Scenario: a Vietnamese subsidiary receives USD 3 million of “flexible” loans from its parent and an individual shareholder over six years: no clear maturity, 0–2% interest varying by year, not a dollar of principal repaid, and on paper everyone calls it a “shareholder loan”. When the company hits trouble and enters rehabilitation/bankruptcy proceedings, the question erupts from every side — the bank creditor, the tax authority, the remaining shareholder: is this a genuine loan or equity dressed as debt? The answer decides payment priority, interest deductibility and even manager liability. This article sets out the distinguishing tests and the consequences of recharacterisation.
The distinguishing tests: how does a genuine loan differ from equity?
No single test decides — courts, tax authorities and insolvency administrators look at the overall behaviour of the money: (1) fixed maturity and an unconditional repayment duty — genuine debt has a due date and a repayment obligation independent of whether the company profits; (2) interest rate and actual interest payment — market-rate interest paid regularly indicates debt; 0% interest “payable when able” indicates equity; (3) accounting and file treatment — a written loan agreement, booked as a liability in the financial statements, and foreign-loan registration with the State Bank where a medium/long-term foreign loan must be registered; (4) attached rights — a “loan” carrying governance vetoes or unusual conversion privileges looks ever more like equity; (5) capitalisation ratio — wafer-thin charter capital under a mountain of “shareholder loans” is the classic disguised-equity sign (thin capitalisation); and (6) lender independence — would an outside bank have lent on similar terms is the most practical test.
The practical conclusion: a shareholder loan designed “like a loan from a stranger” — documented, termed, market interest, paid on schedule, fully registered — will stand; one designed “like family money” will be recharacterised at exactly the moment the company is weakest.
Consequences of being recharacterised as equity
- Payment order in bankruptcy/rehabilitation: under the Rehabilitation and Bankruptcy Law 142/2025, secured and unsecured creditors are handled in statutory order; a shareholder “loan” recharacterised as capital falls to the bottom of the order — paid only after every creditor is satisfied, i.e., practically zero. Even without full recharacterisation, insider loans are scrutinised hard in insolvency (suspect-period transactions, insider preferences);
- Tax: loan interest may be denied as a deductible expense if the transaction is not recognised as genuine debt or breaches related-party/assessment rules — with back-taxes and penalties; loans from a foreign parent add withholding on interest and loan registration layers;
- Internal shareholder disputes: a “lending” shareholder often uses creditor status as leverage over others in restructuring (threatening to call the loan and collapse the company, or swapping debt for cheap shares) — recharacterisation strips that leverage away and rebalances power inside the company.
Designing a shareholder loan that “stands” from day one
Four acts when the money goes in: (1) a complete written loan agreement — amount, term, market-referenced interest, repayment schedule, default events and consequences, no different from a bank loan; (2) perform as signed — pay interest/principal on schedule with documents; every extension in writing before maturity, never “forgotten” for three years then regularised backwards; (3) comply with the outer legal layers — register the foreign loan where State Bank registration is required, handle cross-border interest tax, book it properly as debt in the financial statements with related-party disclosures; (4) keep a sane capitalisation ratio — if the funding need is permanently long-term, convert part into real charter capital instead of piling up unlimited “shareholder loans”: real equity is far cheaper than a recharacterisation fight mid-insolvency.
Frequently asked questions
Is a shareholder loan genuine debt or disguised equity — how is it told apart?
By the money’s overall behaviour: a fixed maturity and unconditional repayment duty; market-rate interest actually paid regularly; a written agreement, liability booking in the financial statements and foreign-loan registration where required; no attached governance rights; and a charter-capital ratio that is not wafer-thin against the “loans”.
What happens if it is treated as disguised equity?
In bankruptcy/rehabilitation under Law 142/2025, the recharacterised amount falls to the bottom of the payment order — after all creditors; for tax, interest may be disallowed as a deductible expense with back-taxes; and in internal disputes, the “creditor” leverage over other shareholders disappears once the loan is treated as capital contribution.
How can a shareholder loan be made recognisable as genuine?
Design and perform it “like a loan from a stranger”: a written agreement with term, market-referenced interest and a clear repayment schedule; pay on schedule with documents, extend in writing before maturity; complete foreign-loan registration and interest-tax handling; book it as debt in the financial statements; and keep capitalisation sane.
Must a loan from the foreign parent be registered?
Medium and long-term foreign loans of a Vietnamese enterprise fall within State Bank registration under foreign borrowing/repayment management law; short-term loans fall within reporting. Late or missing registration can draw penalties and repayment friction through banks — check the registration class when the loan is designed.
This article has been quality-reviewed by the FLAW AI Legal Council