1.         BACKGROUND

1.1.      A Vietnamese company (Seller) exports goods to a foreign company (Buyer) under a goods sale and purchase contract (Goods Sale Contract).

1.2.      The Seller transfers the receivables under the Goods Sale Contract (Receivables) to another foreign company (Debt Purchaser) (not a credit institution) through a debt sale and purchase agreement (Debt Sale Contract) at a Debt Purchase Price being 90% of the Receivables value (Debt Purchase Price).

1.3.      Under the Debt Sale Contract,

1.3.1.   the Debt Purchaser will advance the Debt Purchase Price to the Seller and will receive the Receivables from the Buyer when due;

1.3.2.   if the Buyer fails to pay the Receivables to the Debt Purchaser when due, the Debt Purchaser will have the right to request the Seller to return the advanced Debt Purchase Price plus interest; and

1.3.3.   the period from the advance of the Debt Purchase Price until the return of the Debt Purchase Price is less than one year.

2.         QUESTIONS

Is the advanced Debt Purchase Price considered as a foreign loan?

2.1.      The Debt Purchase Price which the Debt Purchaser has advanced to the Seller under the Debt Sale Contract is not considered as a foreign loan because:

2.1.1.   Under Article 3.1 of Decree 219 of the Government dated 26 December 2013 on Management of enterprises’ borrowing and repayment of foreign loans without government guarantee (Decree 219/2013), foreign loan means a Borrower receives a credit item from a non-resident via signing and implementing a foreign loan agreement in the form of (i) a loan contract; (ii) a contract for purchase and sale of goods on deferred payment; (iii) a loan entrustment contract; (iv) a financial lease contract; or (v) issuance of debt instrument by the borrower.

2.1.2.   The Debt Sale Contract does not fall within any of the above forms of foreign loan  so the advanced Debt Purchase Price is not considered as a foreign loan.

Can the Seller remit the Debt Purchase Price plus interest to the Debt Purchaser’s account in a foreign country under the foreign exchange regulations?

Nature of the Debt Sale Contract

2.2.      The arrangement between the Seller and the Debt Purchaser under the Debt Sale Contract may be considered as, among others:

2.2.1.   a transfer of right to demand the performance of an obligation by a party having such right under Article 365.1 the Civil Code 2015 (see further discussions at here); or

2.2.2.   a factoring (bao thanh toán) subject to the regulations of the Law on Credit Constitutions 2010.

The possibility of the return of Debt Purchase Price by the Seller to the Debt Purchaser

2.3.      Under Article 3.2 of Circular 16/2014, an institutional resident can only conducts some payment transactions through its foreign currency account, which include (i) capital transactions (giao dịch vốn), and (ii) remittance and payment for current transactions (thanh toán và chuyển tiền đối với các giao dịch vãng lai).

2.4.      Under the Ordinance on Foreign Exchange Control 2005 (as amended),

2.4.1.   Capital transactions include (i) direct investment; (ii) indirect investment; (iii) taking and repayment of foreign loan; (iv) granting and collection of foreign loan; (v) and other activities in accordance with the laws of Vietnam (Capital Transactions); and

2.4.2.   Remittance and payment for current transactions include (i) payment and remittance related to goods/service export and import; (ii) payment and remittance related to commercial credit and short-term bank loans; (iii) payment and remittance related to income generated from the direct and indirect investment; (iv) remittance when being entitled to the decrease of direct investment capital; (v) payment of interest and principal of foreign loan; (vi) one-way money transfer; and (vii) other payments and remittances in accordance with the regulations of the SBV (Current Transaction Remittances).

2.5.      There is no specific case of Capital Transactions or Current Transaction Remittances which will apply directly to the return of Debt Purchase Price. The most arguable case could be “payment and remittance related to goods/service export” or “payment and remittance related commercial credit”. However, given that:

2.5.1.   the return of the Debt Purchase Price is for the purpose of implementing this Debt Purchase Contract, not the Goods Sale Contract, it is unlikely that the return of the Debt Purchase Price can be considered as “payment and remittance related to goods/service export”; and

2.5.2.   though the law does not specify, “commercial credit” is commonly understood as the credit granted between traders (for instance, allowing the buyer to defer the payment of goods to the seller). The return of the Debt Purchase Price would not fall within this type of commercial credit.

it is unlikely that the bank would allow the Seller to remit the Debt Purchase Price to the Debt Purchaser under the Debt Sale Contract through its foreign currency account.

This post is written by Trinh Phuong Thao and edited by Hoang Thi Thanh Thuy.