Intra-Group Loans and Guarantees: Parent–Subsidiary Legal Framework
A parent lending to its subsidiary, or guaranteeing the subsidiary's bank loan, looks like "internal business" — but the law treats it as a related-person transaction with its own procedures and risks. This article systematizes the framework for legal/finance teams to get it right from the start.
1. Why parent–subsidiary deals aren't "internal"
Under the 2020 Law on Enterprises, parent and subsidiary are each other's related persons. Consequence: every contract between them — loans, guarantees, asset sales, services — faces related-party controls protecting minority shareholders and creditors from tunneling through off-market pricing.
2. Approval procedure: the 35%-of-total-assets threshold
General rule: contracts/transactions with related persons valued at 35% or more of total assets (per the latest financial statements) require approval by the Board of Directors / Members' Council or the General Meeting of Shareholders, depending on company type — unless the company charter sets a different threshold.
Practical advice:
- Read the charter first — many companies set lower thresholds or require approval for all related-party deals.
- Below-threshold resolutions are still advisable — transparency avoids later validity disputes.
- Interested persons may not vote on the transaction.
3. Parent–subsidiary loans: 4 key points
First — arm's length interest. A 0% or abnormally low "supportive" rate may look harmless, but tax authorities can reassess related-party pricing under Decree 255/2026/ND-CP (effective 1 July 2026). Reference bank rates for comparable loans.
Second — interest deductibility and CIT. The subsidiary's interest expense is deductible for CIT only within statutory related-party limits. Excess is disallowed — effectively "borrowing without the cost."
Third — term and security. Even intra-group, the loan agreement should be as complete as a commercial loan: amount, rate, term, repayment schedule, security (if any), events of default and remedies. With multiple creditors, a thin agreement weakens the parent's priority claims.
Fourth — foreign parent lenders. A loan from a foreign parent is a foreign loan: register with the State Bank of Vietnam (medium/long-term), route drawdown/repayment through a capital account, comply with forex rules. Outbound interest may attract foreign contractor tax (FCT) in Vietnam — factor it into the loan's economics.
4. Parent guarantees: independent commitment, independent risk
When a parent guarantees a subsidiary's bank borrowing:
- Nature: the guarantee is an independent obligation — on subsidiary default, the parent pays within the guarantee scope; the bank need not exhaust the subsidiary first (structure-dependent).
- Authority: guarantee decisions for related persons follow the same related-party approval regime (35% of total assets; check the charter).
- Practice: cap the scope (maximum amount) and term in writing; assess the subsidiary's repayment capacity first; consider counter-guarantees or subsidiary asset pledges to the parent.
5. Consequences of skipping procedure
- Transactions may be declared void where approval rules were violated and the company suffered loss.
- Signatories and related persons must compensate losses and disgorge benefits.
- Tax risk: transfer-price reassessment, interest disallowance, arrears and penalties.
6. Pre-signing checklist
- Is it a related-person transaction — parent–subsidiary: yes.
- Read the charter: the company's own threshold and approving body.
- Obtain the competent body's resolution (interested persons abstain).
- Set arm's length pricing/rates with supporting documentation.
- Foreign-parent loans: SBV registration, FCT calculation.
- Guarantees: cap scope + term, assess repayment capacity.
7. Essential clauses in an intra-group loan agreement
Parent–subsidiary loans are often drafted thinly because "we're family" — until the tax authority or auditors ask questions. At minimum, cover these seven clauses:
1. Arm's-length interest rate. The tax authority's favorite target: interest-free or abnormally low-rate loans between related parties will be re-priced under the arm's-length principle on audit, and may trigger related-party transaction disclosure. Reference commercial bank lending rates for comparable loans and state the basis of determination.
2. Purpose and disbursement. State what the loan funds (working capital, project investment…), disbursement method (single or tranches, conditions per tranche). This serves internal governance and evidences the loan's substance when questioned.
3. Term and repayment schedule. Loan term, principal/interest schedule (quarterly, bullet…), extension mechanics. Avoid loans left "hanging" for years with no interest paid and no extension — easily recharacterized as disguised equity.
4. Withholding tax. Interest paid to a foreign parent is subject to foreign contractor tax (CIT + VAT at deemed rates). Specify who bears the tax and the subsidiary's obligation to withhold, declare, and pay on behalf.
5. Security and guarantees. If the parent guarantees the subsidiary's bank borrowing: the guarantee fee must also be arm's-length; define the guarantee scope, trigger events, and recourse rights after performance.
6. Default and acceleration. Events of default (late payment, covenant breach), acceleration rights, default interest. Even "family" deals need this for the loan to be treated as genuine.
7. Governing law and disputes. With a foreign parent, consider the governing law and arbitration mechanism deliberately — don't leave it to default assumptions.
Practical note: Document the commercial rationale for every intra-group loan in a short board memo — business purpose, why the terms are arm's-length, and how the interest rate was benchmarked. When the tax authority asks (not if), this memo is the first thing they request, and companies that have it fare dramatically better than those reconstructing it years later. Finally, file the related-party transaction disclosures on time — late disclosure draws penalties even when the loan terms themselves are arm's-length. Keep the loan agreement, board approvals, disbursement slips, and interest invoices in one file — auditors and tax inspectors always ask for the complete chain, and a tidy file shortens the review considerably.
FAQ
Q: Does a parent-to-subsidiary loan need special approval?
A: Yes — related-person transaction; 35%+ of total assets (latest FS) needs Board/Council or General Meeting approval unless the charter differs (2020 Law on Enterprises).
Q: Can the intra-group rate be set freely?
A: Not advisable — arm's length principle; unreasonable rates risk tax reassessment (Decree 255/2026/ND-CP, effective 1 July 2026) and capped deductibility.
Q: What should a parent consider when guaranteeing?
A: Independent obligation; same related-party approval regime; cap scope and term; assess repayment capacity.
Q: What if the foreign parent lends to the Vietnamese subsidiary?
A: Foreign loan: SBV registration (medium/long-term), capital account, forex compliance; outbound interest may attract FCT.
Q: What if approval is skipped?
A: Possible voidness (if loss caused); compensation and disgorgement; tax reassessment risks.
References
- 2020 Law on Enterprises 59/2020/QH14.
- 2015 Civil Code 91/2015/QH13.
- Decree 255/2026/ND-CP (effective 1 July 2026, replacing Decree 132/2020/ND-CP).
- Cross-checked via thuvienphapluat.vn at drafting (28/9/2026).
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