- Some solutions to handling overdue short-term foreign loans of enterprises in Vietnam
- Short-term Loans from Foreign Parent Companies: Options for Handling Outstanding Loans
- Short-term loans from foreign parent companies: unforeseen consequences
Disclaimers:
This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.
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Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Business and Investment and contact our team of lawyers in Vietnam via email info@apolatlegal.com.
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