Funding a Vietnamese subsidiary: charter capital, shareholder loans and the tax points in between

A foreign parent has two basic ways to put money into its Vietnamese subsidiary: charter capital, contributed as equity, and shareholder loans, lent and later repaid with interest. Most groups use a mix. The choice is usually made by group treasury on cash-flow and currency grounds, but it has tax consequences in Vietnam that last for years — for the deductibility of interest, for foreign contractor tax on payments abroad, for exchange differences and for the ability to send money back.

This guide sets the two routes side by side, then goes through the points where funding decisions most often come back as tax questions. It is written for group treasurers and CFOs making the decision, and for the Vietnamese finance lead who will have to explain it to an inspector later.

Equity and debt side by side

Neither route is better in general. A subsidiary with years of losses ahead gets little from deductible interest and may later struggle to repay; a profitable, stable one may find a moderate loan useful. What matters is that the choice is deliberate and documented, not the accidental result of whatever the treasury system did that quarter.

Charter capital: getting the contribution right

The registered charter capital and the investment capital are set out in the registration certificates, and enterprise law sets the period within which the investor must contribute. For tax purposes, three habits pay off:

• Use only the direct investment capital account for contributions, with the investor named as remitter. Money that comes in another way is hard to recognise as capital later.
• Match each receipt to the capital schedule and keep the bank advice with the board or owner decision that called the capital.
• Record foreign-currency contributions at the right rate and keep the calculation. Differences between the registered amount and the dong value on receipt are a common audit query.

Late or incomplete contribution has consequences under enterprise and investment law, but it also has a tax one. Where charter capital has not been fully contributed, the rules have limited the deduction of interest on loans that effectively fund the missing capital. Check how the current rules treat your situation before borrowing to cover a capital shortfall.

Shareholder loans: registration, agreements and interest

A loan from a foreign parent is a foreign loan for exchange-control purposes. Loans with longer terms are subject to registration with the State Bank of Vietnam under its rules, and disbursements and repayments generally go through designated accounts. Short-term loans have their own conditions, including what they may be used for. Get the classification right at the start; a short-term loan that is rolled over repeatedly may be treated as a longer-term one.

The loan agreement should state the amount, currency, term, interest rate and how it is determined, repayment schedule and what happens on late payment. Three points for tax:

1. The interest rate must be at arm's length. A shareholder loan is a related-party transaction, disclosed every year with the CIT finalisation and subject to the transfer pricing rules — since 1 July 2026 including Decree 255/2026/ND-CP.
2. Total deductible interest is capped for companies with related-party transactions, by reference to earnings. Check the current cap and the carry-forward rules for excess interest before deciding the loan size.
3. Interest paid abroad carries foreign contractor tax, which the Vietnamese company declares and pays. A tax treaty with the lender's country may affect the rate; check the treaty and the procedure for claiming it rather than assuming.

Exchange differences and currency choice

Groups often lend in their own currency. The Vietnamese subsidiary, keeping books in dong, then records exchange gains and losses every time the loan is revalued and when interest and principal are paid. Those differences affect accounting profit and, depending on whether they are realised or unrealised, taxable profit. They also affect the amount of accumulated losses that must be recovered before profits can be remitted.

Practical steps:

• Model the effect of plausible currency movements on the subsidiary's profit before choosing the loan currency.
• Keep realised and unrealised exchange differences separately identifiable in the ledger, because they can be treated differently for tax.
• Where the subsidiary's revenue is in the same foreign currency, the natural hedge may make a foreign-currency loan sensible; where revenue is in dong, it usually adds volatility.

Guarantees, cash pooling and payables that become loans

Not all group financing is labelled as a loan. Three arrangements often create the same tax questions without anyone noticing:

• Parent guarantees for local bank loans. A guarantee lets the subsidiary borrow locally at a better rate. If the parent charges a guarantee fee, that fee is a related-party payment abroad: it needs an agreement, an arm's length basis, and foreign contractor tax treatment like any other fee.
• Cash pooling. Regional cash pools that sweep balances across borders run into Vietnam's foreign-exchange rules, which do not treat such sweeps as ordinary treasury movements. Check with the bank and your adviser before connecting a Vietnamese entity to a cross-border pool; a sweep can amount to an unregistered foreign loan in one direction or the other.
• Intercompany payables left open. An invoice from the parent for goods or services that stays unpaid for years is economically a loan. The tax authority may ask why no interest is charged, and the foreign-exchange rules may ask why the payable was never settled. Settle intercompany balances on commercial terms, or convert them into a documented loan deliberately.

Each of these is disclosed with related-party transactions in the annual CIT finalisation. The common thread is that the Vietnamese books should show what the arrangement really is, under an agreement signed before the money moves.

Changing course: converting, repaying, reducing

Funding structures change. A loan that cannot be repaid may be converted into equity; retained profit may be used to increase capital; a project that shrinks may reduce capital. Each change has procedures under investment, enterprise and foreign-exchange rules, and tax points to settle:

• Loan-to-equity conversion requires amending the registration and the foreign-loan registration; accrued interest converted with the principal still carries foreign contractor tax.
• Repayment of principal goes through the designated accounts; the bank will check the loan registration and the repayment schedule.
• Capital reduction is a formal procedure and is not a way to return cash quickly; taxes on any gain for the investor depend on the circumstances.

A common mistake is to repay a shareholder loan early because cash is available, without checking that interest for the period has been declared and the foreign contractor tax paid. The bank may accept the transfer; the tax file will still show a gap.

A worked example, and where to check

With hypothetical figures: a parent funds a new factory project with VND 200 billion of charter capital and a VND 100 billion shareholder loan. In year one the subsidiary is loss-making; the interest accrues and is paid, foreign contractor tax is declared on it, but the deduction brings no immediate tax benefit because there is no taxable profit. In year three, with profits, the interest is deductible up to the cap and at an arm's length rate; the subsidiary must also recover earlier losses before it can pay a dividend. A structure that looked cheap on day one is still reasonable — but the parent should know from the start that its first cash back will be interest and principal, not dividends.

To check your own position: the company's e-tax account shows foreign contractor tax returns and payments on interest, and CIT returns with related-party disclosures; the taxpayer information lookup shows the company's status and managing tax office. Keep loan agreements, registration documents, bank records and interest calculations for at least 10 years, the minimum retention for accounting documents under the Law on Accounting. For how foreign contractor tax on interest and fees works, see our foreign contractor tax guides.