When a Vietnamese subsidiary needs more money, the foreign parent faces a choice that looks like accounting but is actually legal: inject more equity (raising charter capital) or lend to the subsidiary (a shareholder loan)? The two money-in routes look identical on day one’s balance sheet and differ in almost everything afterwards: the exit route, the tax burden, the foreign exchange procedures, and how the tax authority views the enterprise’s capital structure. An all-debt structure can have its interest expense squeezed by the thin capitalisation wall; an all-equity structure can lock the group’s money inside a capital reduction procedure lasting months. This article compares the two channels on the four deciding criteria and suggests how to combine them in a typical FDI enterprise.
Criteria one and two: the exit route and the tax burden
The exit route is the largest difference. A shareholder loan is repaid on the loan agreement’s schedule as an ordinary debt obligation: at maturity the principal is repaid, needing no internal approvals beyond the charter and nothing to prove beyond compliance with the foreign borrowing and foreign exchange frame when remitting money out. Equity is nearly one-way: to take charter capital out, the group must either transfer the capital portion to someone else (triggering investment procedures and transfer tax) or reduce charter capital — and returning capital to members of a limited liability company under Article 68 of Enterprise Law No. 59/2020 is permitted only where the company has operated continuously for over two years and still ensures full payment of its debts after the return, together with a change registration and (for an FDI project) an investment certificate adjustment if total investment capital changes. Dividends are not a substitute exit for capital: they are distributed only from after-tax profits, and profits remitted abroad must pass the tax finalisation conditions and notification to the tax authority under tax administration rules.
On tax, the two channels strike in two different places. Interest the subsidiary pays the foreign parent bears foreign contractor tax in Vietnam, with 5 percent corporate income tax on the interest income withheld and remitted by the borrower; in exchange, at the subsidiary level, interest expense is in principle deductible for corporate income tax. Dividends to a foreign shareholder bear no Vietnamese withholding tax, but they are paid from profits already taxed at 20 percent corporate income tax in the subsidiary — that is, equity generates no expense deduction layer at all. Adding both sides: the debt channel creates a Vietnamese tax deduction but leaks 5 percent contractor tax on interest; the equity channel leaks nothing on distribution but offers no deduction. The optimum therefore depends on the interest rate, the subsidiary’s margins and the parent country’s tax frame — and is bounded by the wall of the third criterion.
Criteria three and four: the thin-cap wall and procedures
That wall is the anti-thin-capitalisation rule in the transfer pricing frame: for enterprises with related-party transactions, total deductible interest expense for taxable income purposes is capped at 30 percent of the enterprise’s EBITDA — a rule maintained in the current transfer pricing decree frame (Decree No. 255/2026/ND-CP replacing Decree No. 132/2020/ND-CP from the 2026 tax period). Above the cap, the excess interest is not lost outright but carried forward to later periods within a five-year mechanism under the rules — even so, an over-leveraged subsidiary will see the debt channel’s tax benefit eroded in exactly the years it needs it most. Beyond tax, a parent loan is a foreign loan: medium- and long-term loans (over one year) must be registered with the State Bank before disbursement, drawdown and repayment must pass through a foreign loan account at an authorised bank, and the subsidiary must satisfy foreign borrowing conditions (loan purpose, and the self-borrowing limit tied to the project’s total investment capital on the investment certificate — a point very often missed: total outstanding medium- and long-term debt may not exceed the gap between the project’s total investment capital and its charter capital).
On pure procedure, raising an FDI company’s charter capital comprises an owner or members’ council decision, a charter amendment, an enterprise registration change, and an investment registration certificate adjustment if the investor’s contributed capital within the project’s total investment capital changes — a chain usually counted in weeks to over a month if the file runs smoothly. Lending avoids the enterprise registration chain, but a medium- or long-term loan has its own State Bank loan registration step and foreign loan account operation, so total time is not necessarily much shorter. The practical conclusion of groups is usually a layered hybrid: charter capital thick enough for the subsidiary to stand before banks and licensing authorities (and not hit the thin-cap wall), with the flexible portion following cash needs going through a properly registered shareholder loan — and every loan at a market interest rate supported by transfer pricing documentation, because a parent-subsidiary loan at 0 percent or at an excessive rate is an invitation for the tax authority to reassess.
Shareholder loan or equity injection: a quick decision table
- Need flexible exit on a schedule? Choose the loan channel (repay per contract), because charter capital reduction carries Article 68 conditions and a long procedure.
- Want a deduction at the subsidiary? Interest is deductible within the 30 percent EBITDA related-party cap; dividends create no deduction.
- Which tax leak is acceptable? Interest bears 5 percent contractor tax outbound; dividends carry no withholding but come from 20 percent-taxed profits.
- A medium or long term parent loan is a foreign loan: State Bank registration, a foreign loan account, and outstanding debt within the total investment minus charter capital gap.
- A hybrid is the common answer: capital thick enough for standing, plus a market-rate shareholder loan for the flexible part.
Frequently Asked Questions
Is taking money back easier with a shareholder loan than with equity?
Markedly easier. A shareholder loan’s principal is repaid on the loan agreement’s schedule as a debt obligation — at maturity it is remitted through the foreign loan account, with no capital reduction to apply for and no buyer to find for a capital portion. Money that has become charter capital, by contrast, exits only by transferring the capital portion (investment procedures and transfer tax) or by reducing charter capital, and returning capital to members under Article 68 of the 2020 Enterprise Law requires the company to have operated continuously for over two years, to still ensure full debt payment after the return, plus a change registration and possibly an investment certificate adjustment. This asymmetry is why groups keep the “variable” portion of funding in debt form.
Is interest the subsidiary pays the parent taxed?
In two layers. When interest is paid abroad, it bears foreign contractor tax in Vietnam with 5 percent corporate income tax on the interest income, withheld and remitted by the subsidiary before transferring the money. In the other direction, interest expense is a deductible cost of the subsidiary for corporate income tax — but for related-party transactions, total deductible interest is capped at 30 percent of EBITDA under the current transfer pricing frame (Decree No. 255/2026/ND-CP), with the excess carried forward under a five-year limit mechanism. The parent-subsidiary interest rate must also be at market level, or the tax authority may reassess it under the arm’s length principle.
Is borrowing too much relative to capital treated as thin capitalisation?
Vietnamese law has no nominal prohibited debt-to-equity ratio, but the “thin capital” effect appears through two mechanisms. The tax mechanism: the 30 percent EBITDA deductible interest cap for related-party transactions makes a debt-heavy structure progressively lose its tax benefit and attracts transfer pricing scrutiny. The foreign borrowing mechanism: an FDI enterprise’s total outstanding medium- and long-term foreign debt is limited to the gap between the project’s total investment capital and its charter capital — leverage beyond that frame cannot be registered with the State Bank. The right question is therefore not “what ratio is thin” but “does this structure pass both mechanisms”.
Does raising capital take longer procedurally than lending?
Usually a little longer, but not overwhelmingly. Raising an FDI company’s charter capital needs a capital increase decision, a charter amendment, an enterprise registration change and an investment registration certificate adjustment if the contributed capital within the project’s total investment capital changes — a smooth file counted in weeks to over a month. A shareholder loan avoids that chain, but a medium- or long-term foreign loan must be registered with the State Bank and operated through a foreign loan and repayment account, with borrowing conditions and limits checked in advance. The real difference lies not in the initial few weeks of procedure but in the exit route: a loan exits on the contract schedule, charter capital exits through a separate legal procedure.
This article has been quality-reviewed by the FLAW AI Legal Council