BANKING & FINANCE

A significant step in State management on foreign exchange is the birth of the Foreign Exchange Ordinance (the "Ordinance"). The Ordinance was passed by the Standing Committee of the National Assembly on 13 December 2005 with an expectation that this new legislation will regulate the high level foreign exchange market in Vietnam and will satisfy the conditions for the country's integration into the WTO. The Ordinance will become effective on 1 June 2006.


FOREIGN EXCHANGE AND LOANS

(April 2007 Update)


1. Foreign Exchange

While the Government is responsible for the macro-economic foreign exchange policies, the SBV is responsible for regulating and implementing those policies and for overseeing currency transactions to ensure that they comply with the relevant guidelines. A significant step forward in State management on foreign exchange is the birth of the Foreign Exchange Ordinance (the "Ordinance"). The Ordinance was passed by the Standing Committee of the National Assembly on 13 December 2005 with the expectation that this new legislation will regulate the high level foreign exchange market in Vietnam and will satisfy the conditions for the country's integration into the WTO. The Ordinance became effective on 1 June 2006.

1.1 Bank Accounts

Accounts in Vietnam

All FICs and foreign parties to BCCs must open a Capital Account with a bank located in Vietnam. The main purpose of the Capital Account is to monitor the flow of capital in foreign currency into and out of Vietnam. Therefore, certain transfers of capital (e.g. transfer of capital/equity, profits or off-shore loans) must be effected through this Capital Account.

In addition to the Capital Account, FICs and foreign parties to BCCs can open other foreign currency and VND accounts at other banks in Vietnam.

Accounts outside Vietnam

The opening and operation of offshore accounts are under the strict control of, and must be approved by, the SBV. Normally, the SBV approves offshore accounts for the purposes of disbursement and repayment of an offshore loan provided that the loan principal must not be less than US$5,000,000. Recent regulations have allowed FICs to open offshore accounts in certain special circumstances. In practice, SBV has approved several offshore accounts opened by BOT companies in Vietnam for security purposes as required under financing agreements or for the remittance of equity.

1.2 Conversion

All FICs and foreign parties to BCCs are entitled to buy foreign currency for current transactions and other permitted transactions in accordance with the foreign exchange regulations.

Although not being required to obtain approval for conversion, the ability of FICs and foreign parties to BCCs to convert VND into foreign currency is subject to foreign currency being available from banks licensed to operate in Vietnam.

Government guarantee

The Government shall guarantee the conversion for important projects as listed by the Government from time to time. In practice, the Government has issued several guarantees of availability for some BOT projects in Vietnam and those guarantees contemplate a special procedure for conversion and remittance of foreign currency.

In relation to other important projects and infrastructure construction projects, the Government only guarantees its support for currency conversion. However, Vietnamese laws do not elaborate on the details or extent of this type of Governmental support would cover. Accordingly, it is not entirely clear whether those guaranteed FICs would be given access to the foreign currency reserves of Vietnam should no foreign currency be available in the banking system.

Conversion purposes

The foreign currency conversion used to be under the strict control of the SBV. However, this restriction has been gradually removed. Under the new Ordinance, all residents are entitled to buy foreign currency to meet their payment requirements for legitimate purposes, subject to the selling bank's verification.

Conversion and remittance of foreign currency are said to be liberalised in relation to payment for current transactions. According to Decree 160 dated 28 December 2006 implementing the Ordinance (“Decree 160”), payment for current transactions includes the following: (i) repayment of principal, interest and fees under foreign loans; (ii) overseas remittance of net income and depreciation of invested capital (if applicable); (iii) payment for imports of goods and services and other current transactions; and (iv) other remittance for consumption purposes and similar transactions.

1.3 Remittance of Capital and Profits

Remittance of capital

Foreign investors in Vietnam may not be able to remit their paid-in capital out of Vietnam prior to the termination of a BCC or dissolution of an FIC. This requirement may prevent a project company in Vietnam from making reimbursements of pre-incorporation costs to its sponsors.

Upon termination or dissolution of a company, foreign investors are entitled to repatriate their share of the charter capital and re-invested capital of FICs or capital for implementing BCCs out of Vietnam. Foreign investors are required to submit certain supporting documents to the remitting bank for verifying such remittances. Prior approval from the Licensing Authority must be obtained where the amount of repatriated capital exceeds the original amount of the charter capital and re-invested capital of the relevant FIC or capital for implementing BCCs contributed by foreign investors.

The repatriation of the depreciation of invested capital is now classified as payment for current transactions under Decree 160. Therefore, the buying of foreign currency and money transfers with respect to such repatriation will be allowed if depreciation of invested capital is permitted by the relevant authority.

Remittance of profits

Foreign investors are entitled to repatriate their share of the profits earned in Vietnam on an annual or quarterly basis. Upon remittance, foreign investors are required to submit certain supporting documents to the remitting bank for verification purposes.

1.4 Liberalisation of current transactions

With the introduction of the Ordinance and the issuance of Decree 160, payments and money transfers in relation to current transactions in Vietnam are said to be liberalised. This represents Vietnam's commitment to the liberalisation of current transactions in accordance with such conditions set out in Article VIII of the IMF Rules. In particular, a foreign investor is now allowed to remit overseas his profits or invested capital without presenting the remitting bank a tax certificate from the tax office as evidence that it has fulfilled all tax obligations in Vietnam.

1.5 Foreign Currency Payments

Foreign currency payments within Vietnam, except for certain limited circumstances, are strictly prohibited under the Ordinance and are subject to the strict control of the SBV. Except certain permissible circumstances provided by Circular 01 of the SBV dated 16 April 1999 or otherwise permitted by the Prime Minister, residents and non-residents are prohibited from effecting a sale/purchase, making a payment, or granting loans in foreign currency and posting notice of goods and services in a foreign currency. For example, this requirement may, and, has, prevented a company from making a foreign currency loan to another company in Vietnam.

Examples of the permissible circumstances provided by Circular 01 are:

*

companies providing international services in such industries as aviation, maritime, posts and telecommunications, postage, insurance and tourism may, in certain circumstances, receive foreign currency by way of a bank transfer;
*

foreign invested projects operating in areas of business such as office premises, hotels, international hospitals, international schools and other services may receive foreign currency from non-residents by way of a bank transfer;
*

hotels, restaurants, supermarkets and shops may accept payment cards denominated in a foreign currency from their customers but the final settlement between those entities and their banks must be made in VND;
*

foreign contractors may receive foreign currency in Vietnam by way of a bank transfer;
*

companies in Vietnam may receive foreign currency from export processing companies by way of a bank transfer;
*

foreigners in Vietnam may receive their salaries, bonuses and allowances in foreign currency by way of a bank transfer or by cash;
*

Vietnamese residents may receive foreign currency to cover the costs of their overseas trips;
*

diplomatic missions, consulates or offices of international organisations operating in Vietnam may accept foreign currency cash for visa fees, consular fees and other fees; and
*

companies selling duty-free goods and providing services in restricted areas at border gates may receive foreign currency cash.

It should be noted that a breach of the above requirements may make the whole contract, to which the payment relates, invalid.

1.6 Rates of Exchange

Each day the SBV announces in the mass media an average exchange rate in the Foreign Currency Interbank Market of VND against US$. This official exchange rate is used in the following circumstances:

*

to calculate import/export duties;
*

to consider bidding for national projects at the time of the opening of bids; and
*

to calculate the value of capital contributions made to a JVC or a BCC at the time of the capital contribution.

Commercial banks (including foreign bank branches) shall determine and announce their buying/selling rates of VND against US$ within the range permitted by the SBV.

1.7 Residents and non-residents

A distinction is made between "residents" and "non-residents" under the Ordinance.

"Residents" include:

1.

credit institutions licensed and operating in Vietnam;
2.

economic organisations established and carrying on business in Vietnam;
3.

State bodies, units of the armed forces, political organisations, social organisations, charity funds and other organisations;
4.

diplomatic representative offices and consulates of Vietnam in foreign countries;
5.

representative offices of Vietnam organisations mentioned in (a), (b) and (c) operating in foreign countries;
6.

Vietnamese citizens residing in Vietnam, Vietnamese citizens residing in a foreign country for less than 12 months and Vietnamese citizens working in the organisations mentioned in (d) and (e) and their dependants;
7.

Vietnamese citizens travelling overseas for tourism, studies, medical treatment and visiting; and
8.

foreigners residing in Vietnam for 12 months or more, except those foreigners who are in Vietnam to study, receive medical treatment or for leisure or who are working in the diplomatic representative offices, consulates or representative offices of foreign organisations in Vietnam.

"Non-residents" are those who are not classified as "residents" under the Ordinance.

2. Loans

Subject to the law of Vietnam, from the date of receiving an investment certificate by a Licensing Authority, FICs in Vietnam are entitled to obtain loans from (and grant security to) both onshore and offshore lenders.

Borrowing limit

The investment certificate of an FIC stipulates its invested capital and charter capital. The difference between the invested capital and the charter capital is the loan capital of the FIC. All loans obtained by an FIC from onshore and offshore lenders (including loans from shareholders) must not exceed the amount of the loan capital. Exceptions are made in the following circumstances:

*

offshore loans for working capital with a term of one year or less if the loan is obtained after the completion of construction and the project is already in operation; and
*

refinancing (ie: when an existing loan is paid out by another new loan).

Approval from the Licensing Authority will be required if the loan amount results in the borrower exceeding the loan capital unless that loan falls under the above exceptions. On this basis, due consideration should be given to the capital structure of an FIC in Vietnam.

Registration

Offshore loans with a term of up to 1 year (or short-term loans) for working capital purposes are not subject to registration with the SBV. A short-term loan, however, must be registered with the SBV if the loan is extended and the total loan term (including both original term and extended term) is over one year.

All loans obtained from offshore lenders (including offshore shareholders) and with a term of more than 1 year must be registered with the SBV within 30 days from the date of execution of the loan agreement and prior to the first drawdown under the loan agreement. For the purpose of registration with the SBV, the borrower is required to submit a standard application form to the SBV and the loan agreement must be translated into Vietnamese. It should be noted, however, that a prior approval from SBV must be obtained if a provision of the finance documents is not consistent with the laws of Vietnam.

Any amendment to the details of the SBV registration certificate (including loan assignments) must also be registered with SBV within 30 days of the date of the amendment agreement and before the effective date of such amendment.

Withholding tax

Payment of interest to offshore lenders is subject to withholding tax of 10% (see Chapter II - Taxation).