Guarantee for obligations of a non-resident by a Vietnamese individual

It is not entirely clear under the foreign exchange (FX) regulations of Vietnam if a Vietnamese individual can provide guarantee for a non-resident (i.e. guarantee for the performance of obligation of such non-resident) (Non-Resident Guarantee). While the FX Ordinance 2005 provides that “economic institutions [established in Vietnam] are permitted to provide offshore loans, except for the export of goods and services on deferred payment, and to provide guarantees for non-residents when the Prime Minister so permits”, there is no similar clause applicable to Vietnamese individuals. Due to this ambiguity, one can take different views on this issue.

Supporting view

Some can argue that a Vietnamese individual can provide Non-Resident Guarantee because:

  • The FX Ordinance 2005 defines “foreign exchange activities” as activities of residents and non-residents in current transactions, capital transactions, use of foreign exchange in the territory of Vietnam, provision of foreign exchange services, and other transactions related to foreign exchange. This suggests that a transaction will only be subject to the governing scope of the FX Ordinance 2005 if it involves in “foreign exchange” (e.g. foreign currency). Arguably, the Non-Resident Guarantee provided by a Vietnamese individual does not physically involve “foreign exchange” (until the Non-Resident Guarantee is enforced and the non-resident being the guaranteed party needs to repay to the Vietnamese individual), so this transaction should be not restricted by the FX Ordinance 2005. This argument would be stronger if in case of enforcement, the guaranteed party repays to the guarantee party in VND in Vietnam or if the Non-Resident Guarantee is non-recourse; and

  • Without being subject to the FX Ordinance 2005, a Vietnamese individual should have the right to guarantee the performance of obligation of other party (including non-resident) on the basis of Article 3.2 and 117.1 of the Civil Code 2015.

Even if the above view is adopted, there remains practical issues which may arise during the implementation. For instance, if the beneficiary to the Non-Resident Guarantee is also a non-resident party and the Vietnamese individual needs to remit the guaranteed amount offshore in case of enforcement, it is unlikely that the remittance can be gone through the bank since there is no specific provision under the FX regulations allowing him/her to do so.

Counter view

Without a clear provision of the FX Ordinance 2005, some can take a counter view as to the right to provide Non-Resident Guarantee by a Vietnamese individual:

  • One can argue that the Non-Resident Guarantee is naturally a FX transaction because it involves a non-resident party. There are some provisions of the FX Ordinance 2005 suggesting that a similar approach is taken. For example:

    • under Circular 16/2014, VND remittances in or out a VND account of non-resident are subject to the FX regulations. In this case, even the remittances are effected in Vietnamese dong but because they arise from the account of a non-resident, such transactions are still subject to the governance of the FX regulations; and

 

  • Article 19.2 of the FX Ordinance 2005 specifically restricts a Vietnamese organization from providing a Non-Resident Guarantee (without considering if this transaction involves foreign exchange or not).

 

  • The State Bank of Vietnam normally takes a strict view as to the transactions between a resident and non-resident such as the Non-Resident Guarantee. Accordingly, they may consider that all of these transactions will be governed by the FX regulations and can only be implemented if specifically allowed by the laws.

 In general, when it comes to permitted FX activities, an organization usually has broader rights than those of an individual. Accordingly, it is unlikely that the law intends to restrict Vietnamese organisations to provide Non-Resident Guarantee, while Vietnamese individuals are free to do so. In fact, if the supporting view discussed above is adopted then the same arguments can be made for an organization (i.e., an organization could provide Non-Guarantee as long as the payment is made in VND in Vietnam). However, because of the obvious restriction under Article 19.2 of the FX Ordinance 2005, there remains a risk that an organization still needs to obtain a specific approval from the Prime Minister for doing so.

This post is written by Hoang Thi Thanh Thuy and edited by Nguyen Quang Vu.