Project Finance 2022 Comparisons

Sponsors

In Vietnam, project sponsors come from very diverse backgrounds, including state-owned enterprises (SOEs) and both domestic and international private enterprises (LLCs). SOEs such as Electricity Vietnam, Vietnam Expressway Corporation, and PetroVietnam sponsor some of the largest infrastructure projects, such as thermal power plants, refineries, electricity transmission lines, steel mills or railways. Sometimes sponsors are also main contractors to the project. Domestic and international LLCs are also big players, sponsoring diverse projects such as residential urban area developments, entertainment complexes, hotels and resorts, as well as production facilities. The growth in renewable energy development has also brought strong incentives for new LLCs to join the market.

Lenders

Lenders in Vietnam are mainly commercial banks having a market share in sponsoring projects, including Vietcombank, Vietinbank, BIDV and Techcombank. International credit institutions are also active in the country through a diverse selection of financial institutions ranging from commercial lenders to export credit agencies to investment funds, especially Credit Suisse and SMBC. In recent years, JICA, JBIC, ADB, AIIB, Standard Chartered, UOB, DBJ, Kexim, CDB, CCB and BOC have emerged as some of the major lenders.

For big projects, the syndication mechanism is applied, in which a foreign lender can form a partnership with a Vietnamese bank to provide loans and to authorise the domestic bank as security agent for the foreign lender in signing and managing encumbrances. This often occurs when Vietnam laws do not allow foreign lenders to receive a mortgage over land and assets attached to the land associated with a project.

The participation of investment trusts or pension funds have recently become more popular in Vietnam with offshore wind projects.

The main legislation for public-private partnerships (PPP) in Vietnam is the PPP Law, which was enacted on 18 June 2020 and became effective from 1 January 2021. Under Article 4, applicable infrastructure facilities under PPP Law include (i) transportation (airport, tunnel, bridges, railroads and expressway), (ii) power grids and power plants (except hydro power plants), (iv) healthcare (hospital, clinics or operations and maintenance (O&M) of equipment) and education (schools), and (v) IT infrastructure.

Under the healthcare and education sector, the project value must be at least USD5 million, and the private sector equity capital contributions should be at least 15%.

The starting point of PPP project is a public choice between public investment (under the law on public investment) or PPP investment. Both types of investment come from the national or provincial plan of infrastructure projects. To be listed on the plan, the governmental authority must do research on the demand of economy and plan for development of national or provincial economy and society. Then the relevant official agents (normally the local department of planning and investment (DPI) or national ministry of planning and investment (MPI) shall propose a pre-feasible study to the local people’s committee (or central government) for approval. Once approved, the list will contain the options either investment under PPP or public investment. Sometimes, projects calling for PPP investment but lack of interests or too short time to bid for investors will be transferred to public investment, and vice versa. For example, Vietnam's more than 2000 km expressway were divided into different sections. Many sections originally allocated for PPP investment, but due to high social demand and short preparation periods, were allocated to public investment by the Prime Minister. The exception to this rule is non-solicited projects, but they must also be approved for the list of PPP projects seeking investors.

Currently, the list of PPP projects seeking investors exceeds USD20 billion, more than half of which are airports, roads and bridges, offering opportunities for large foreign contractors.

Upon listing and approval of the pre-feasibility study, the government authority will arrange a feasibility study, and then organise a bid to select the PPP investor. The bid invitation will include a form of PPP contract, which is based on the governmental standard form contract, and could be either build-operate-transfer (BOT), build-transfer-operate (BTO), build-own-operate (BOO), O&M, build-transfer-lease (BTL), or build-lease-transfer (BLT).

PPP Law no longer recognises build-transfer (BT) as a mode of PPP, notwithstanding strong opposition, as most PPP projects before PPP Law are BT projects, and also subject to scandals, due to a lack of transparency and market price valuation, especially land valuation for swapping with infrastructure.

The PPP investors must prepare a proposal taking into account the feasibility study and the form of PPP contract to submit a bid with the best terms and conditions. Please note that:

• A bid security at 0.5% and 1.5% of the total investment project value should be submitted with the bid dossier. If the bidder wins, they will need to submit another performance bond equal to 1 to 3% of the project value.
• The government does not expressly recognise GGU (Government Guarantee and Undertaking). As a matter of fact, the Communist Party issued a resolution that restricts issuance of GGU to only special projects. As a result, bidders who wish to receive GGU should be more practical and seek alternative methods, such as the export credit agency (ECA) or limited guarantees for conversion of foreign exchange and repatriation of profits.

• With regards to foreign currency guarantee, the PPP Law provides guarantee in relation to availability of foreign currency for loan repayments and transfer of profits, limited to 30% of the total project revenue. Considering that Vietnam has a GDP per capita of close to USD400 billion per year and a large part of that GDP is based on imports and exports (Vietnam is the largest trading partner of the US and China within the Association of Southeast Asian Nations (ASEAN) region), investors may believe that 30% would suffice in crisis, since 100% of the demand for foreign exchange would be satisfied in a normal manner.

• The applicable law for the PPP contract will be the Vietnam law. Other contracts, such as project contracts or finance contracts, can be governed by foreign law if one of the parties is a foreign national.

The government issued two important legislations following the PPP Law:

• Decree No 35/2021/ND-CP, which provides detailed guidance on the Law on PPP 2020 (Decree 35); and
• Decree No 28/2021/ND-CP, which provides guidance on the financial control mechanisms of such projects (Decree 28).

Workable Law on PPP

The Law on PPP 2020 introduced mechanisms for sharing revenue risks and foreign currency convertibility guarantees. Accordingly, the government decided to apply a revenue risk-sharing mechanism for qualified PPP projects in the form of the adjustment of product prices, service fees or contract terms.

When the actual revenue is 75% lower than the revenue specified in the financial plan under a PPP project contract, the state will share with the investor or PPP project enterprise 50% of the difference between 75% of revenue in the financial plan and the actual revenue, provided the following conditions are met:

• projects are developed and executed under BOT, BTO or BOO contracts;
• changes in relevant planning, policies and laws result in a reduction in revenue;
• measures to adjust the prices and charges of public products and services and PPP contract terms have been fully taken, but the minimum revenue requirement of 75% has not yet been met; and
• the reduced revenue has been audited by the state audit.

In exchange, the investors and enterprises commit to sharing no less than 50% of the increase in revenue with the government (if the actual revenue is 125% higher than the revenue specified in the financial plan).

As noted, in terms of foreign currency convertibility guarantees, the PPP project enterprises may buy foreign currency to meet the needs of current capital and other transactions, or transfer capital, profits or other liquidated investments remitted abroad. In case the foreign currency market cannot accommodate their legal foreign currency demands, then they shall be entitled to use no more than 30% of Vietnamese dong revenues generated from each project after the deduction of Vietnamese dong spending amounts as a guarantee for foreign currency balancing.

More Optimistic Changes in Decree 35 and Decree 28

Decree 35 has expanded the types of incentives available to an investor for having an approved PPP (another 5% if they use sufficient local contractors, goods and products for project implementation). It has laid out in detail the selection process for PPP investors, from qualifying requirements, applicable selection methods and selection time limit to guidance for each selection method, including principles to review bids. Potential investors will appreciate this transparency, having received legal insurance that authorities will review their proposals transparently and fairly.

One significant difference of Decree 28 compared to previous regulations is that the cash flow to calculate a PPP project’s financial plan is now expressly specified as after-tax. Investors will appreciate this change when formulating their financial plan for bidding proposals, as they can now better account for a critical cost for the PPP project company. Secondly, Decree 28 has removed the caps on loan interest rates previously imposed on companies, giving firms much greater flexibility in estimating costs and arranging finances for their projects.

Obstacles

Decree 28 has arguably failed to address the long-standing problems with PPP projects in Vietnam, such as long delays in capital contributions from the state. Numerous projects have experienced this issue. For example, the government failed to contribute VND1.18 trillion (USD513 million) to the Deo Ca Tunnel project even after the company had completed construction and commissioned it. The Hanoi-Haiphong BOT project is another example, in which the government was not able to provide the promised capital support of more than VND11.7 trillion (USD510 million).

The procedure for the payment of shared revenue is arguably too long and too complicated. Under Decision No 03/2020/QD-KTNN of the State Audit Office of Vietnam (SAV), an audit by the SAV could take up to 60 days. The signing authority reviews revenue differences, and the authorised financial bodies review whether to approve the revenue sharing (up to 60 days). Finally, the state treasury has to examine the payment dossier. This whole process could take over six months or more to complete.

Another issue is the regulation on the determination of PPP project sharing revenue. Under Decree 28, only the state agency concluding the PPP projects agreement shall determine the shared revenue between the state and the contracting enterprise, which is later reported to the competent authority. The role of the contracting enterprise in the determination of sharing revenue is omitted. The Law on PPP 2020 provided for an alternative approach, requiring that the contracting enterprise in the PPP agreements be involved in determining the actual revenue, which will subsequently be reported to the competent authorities for implementation of the sharing revenue mechanism. This discrepancy between the Law on PPP 2020 and the Decree 28 creates a negative impact on the private investor concluding the PPP agreement with the state agency and confusion in applying the laws.

In view of the likely delays in receiving committed state capital contributions, complicated payment procedures, and lack of safety nets in determining shared revenue, Vietnam PPP projects (except in energy projects with power purchase agreements) have historically been sponsored by domestic entities, who are generally more willing to take risks and better able to negotiate local administrative and regulatory issues.

One of the major issues when structuring a deal is how to make the project bankable. Generally, a project company would fund its project cost through equity and debt. At least 15% total funding should come from equity financing and 85% should come from debt financing (including senior debt, subordinated debt, and project bonds).

Obviously the capability of the investors, including their financial soundness, is always a consideration as it secures the success of the project to a certain extent. An experienced investor can handle the local bureaucratic and political issues, and projects often resort to the investors' financial conditions to withstand difficult times.

Income stream is the next issue. Basically, a concession contract can be divided into two types:

• contracts that generate steady cash flow (such as an electricity project) with an official off-taker and a take or pay or pass-through power purchase agreement (PPA); and
• contracts where the cash flow is unclear and unstable (such as BOT transportation projects, whose revenues are derived from citizens' participation).

The former is more financially secured as there is often one off-taker who is state-backed, so has seen more international investments and often provides financing on more favourable terms. In the latter case, lenders often consider the project revenue assumptions, together with additional plus factors, such as minimum revenue guarantee or the mechanism for sharing revenue risks (see 1.2 Public-Private Partnership Transactions).

Last but not least, foreign currency convertibility guarantees are a specific feature of projects involving foreign parties. However, some sponsors have considered and implemented hedging mechanisms depending on the size of the project and the time period involved.

Other concerns include the following.

• The value of the loan over the total investment capital of the project must not exceed the difference in amount between the total investment capital of the project and the charter capital contribution registered in the investment registration certificate of the project.
• There are different types of fees that can be collected by lenders, especially local lenders, such as a prepayment fee, a facility commitment fee, an arrangement fee (in the case of syndication), and a utilisation commitment fee. International lenders are not restricted in the type of fees they may collect; however, for the restructuring of foreign loan transactions, the fees paid to the restructuring lender may not be higher than the fee paid to the original lenders.
• For sponsor support loans, sponsors must ensure that the interest rate is not 0%, otherwise they may incur tax liability based on the market price as determined by the tax authorities.

Highways and Power Plants

With transparent processes, increased incentives and much more flexibility granted to companies, the PPP Law, Decree 28 and Decree 35 have the potential to attract more private interest and investments to PPP projects, especially in infrastructure. In 2021, drafts of Vietnam’s development plans for crucial infrastructure, including electricity and transport for 2021–2030 were first circulated for opinions. Under these draft plans, Vietnam aims to construct an additional 5,700 km of highway and 137.2 GW of electricity capacity.

The Power Master Plan VIII commits Vietnam to increase renewable projects in the coming years, to reach the proportion of electricity produced from this source (about 11.9–13.4% in 2030). LNG power is also a rising trend, but the most important projects would be offshore wind farms. For instance, the La Gan power project would potentially reach USD6 billion offshore wind power, the Son My 2 Power Plant project will accompany the Son My LNG Terminal project in Binh Thuan province, executed by AES and PVGas, and Nhon Trach 3-4 LNG combined cycle power plants expect to receive LNG from Long Son LNG terminal in Baria Vung Tau province, followed by Quang Ninh LNG power in the northern area and Thanh Hoa LNG power in the central area (all developed by PVPower). Project finance was a major consideration in both these projects.

In general collateral includes movable assets, immovable assets and property rights, which are listed below:

• immovable assets, including land use rights and constructions attached to land, such as houses, factories, buildings and warehouses;
• equipment and machinery;
• property created from surface rights;
• valuable instruments, securities and deposits in bank accounts;
• property rights arising from contracts such as construction contracts, contracts for the supply of raw materials, and sale or purchase contracts;
• shares, stakes and rights to purchase stakes or interests arising from shares and stakes;
• project company claims against third parties and insurances;
• rights to extract natural resources or host government concessions; and
• property rights deriving from industrial property rights, information technology, science and technology activities.

The Civil Code 2015 provides for various securities over assets, including pledge, mortgage, deposit, collateral, escrow, title retention, guarantee, mortgage and lien. Security is typically provided in the form of a mortgage due to its ability to fit a wide range of assets. A mortgage in Vietnamese law allows the mortgagor to use assets under its ownership as security for the performance of obligations to the mortgagee without transferring such assets to the mortgagee.

A security agreement over immovable assets only takes effect once it is notarised by a notary office. In addition, securities over the following assets are required to be registered with the Land Use Right Registration Office under the provincial Department of Natural Resources and Environment (DONRE):

• land use rights; and
• assets attached to land which are recorded in a certificate of rights to use land, ownership of house and property on land (LURC).

In terms of movable assets, there is no requirement regarding notarisation for a security agreement. A pledge or mortgage over aircraft or seagoing ships is required to be registered, but otherwise it is optional for the party to register securities over movable assets. The registration should be made with the National Registration Agency for Secured Transactions (NRAST) of the Ministry of Justice of Vietnam. Generally, upon the registration, the secured party shall have priority over unregistered secured parties.

Whilst the security agreements will remain effective, securities will only take effect against a third party after they are registered with NRAST. In effect, whereas Vietnam recognises the concept of the tracing of assets, the actual tracing of assets shall be conditioned upon whether or not there has been registration with NRAST.

Vietnamese law does not recognise the concept of a floating charge. In practice, NRAST will not accept the registration of floating charges or wording that is too general, such as “all rights associated to or in connection with the project”. It is because some other rights (such as personal rights, moral rights) will not be a subject of collateral and thus cannot be registered with NRAST. The assets to be the security and registered at NRAST must be movable assets (including property rights).

Nevertheless, a project owner may create security over the investment project and property rights associated with the project, provided that they are specified, including the exploitation rights, the management rights of investment projects and other property rights or other properties affiliated to investment projects. As such, the de facto result is often the same.

Some new collaterals are stipulated in Decree No 21/2021/ND-CP – eg, assets created from surface rights, usufruct rights, an investment project and assets belonging to an investment project. Moreover, the investor may use the entire investment project, which is not prohibited by law from being transferred, a property right in terms of exploitation or the management of an investment project to ensure the performance of obligations; in the case of investing in a mortgaged property that causes the value of these properties to increase, the additional investment value belongs to these mortgaged properties.

Future assets are also permitted by law to be used to secure the performance of an obligation. Accordingly, secured parties shall have the rights over the future assets from the time at which the future assets are formed. However, it is important for lenders to note that security over future assets does not apply to land use rights.

Decree 21/2021 also differentiate between valid of the security and the effect of the security to third party (the right to chase the assets being illegally transferred to third party). This right is also recognised under Decree 21.

According to NRAST, the registration fees (per dossier) applicable from 1 July 2022 are as follows:

• registration fee – VND80,000 (approximately USD3.40);
• registration fee to change registered content – VND60,000 (USD2.5);
• deregistration fee – VND20,000 (USD0.8); and
• fee for the issuance of a copy of the document certifying the registration content: VND25,000 (USD1.10).

For securities over immovable assets, the current fees in relation to registration (per dossier) in Ho Chi Minh City are as follows:

• registration fee – VND80,000 (approximately USD3.40);
• registration fee to change registered content – VND60,000 (USD2.50); and
• deregistration fee – VND20,000 (USD0.80).

In Hanoi, the fees are similar.

The fee for notarisation is determined according to the value of the asset or the value of the transaction, but will not exceed VND70 million (approximately USD3,000).

Under the Article 295 of the Civil Code, collateral may be described generally but must be identified. Description of collateral (individually each item or general description) shall be agreed upon by securing parties and subject to types of collateral. Accordingly, under Decree 21/2021/ND-CP, there is some request for a description of collateral as follows:

In case collateral is immovable property or movable property, which is required by the law for registration, information described as agreed upon must conform to information on certificates. In case collateral is property rights, information described as agreed upon must include name and legal basis for emergence of property rights.

Properties used as security for obligation fulfilment include auxiliary objects, integrated objects or distinctive objects, description must include characteristics to determine these objects according to the Civil Code.

Description of valuable instruments, securities and deposit balance in credit institution, branches of foreign banks as collateral must conform to regulations and law on valuable instruments, securities and financial institutions.

In case investment projects used as security for obligation fulfilment are construction projects for houses, construction projects for structures other than houses or other projects that are required by relevant law provisions to obtain certificates, decisions of competent authorities or other legal basis, description under security contracts must be able to display this legal basis.

Commodities rotating during manufacturing, business and storage processes used as security for obligation fulfilment can be described by value or type. Description of collateral that is warehouse must include address and code of warehouse (if any) or other signs of warehouse location.

Under Vietnamese law, collateral for security for obligation fulfilment includes:

• current properties or off-plan properties, except for cases where the Civil Code or other relevant laws forbid sale, transfer or other change of ownership at the time of establishing security contracts, security measures;
• properties sold under property sale agreements with retention of ownership;
• properties considered as subjects of obligations under infringed bilateral contracts in case of lien measures; and
• properties under general public’s ownership if prescribed by relevant laws.

There are no restrictions on domestic entities granting security or guarantees, except if an entity grant regularly guarantees to make a profit, such entity shall be deemed to have committed a violation due to engaging in banking activity, which is only allowed to be conducted by credit institutions.

In addition, it is not permitted to create securities over immovable assets in favour of foreign lenders, including land use rights and assets attached to land.

Liens are not officially recognised under Vietnam law, except for two specific cases: retention of title and lien on the property. Retention of title is provided under Article 331 of the Civil Code 2015, which is an agreement between the seller and the buyer in a purchase contract and can be registered with NRAST. Under this mechanism, the ownership of the property remains with the seller until the purchaser fulfils their payment obligation.

Liens are provided under Articles 346 to 350 of the Civil Code 2015 and do not need to be registered at NRAST. There is also no centrally recorded and searchable database of liens. Liens shall arise from the due time for the performance of an obligation that the obligor failed to perform or performed incorrectly. Liens on property shall take effect against a third party from the time of possession (eg, the contractor has the lien against the employer for unpaid construction works until handover to the employer). The lien is a statutory right, but it is unclear whether it can be waived.

The lien holder can only hold the assets until their interests are satisfied and may not sell them. The interests of the banks can be protected against liens only for immovable assets, because in this case the bank may still proceed with an auction even if it does not hold possession of the assets (ownership of assets is transferred based on property registration). With respect to movable assets, the bank has to possess the assets before it can enforce a lien. If the movable assets are under lien, it is impossible to enforce until the lien is terminated. In that sense, the lien holder takes priority over the bank.

With regard to securities over movable assets, NRAST has operated an online registration system allowing access to the NRAST database of registered securities. Accordingly, an online search can be made based on the registration number or information of the securing party, without the user incurring any fees. In addition, lenders may request NRAST to provide information regarding the registered securities, with a fee of VND30,000 (approximately USD1.3) per request. However, because registration is optional in most cases, the search result may not cover all the securities created in fact.

For immovable assets, lenders may check information related to securities over land use rights or assets attached to land by reviewing the relevant LURC. However, not all assets attached to land are recorded in a LURC. Moreover, in certain cases, there may be a delay in updating the status of securities in a LURC. For the most comprehensive and updated information related to securities over immovable assets, it is highly recommended to submit a request to DONRE where the immovable asset is located. The provision of related information is subject to the determination of DONRE. However, the request may be more acceptable for DONRE if it is submitted by the owner of the immovable asset.

Under Vietnamese law, a security shall be released in the following cases:

• if the secured obligation has terminated or discharged;
• if the security has been cancelled or substituted with another security;
• if the security has been enforced or disposed; or
• as agreed by the parties.

If the security has been registered with DONRE or NRAST, the party may conduct the procedure for deregistration.

A secured lender can enforce its collateral in one of the following cases (Article 299 of the Civil Code 2015):

• if an obligor fails to perform an obligation when it falls due, or performs it a manner other than was agreed;
• if an obligor must perform the secured obligation before a time limit due to their violation against the obligation as agreed or prescribed by law; and
• in other cases, as agreed by the parties or prescribed by law.

General provisions regarding enforcement of collateral include:

• In case secured parties enforce collateral on the basis of agreements under security contracts, letter of attorney or written consent of securing parties is not required.
• Where the security property must be enforced in order to satisfy one obligation which has fallen due, the other obligations which have not yet fallen due shall also be deemed due and all secured parties shall be entitled to take part in the enforcement.
• Secured parties may simultaneously realise all parts and sections of collateral that is integrated objects.
• In case collateral includes multiple attaching properties, which can be divided, enforce each property individually otherwise enforce all properties simultaneously.
• In case investment in mortgaged properties results in creation of new properties or additional properties created from investment (hereinafter referred to as “created properties”) which are not affiliated to mortgaged properties according to mortgage agreements, then if created properties can be separated from mortgaged properties without causing loss or reduction in value of mortgage properties, enforcement of properties shall not include created properties which are handed over to investors by the secured parties; however, created properties cannot be separated, and properties to be enforced shall include the created properties and investors shall receive payment for the created properties incurred by the secured parties.

In the case of a mortgage on land use rights without mortgage property on that land in which the land user is also the owner of the property on the land, such property shall also be included in the enforced property, unless another agreement has been reached. If the land user is not also the owner of the property on the land, then such owner may continue to use the land in accordance with their rights and obligations during the enforcement of the land use rights. The rights and obligations of the mortgagor in relation with respect to the owner of the property on land shall be transferred to the transferee of the land use rights, unless otherwise agreed. In the case of a mortgaged property on land without a mortgage on land use rights, but in which the owner of the property on land is also the land user, such land use rights are also part of the enforced property, unless otherwise agreed. In the case of mortgaged property on land without mortgage on land use rights, whose owner is not the land user, the transferee of such property on land is permitted to continue using such property within the transferred rights and obligations of the land user during the enforcement of the land use rights, unless otherwise agreed.

Depending on the security agreement, collateral can be realised through auction, sale, substitution or another method. Otherwise, enforcement will usually take the form of an auction (Article 303 of the Civil Code 2015).

The secured lender does not need court approval to enforce the collateral if the security agreement already specifies how enforcement will occur, including methods, trigger events and timing. Prior to the enforcement of the collateral, a secured lender must notify the securing party and other secured lenders in a timely manner. If no agreement can be reached, perform within a reasonable period, not exceeding ten days for movable properties or 15 days for immovable properties, until the point of realising collateral (Article 300 of the Civil Code 2015 and Article 51 of Decree 21/2021/ND-CP). The securing party and the secured party may agree on collateral prices or have the collateral valuated by an asset valuation organisation value the collateral upon enforcement. If no agreement has been entered into, the collateral will be valued by an asset valuation organisation. A securing party or individual holding collateral is required to provide collateral to a secured party according to a notice on enforcement of collateral. If the holder does not provide collateral for enforcement, the secured lender can request a settlement from the court (Article 301 of the Civil Code 2015). The secured lender shall receive the sum of money obtained from the enforcement of the collateral after deducting from the cost of preservation, capture and enforcement. As regards overdue loan debts, the credit institution shall follow the order in which principal amounts should be collected before interest amounts (Article 18.4 of Circular No. 39/2016/TT-NHNN).

In practice, the enforcement of collateral is challenging due to certain restrictions and concerns, including the following.

When an obligor deliberately fails to deliver collateral for enforcement, the secured lender does not have the right to capture the collateral; in this case, secured parties have the rights to consider and conduct physical inspections of collateral to prevent dispersion and enforce or request court action for resolution (Article 52.6 of Decree 21/2021/ND-CP).

Collateral that is a right to use land that is subject to a variety of obligations when it is used in transaction. In principle, land use rights can also be transferred in cases where mortgages are permitted. However, in cases where the law restricts the recipients of land use rights transfer, the sale will be more complex and risky. As an example, in order to purchase agricultural land use rights and use the land for non-agriculture purpose, such as building a manufacturing factory or a shopping mall, enterprises must satisfy all conditions provided by the law. In addition, to obtain a certificate of land use rights, ownership of houses and other land-attached assets, they must change the use of the land from agriculture to business. The next danger of deadlock is that even if the mortgagor can seize the secured real estate, it is challenging to pass through the buying and selling procedures and notarisation although the creditor has kept the real estate ownership certificate, the mortgage contract has been notarised, the mortgage has been registered at the natural resources and environment agency, all procedures have been completed, the mortgage property has been seized, but the collateral is unclear. Historically, many organisations selling real estate, notarising and registering real estate have not accepted the purchase and sale of real estate based on the commitment of the creditor and the owner as specified in the mortgage contract. In addition to the authorisation contract signed by the owner to allow the sale of the property, the auction organisation also requires the owner to sign other documents before the auction can take place.

There are instances in which collateral cannot be enforced because it is related to a criminal case or to a civil case of a third party.

Under the Civil Code, contracting parties in a contract may agree to select the applied law for the contract which is foreign law, except for the following cases:

• the consequences of its application are not inconsistent with the fundamental principles of the law of the Socialist Republic of Vietnam;
• the contents of foreign law are not identifiable regardless of the adoption of necessary measures prescribed by procedural law;
• cases related to real estate in Vietnam;
• cases where parties choose Vietnamese courts; and
• PPP projects.

However, the parties should also choose the laws in Vietnam applied in security agreements if the collateral must be registered in Vietnam (eg, shares, cars, aircrafts). This selection will bring more convenience to the collateral handling process in the future because the process will comply with the provisions of laws in Vietnam for properties requiring registration of their ownership.

According to Vietnamese law, foreign judgments or arbitral awards may be enforceable in Vietnam if they satisfy certain requirements. However, the court shall not re-examine the content of the case – it will only address the procedural aspect (res judicata principle).

For foreign judgments, the court will take into account the following:

• whether the judgment satisfies the requirements for recognition under international treaties to which Vietnam is a contracting party;
• the effect of the award/enforcement of the award under relevant jurisdictions;
• the procedure of summoning relevant parties and serving of documents;
• whether a Vietnamese court has already settled/accepted the case; and
• whether the case can be settled via foreign courts under Vietnam laws.

Another ground for enforcement is based on the doctrine of comity. In the past, Vietnamese courts required that the applicant demonstrate that the foreign court had already accepted and enforced a Vietnamese decision. This resulted in significant difficulties in applying the comity principle. Nevertheless, this practice has been overturned in recent years, and local courts are increasingly accepting the enforcement of foreign court judgments on the basis of comity.

The court would look at the following when considering arbitration awards:

• the validity of the arbitration agreement;
• the appointment of arbitrators; procedures for settlement of disputes;
• whether the award exceeds parties' requests;
• the effect of the award/whether the arbitral award has been cancelled or terminated in another jurisdiction; and
• whether the case can be settled via arbitration under Vietnam laws.

Despite the res judicata principle, in practice, a Vietnamese court may not enforce foreign judgments/arbitral awards due to violations of “fundamental” Vietnamese laws. Another key issue that often arises is whether the parties have been properly informed of the case, received all the documents of the case, and been given the best opportunity to present their case.

In order to enforce foreign court judgments, Vietnam is considering joining the treaty. Once the participation is completed, there will be more certainty to the enforcement of foreign judgments in Vietnam.

Therefore, if currently, there is no agreement between Vietnam and a foreign country on mutual legal assistance in civil and criminal matters, but both Vietnam and the foreign government are members of the New York Convention 1958, then perhaps an arbitration process located in a foreign country may be more effective than a court proceeding. Therefore, such arbitral awards may be recognised without regard to reciprocity.

Foreign lenders are not permitted to obtain security over land and other assets attached to land (Articles 3 and 179 of Law on Land 2013 and Articles 144 and 159 of the Law on Housing 2014). Only local credit institutions are permitted to hold both land use rights and housing securities, including foreign bank branches operating in Vietnam (Articles 174 and 179 of the Law on Land 2013 and Article 144 of the Law on Housing 2014). To enforce their rights under loans or security agreements, foreign lenders may appoint a local credit institution as a security agent through syndication loan. Currently, the draft circular on requirements for enterprises' offshore loans without government guarantee, replacing Circular 12/2014/TT-NHNN, supplements the regulation that the focal point for handling collateral must be a credit institution, foreign bank branch or other legal entity established and operated under the law of Vietnam if the offshore loan has collateral formed on Vietnamese territory, unless the lender receives the collateral as a replacement for performance of the guaranteed obligation. As a result of this provision, loan expenses will increase, and its application to foreign lenders is unclear. A credit institution is currently only permitted to handle collateral for loans that it lends (either a single loan or a syndicated loan (when acting as a focal member to receive security assets)) and there are no specific regulations regarding the provision of collateral handling services for loans made by other lenders. Also, there are no regulations governing the service industry that handles security assets, particularly for organisations that are not credit institutions. As a result, the State Bank of Vietnam needs to provide more specific instructions in the final circular in order to implement this regulation.

In contrast, a foreign lender can enforce share security by taking ownership of the shares or selling them to a third-party purchaser. Even so, they should be aware that foreign ownership in Vietnamese companies may be subject to foreign ownership caps and approvals of the competent authority, which may vary depending on the operating sector.

In accordance with the law, Vietnamese companies may borrow from foreign lenders, subject to certain conditions.

In the first instance, a foreign loan should only be used for the following purposes:

• To implement the business plans or investment projects of the borrower or a company to which the borrower contributes direct capital contribution (only for mid-term and long-term foreign loans). In this case, the ratio of the loan serving that business plan or project of investment to the total loan taken by the borrower must not exceed the borrower's contribution to the aforementioned company. Moreover, if the borrower has investment registered project, the total amount of midterm or long-term loans (including the domestic loans) taken by the creditor must not exceed the difference between the total capital and the contributed capital in the certificate of investment.

• To restructure the foreign debts incurred by the borrower without increasing the loan expense.
• To replenish the short-term loan capital of credit institutions and branches of foreign banks (short-term foreign loans only).

Foreign loan expenses, including interest rates and fees, are agreed by the relevant parties, unless they are otherwise subject to conditions and the ceiling of foreign loan expense decided and announced by the Governor of the SBV from time to time.

Secondly, the following foreign loans must be registered with the State Bank of Vietnam (SBV):

• mid-term and long-term loans (more than one year);
• renewed short-term loans that have more than one year of maturity term; and
• short-term loans that are not covered by any loan renewal contract but remain the outstanding principal owed upon the anniversary of the date of first fund withdrawal in a full calendar year, unless the borrower has already fulfilled their debt obligations within a period of ten days after the anniversary of the date of first fund withdrawal within a full year.

The SBV's confirmation of foreign loan registration is a perquisite for banks in Vietnam to conduct money transactions related to the loan, including drawdowns and payments. Except in certain cases, if the content of a foreign loan referred to in the confirmation of registration changes, the borrower must register the changes. Whenever a state-owned company seeks a mid-term and long-term foreign loan, it must have a plan assessed and approved by the competent authorities.

Additionally, borrowers are required to open a foreign borrowing and foreign debt repayment account with an account service provider to withdraw funds and repay foreign loans, as well as to carry out other money transfer activities relating to foreign borrowing, foreign debt repayment, and foreign loan guarantees.

At the moment, the State Bank of Vietnam is considering the implementation of further regulations regarding foreign loans by Vietnam entities. The following changes to the foreign loan regime will be made as a result of the draft circular on requirements for enterprises' offshore loans without government guarantee, replacing Circular 12/2014/TT-NHNN:

• a ceiling for foreign loan fees (such as commitment fees, disbursement fees, agent fees) maximum at reference interest rate + 8%/year or six-month SOFR Term Rate + 8%/year. SOFR Term Rate is determined according to the closest period before the date of the foreign loan agreement and other agreements, supplement agreements relating to foreign loan fees.
• mandatory use of currency swaps to insure against foreign currency risks.
• the prohibition on using short-term offshore loans for debts from securities or real estate trade, capital contribution to other companies or project transfer financing is one of the most significant conditions of which foreign lenders should be aware.
• many management tools in the draft circular – such as requirements on the ceiling level for offshore loan expenses and offshore loan limits, conditions on offshore loan guarantees and requirements on conducting foreign currency derivative transactions – may appear to be obstacles for foreign lenders.

A foreign lender is not permitted to take securities over immovable assets, including land use rights and assets attached to land. An alternative solution may be set up in the form of a guarantee or standby letter of credit issued by a local bank that will take securities over immovable assets. However, these structures may incur additional costs for the parties.

With regard to guarantees, if a Vietnamese entity grants a guarantee in favour of a foreign lender in order to secure the obligations of another Vietnamese entity under a long-term (more than one year) foreign loan, a copy of the guarantee must be submitted together with the dossier for foreign loan registration at the SBV.

In addition, in order to make payment for the foreign lender, the guarantor is required to submit a package of documents to the bank, including the loan agreement, guarantee, confirmation of the borrower’s account bank and confirmation of the loan registration.

The draft circular on requirements for enterprises' offshore loans without government guarantee, replacing Circular 12/2014/TT-NHNN supplements the regulation that the focal point for handling collateral must be a credit institution, foreign bank branch or other legal entity established and operated under the law of Vietnam if the offshore loan has collateral formed in Vietnamese territory, unless the lender receives the collateral as a replacement for performance of the guaranteed obligation.

Foreign investment is governed by the Foreign Investment Law 2020 (direct investment) and the Law on Securities 2019 (portfolio investment). Under the investment law, foreign investors are defined as those that are established abroad (foreign investor – F0 level) or own more than 50% of a locally incorporated company (foreign invested enterprises (FIEs) – F1 level) or over 50% or more of whose charter capital is held by one or more of the business organisation(s) mentioned above (FIEs – F2 level). Specifically, this regulation presupposes that FIEs are considered as “foreign enterprises” only if foreign investors directly and/or indirectly own equity in an FIE.

Vietnamese law provides the following forms of direct investment:

• the establishment of a business organisation;
• a capital contribution or purchase of shares or stakes;
• the execution of an investment project;
• an investment in the form of a business co-operation contract; and
• new forms of investment and types of business organisations prescribed by government regulations.

Enterprises can be set up in the form of a limited liability company, a joint stock company, a partnership company or a private company. However, investors usually prefer limited liability companies and joint stock companies. In order to establish a company in Vietnam, a foreign investor must obtain an enterprise registration certificate (ERC) and an investment registration certificate (IRC).

In some cases, in order to make a capital contribution or a purchase of shares or stakes, a foreign investor must register for such. Accordingly, foreign investors must register with and obtain the approval of the provincial Department of Planning and Investment for share acquisitions (M&A Approval).

As for business lines, Vietnamese law contains a list of business lines in which investments are prohibited and a list of business lines in which investments are subject to conditions. For foreign investors, the investment is also subject to any international or bilateral treaties to which Vietnam is a party, including its WTO commitments. Thus, Vietnam’s WTO commitments include certain conditions regarding foreign investors' capital ownership ratios, investment forms, investment activities, and Vietnamese partners' participation in investment activities.

Foreign investors can also conduct indirect/portfolio investments in the following forms:

• by providing convertible loans;
• by buying shares in a Vietnamese enterprise without directly participating in the management and administration of the business;
• by buying and selling bonds and other securities on the Vietnamese stock market;
• by buying and selling other valuable papers in Vietnamese dong;
• through an investment trust in Vietnamese dong through a fund management company or securities company; and
• through a capital contribution or transfer of contributed capital of foreign investors (not directly involved in management) in securities investment funds and fund management companies.

Foreign investors may transfer the following profits abroad:

• investment capital and investment liquidations;
• income from business investment activities; and
• money and other assets legally owned by the investor.

Profits can be transferred abroad annually or after the end of investment activities in Vietnam. The transfer is subject to some conditions provided by law, including:

• the fulfilment of financial obligations to the State of Vietnam;
• the submission of audited financial statements;
• corporate income tax finalisation declarations and fulfilment of all tax obligations; and
• notification to the tax authority of the profits transfer abroad.

Profits transferred from Vietnam to foreign countries can be in cash or in kind. The transfer abroad of profits in cash must comply with some conditions, as follows:

• it must be conducted through the direct investment capital account (DICA) or indirectly invested capital account (IICA) (the foreign investor may use Vietnam dong in the capital account of indirect investment to buy foreign currencies at licensed credit institutions and remit to foreign countries);
• if the DICA has been closed, foreign investors may use a foreign currency payment account or a VND payment account to transfer capital and profits abroad; and
• the transfer of profits abroad in kind must comply with the provisions of the law on the import and export of goods.

A project company is permitted to maintain offshore foreign currency accounts, subject to approval and licensing from the SBV. The opening and use of offshore foreign currency accounts must strictly follow the regulations provided in such licence. An offshore foreign currency account can be opened and used for the following purposes:

• to meet the conditions for the grant of licences for the establishment and operation of branches and representative offices in accordance with the laws of the host countries;
• to serve the operation of overseas branches and representative offices;
• to repay foreign loans to foreign lenders;
• to fulfil commitments with foreign partners if the company is eligible for particularly important investment under government programmes or is making investments in the form of a PPP; and
• to fulfil commitments, agreements and contracts with foreign partners, including contracts on overseas construction, contracts on ship purchase and sale with foreign partners, and other commitments, agreements or contracts.

Financing or project agreements are not required to be registered in order to be valid or enforceable under current Vietnam laws. In the case of foreign loans, however, not all projects in Vietnam are allowed to raise capital abroad – only projects whose financing purpose is specified in Article 5 of Circular 12/2014/TT-NHNN are allowed to take foreign loans. The Circular 12/2014/TT-NHNN is currently undergoing an amendment process. The draft circular replacing Circular 12/2014/TT-NHNN is intended to put stricter control on the borrowers of offshore loans without a government guarantee, two significant changes are:

• the prohibition on using short-term offshore loans for debts from securities or real estate trade, capital contribution to other companies or project transfer financing; and
• the prohibition of using medium and long-term loans to support the projects of the organisation where the borrower is an investor, only the borrower's own projects are allowed.

Furthermore, pursuant to Article 9 of Circular 03/2016/TT-NHNN, the mid-term and long-term foreign loan, the renewed short-term loan with more than one year of maturity term, and the short-term loan that is not covered by any loan renewal contract but remains the outstanding principal at the date in a full calendar year from the date of the first fund withdrawal must be registered with the SBV, unless the borrowers have already fulfilled their debt obligations within ten days of the date of full one year from the date of the first fund withdrawal.

Under Vietnam laws, foreign entities (ie, entities incorporated in a foreign country) are not currently entitled to use land or natural resources, nor to undertake any business in relation to land or natural resources. If a foreign entity intends to use land or conduct business in regard to land, it must establish a subsidiary in Vietnam. This foreign-invested enterprise may be allocated land with a land use levy to implement investment projects for the construction of houses for sale or for a combination of sale and lease or may be leased land to implement investment projects in agriculture, forestry, aquaculture or salt production, for non-agricultural business and production purposes, for the construction of public facilities for commercial purpose, and for the implementation of investment projects on houses for lease.

A foreign-invested enterprise has a narrower scope of business activities in relation to real estate trading in Vietnam than a local enterprise. Under Article 10 of the Law on Trading of Real Estate 2014, a foreign-invested enterprise is not required to obtain any licence to conduct real estate trading in Vietnam, except for the operation licence when establishing.

The concepts of agent and trust are not officially recognised under Vietnam law but are introduced and endorsed under syndication lending. Under SBV Circular 42/2011/TT-NHNN on syndication loans, the loan participants may jointly appoint a bank to hold trust of security assets for all participants. This becomes the premise for many transactions in Vietnam.

“Subordination agreements” and “senior debt” are stipulated under Vietnam law via the priority of debt payment; in particular, the lender may request the borrower to register security transactions and, accordingly, such transactions/mortgaged assets are registered first and will be paid first when the borrower falls into an insolvency event.

Subject to parties’ agreement, subordination may be applied for a loan in Vietnam. In the event a company becomes insolvent, the sequence of the redistribution of assets will comply with Articles 53 and 54 of the Law on Bankruptcy 2014. Accordingly, the secured debts will be prioritised for repayment before the unsecured debts. Therefore, even if the parties enter into a subordination agreement, if other loans are registered for the security transaction, as mentioned previously, the effectiveness of this agreement may be challenged.

“Projects” and “companies” are governed separately under Vietnam law; in particular, a project is governed by the law on investment while a company is regulated by the law on enterprises. One company may have several projects. The law of Vietnam does not directly stipulate which legal form the project company must adopt. Subject to the project’s activities, the company may be required to satisfy certain conditions. For instance, if the foreign investor intends to set up a subsidiary in Vietnam to conduct advertising activity, the project company must be organised as a multi-member liability company or a joint stock company because, according to the Schedule of Specific Commitments in Services, a foreign investor is only entitled to establish a joint venture to conduct advertising activity in Vietnam.

Project companies are mainly established as limited liability companies, which are able to borrow money from banks or issue bonds under Decree 153/2020/ND-CP. Specifically, Decree 153/2020/ND-CP only grants corporate bond purchase permits to professional securities investors (as defined under the securities law provisions) and strategic investors, on a case-by-case basis. Vietnam regulators are currently in the process of drafting a decision to be issued by the Prime Minister, under which Vietnam companies will be required to obtain the approval of the Prime Minister before providing guarantees to foreign lenders, increasing the difficulty of issuing international bonds.

Under the Law on Bankruptcy 2014, a company will be regarded as falling into the state of insolvency if it is unable to pay its debts within three months of the debts’ due dates. The procedure for bankruptcy begins with the application for initiation of the bankruptcy process, and shall produce two possible outcomes:

• the company is declared bankrupt; or
• the company recovers and is considered solvent.

The second outcome ensues upon the occurrence of the following:

• the creditors’ conference – one of the most critical stages in the bankruptcy procedure, to assess the viability of the survival of the company and successfully pass a resolution to apply a rescue procedure to resume business operations (Rescue Plan); and
• the court issues a decision to recognise the Rescue Plan; and
• the company fulfils the Rescue Plan.

Failure to agree upon or devise the Rescue Plan or inability to implement such Rescue Plan within the statute of limitations shall result in the company being declared bankrupt.

Bankruptcy Procedure

The primary statutory steps of a bankruptcy procedure are as follows.

• Application for the initiation of a bankruptcy procedure.
• The court receives the application, checks and handles the application.
• The court issues a decision initiating the bankruptcy procedure and appoints the bankruptcy trustee.
• The bankruptcy trustee prepares and publishes a list of creditors, makes and publishes a list of debtors, and co-ordinates the stocktaking and valuation of the company’s assests.
• The creditors’ conference is summoned by the judges.
• The creditors’ conference is held, and a resolution is passed specifying one of three proposals:
1. suspension of the bankruptcy procedure;
2. applying the Rescue Plan; or
3. declaring the company bankrupt.
• The court sends the resolution to the competent procuracy department and the relevant parties for the implementation thereof.

Content of Rescue Plan

The Rescue Plan may include the following solutions as provided by the law:

• capital mobilisation;
• debt relief and debt moratorium;
• changing products and goods;
• technological innovation;
• reorganisation of the governing board, and merging or separating the production division;
• selling shares to the creditors and others;
• selling or lending the assets; and
• other solutions under the regulations of the law.

Upon the commencement of an insolvency proceeding, lenders' rights to enforce their loans or any security/guarantee are restricted, and the duration and scope of the restriction varies depending on the type of debt.

Enforcement for Lenders of Secured Debts

Lenders of secured debts may or may not enforce the secured assets to recover their debt subject to the court's decision and the resolution of the creditors' conference. If the creditors' meeting passes a resolution on a Rescue Plan that includes the usage of the secured assets for the rescue procedure, and if the creditors of such debts agree to such arrangement, the secured assets shall be contributed to the recovery of the debtor. Only if the secured assets are likely to be damaged or dramatically devalued, or if the secured assets are not used for the implementation of the Rescue Plan, may the lender enforce its loan, but such enforcement shall still be subject to the decision of the judges.

However, if the value of the collateral is not enough to cover the debt, the remaining value of the debt shall be paid during the liquidation of the assets, with low priority (see 6.3 Priority of Creditors).

Enforcement for Lenders of Unsecured Debts

Following the commencement of the bankruptcy process, the following activities are prohibited for the company:

• paying the unsecured debts (with certain exceptions); and
• making an unsecured debt into a secured or partly secured debt with collateral that is an asset of the company.

Enforcement of the unsecured debt will take place during the liquidation of the low priority assets (see 6.3 Priority of Creditors).

As per Vietnamese law, the priority for debt settlement upon insolvency of a company is listed below:

• secured debts under security contracts (which are initiated prior to the court’s handling of the application for the initiation of the bankruptcy process);
• the cost of bankruptcy;
• unpaid salaries, severance pay, social insurance, medical insurance for employees and other benefits under the executed labour contracts and collective bargaining agreement;
• debts incurred after initiating the bankruptcy procedure for the purpose of resuming the company's business operations;
• financial obligations to the state;
• unsecured debts payable to creditors in the list of creditors; and
• unpaid secured debt because the value of the collateral is insufficient to cover such debt.

Non-recoverable Debts

If the value of the secured assets is not sufficient to cover all the debt, the lender shall have to wait until the asset liquidation stage when the court issues the declaration of bankruptcy to know whether or not the outstanding debt is recoverable. There are risks that the outstanding debt cannot be recovered, as the order of payment for such amount is pushed after certain other financial obligations. The same risks are applied to the unsecured debt.

Invalid Transactions Entered into Before the Initiation of the Bankruptcy Procedure

According to the law, certain transactions made by the insolvent company within six months prior to the court deciding to initiate the bankruptcy procedure shall be deemed invalid. These transactions include, but are not limited to, the conversion of unsecured debts into wholly or partly secured debts using the assets of the company, and the payment or offsetting of debts that are undue or offsetting the amount greater than the due debts. Such regulation puts a restraint on the method and timing for creditors to settle their debts and recoup their losses, even if the creditors identify the insolvency risk of the borrower at an early stage.

The Vietnam law on bankruptcy applies to all types of enterprises, including credit institutions, co-operatives and co-operative unions operating in the country.

Insurance companies provide no restrictions or controls on project assets under insurance policies used in relation to project finance.

The Law on Insurance Business 2000 (amended in 2010) stipulates individuals and organisations with insurance needs may only enter into an insurance agreement with an insurance company operating in Vietnam. Companies with foreign investments in Vietnam may choose to participate in insurance through local insurance companies or use cross-border insurance services.

If cross-border insurance services are used, the following conditions must be met:

• the country where the foreign insurance company’s headquarter is located has signed international treaties on trade, including an agreement on the provision of cross-border insurance services in Vietnam;
• nearly 50% of the capital of a foreign-invested enterprise that intends to purchase insurance is owned by foreign investors;
• the foreign insurance company has acquired a licence(s) from the state authorities managing overseas insurance in its home country to operate cross-border insurance services in Vietnam, as well as evidence of having legally operated for at least ten years before its provision of cross-border insurance services in Vietnam;
• the foreign insurance company has written permission(s) and confirmation(s) from the state authorities managing overseas insurance in its home country to provide cross-border insurance services in Vietnam, and that it has not violated any laws on insurance business and insurance brokerage and other foreign regulations in the three consecutive years prior to the year that cross-border services are provided in Vietnam;
• the foreign insurance company has assets worth at least USD2 billion in the fiscal year prior to the year that cross-border insurance services are provided in Vietnam;
• the foreign insurance company is ranked at least “BBB” by Standard & Poor’s or Fitch, “B++” by AM Best or "Baal" by Moody's, or has earned an equivalent rank from other experienced ranking organisations in the fiscal year prior to the year that cross-border insurance services are provided in Vietnam;
• the foreign insurance company has carried out profitable business for the three years immediately preceding the year that cross-border insurance services are provided in Vietnam;
• the foreign insurance company must deposit at least VND100 billion in a bank licensed to operate in Vietnam and have a letter of guarantee from such bank that it undertakes to make payments when liabilities under cross-border insurance contracts in Vietnam exceed the mandatory deposit;
• the foreign insurance company must implement a procedure of claim settlement, which specifies the formalities, steps and time for settling damages and claims for insurance buyers in Vietnam; and
• the foreign insurance company shall provide cross-border insurance services in Vietnam through an insurance broker enterprise that is licensed to operate in Vietnam.

However, Law on Insurance Business 2022 shall be effective on 1 January 2023, specifies the relevant subjects compared to the Law on Insurance Business 2000 (amended in 2010). In particular, entities and persons in Vietnam wishing to participate in insurance schemes can only do so with insurers, foreign non-life insurer's branches or mutuals offering micro-insurance products that obtain establishment permits or business licenses in Vietnam, except in the case of cross-border insurance services provided by international treaties to which the Socialist Republic of Vietnam is a signatory.

Furthermore, the Law on Insurance Business 2022 establishes the following requirements for the provision of cross-border insurance services: Article 6.2 makes it clear that the government will be responsible for this matter. As a result, when this law takes effect, a decree will be issued directing the publication of the Law on Insurance Business 2022. Until then, it is required to conduct more research on the new decree and its transitional clauses.

There are no restrictions on foreign creditors receiving proceeds from insurance policies over project assets.

Interest payments are subject to withholding tax of 5% unless the country of the lender has entered into a tax treaty with Vietnam, in which case the withholding tax may be exempted or reduced in accordance with such tax treaty.

Vietnam laws do not require other taxes or charges to be levied on foreign loan-making to entities incorporated in the territory. The withholding tax of 5% applies to any costs and fees payable by the borrower to the foreign creditor in accordance with the contract they have entered into.

The Civil Code 2015 caps interest rates at a maximum ratio of 20% per year. However, the Civil Code 2015 also states that, if any other law regulates otherwise, such provision shall prevail.

In fact, the SBV issued Circular No 12/2014/TT-NHNN to regulate that the foreign creditor, the borrower and related parties may agree on foreign loan expense, unless there is another decision of the governor of the state bank makes a further decision concerning the application of foreign loan expense requirements. A foreign loan expense is the total expense in relation to the loan expressed as a percentage per annum, including interest and other expenses that the borrower has to pay to the creditor, the guarantor, insurance companies, agents and other parties that are involved.

However, on 19 May 2022, SBV issued a draft circular concerning the conditions for foreign loans to enterprises that are not guaranteed by the government. According to the draft circular, the cost of foreign borrowing shall be determined by an agreement between the borrower, the lender, and related parties, but must not exceed the following cost ceiling.

For foreign loans in foreign currencies, reference interest rate plus 8%/year if reference interest rates are used; or SOFR Term Rate plus 8%/year if reference interest rates are not used.

The SOFR Term Rate specified in this clause is the six-month SOFR Term interest rate announced by CME on its official website the day before the signing of the loan agreement, foreign loans, and amendments or supplements relating to foreign borrowing costs.

In the case of Vietnamese dong foreign loans, the interest rate would be the rate on government bond plus 8%/year.

The interest rate of Vietnamese government bonds specified in this clause is the exercise interest rate of ten-year government bonds in Vietnamese dong at the nearest possible time before the date of signing the foreign loan agreement and amendment agreement, as well as any foreign borrowing costs associated with it.

The applicable law governing project agreements depends on the jurisdiction of the parties. Usually, Vietnamese parties select Vietnamese law, while foreign parties prefer the law applicable to their jurisdiction, such as English, Chinese, Japanese or Singaporean. Vietnamese law, however, stipulates that the application of foreign laws shall not be in breach of any of its principles.

According to Vietnamese law, the project agreement and other documents signed between a Vietnamese state authority and a PPP project investor or enterprise are governed by Vietnamese law.

For financing agreements, the applicable law is determined by the bargaining power between the parties and is generally determined by the lender’s preference. Vietnamese law usually governs the terms of loans provided by Vietnamese lenders. Foreign lenders prefer English law, particularly international banks; in very limited cases, financing agreements are governed by Hong Kong or Singaporean law.

Typically, agreements between project companies and a state-owned off-taker are governed by Vietnamese law, especially in the case of oil and gas projects and power generation projects. Security agreements over immovable assets are also governed by Vietnamese law.