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Contractual payment terms in foreign currency in Vietnam

The purpose of agreeing on a payment method in foreign currency is to limit fluctuations in the payment currency when compared with the domestic currency. However, payment terms in foreign currency can also have certain disadvantages for the parties when entering into a contract. So what is a contract with a payment term in foreign currency, and what are the shortcomings of this type of contract? In the article below, Viet An Law Firm will present the current regulation related to contractual payment terms in foreign currency in Vietnam.

Contractual payment terms in foreign currency

Legal basis

  • Civil Code 2015;
  • Law on Promulgation of Legal Documents 2015;
  • Foreign Exchange Ordinance 2005, as amended and supplemented in 2013;
  • Circular No. 32/2013/TT-NHNN, as amended and supplemented by Circular No. 03/2019/TT-NHNN.

Overview of contractual payment terms in foreign currency in Vietnam

Overview of the contract

A contract is an agreement between parties that are traders or related persons to serve profit-making business activities.

What is the concept of a contract with a foreign currency payment term?

A contract with an agreement in foreign currency is a type of contract in which an agreement between two (or more) parties is signed, including terms of financial transactions, payments, or transactions of goods and services made in a foreign currency, rather than the currency of the country in which the contract is performed.

In this contract, the parties often agree in advance to use a specific currency to make payments and transactions. This agreement may be due to a free agreement between the parties or based on other relevant legal provisions.

The popularity of contracts with foreign currency payment arrangements

Foreign currency is usually the currency used in international and regional transactions instead of the currency of a specific country or territory. In the field of international business, popular strong foreign currencies include USD (US dollar), EURO (European common currency), GBP (British Pound), CAD (Canadian dollar), CHF (Swiss), and YIP (Japanese Yen). Therefore, payments in commercial contracts can be made using the country’s domestic or foreign currency as appropriate to the transaction.

In addition, payment in foreign currency helps parties prevent exchange rate risks and facilitate international transactions.

Hedging exchange rate risks

One of the most important reasons for using foreign currency in contracts is to deal with exchange rate risk. When the parties participating in a transaction use their country’s currency in an international commercial contract, the parties in the contract may have to face exchange rate fluctuations. Using foreign currency can help protect parties from the negative impact of this volatility.

This is especially important for businesses involved in international trade, where exchange rate risk can affect their own profits and financial stability.

Facilitate international transactions

Because foreign currencies are often accepted and widely used globally, contracting parties can easily use foreign currencies to make payments and commercial transactions.

Can contracts in Vietnam be paid in foreign currency?

According to Article 22 of the Foreign Exchange Ordinance 2005 (amended and supplemented in 2013), regulations restrict the use of foreign exchange: “On the territory of Vietnam, all transactions, payments, listings, advertisements, quotations, Valuation, price recording in contracts, agreements and other similar forms of residents and non-residents may not be done in foreign exchange, except in cases permitted under the regulations of the State Bank of Vietnam.”

In addition, Article 3 of Circular 32/2013/TT-NHNN stipulates guidelines for restricting the use of foreign exchange in the territory of Vietnam: “On the territory of Vietnam, except for cases where foreign exchange is used stipulated in Article 4 of this Circular, all transactions, payments, listings, advertisements, quotations, valuations, price recording in contracts, agreements and other similar forms (including conversion or Adjustment of prices of goods, services, value of contracts, agreements) of residents and non-residents cannot be made in foreign exchange.”

It can be seen that transactions, payments, listings, advertisements, price recording in contracts, quotations, pricing agreements, or other similar forms are carried out by residents, non-residents are not allowed to make in foreign exchange, unless permitted by the State Bank.

Thus, a contract with an agreement to pay in foreign currency in the cases listed in Article 22 of the Foreign Exchange Ordinance 2005 (amended and supplemented in 2013) or Article 3 of Circular 32/2013/TT-NHNN cannot be implemented currently in foreign currency.

When are contracts in Vietnam paid in foreign currency?

According to Article 4 of Circular 32/2013/TT-NHNN amended by Article 1 of Circular 03/2019/TT-NHNN and Clause 1, Article 1 of Circular 16/2015/TT-NHNN, it stipulates cases of payment in cash. Foreign currency in Vietnam includes some of the following cases:

  1. Customs agencies, police, border guards, and other State agencies at Vietnam’s border gates, and foreign warehouses list and collect taxes and fees.
  2. Banks, non-bank credit institutions, and foreign bank branches licensed to do business and provide foreign exchange services have been permitted by the State Bank of Vietnam to do so by the provisions of law.
  3. Other organizations permitted to provide foreign exchange services have been permitted by the State Bank of Vietnam to do so by the provisions of the law.
  4. Residents who are organizations with legal status may transfer internal capital in foreign currency between that organization’s account and the account of a dependent unit without legal status and vice versa.
  5. Residents may contribute capital in foreign currency by transfer to implement foreign investment projects in Vietnam.
  6. Residents execute import and export entrustment contracts (price recording and payment).
  7. Residents who are domestic contractors or foreign contractors shall comply with the following regulations:
  • Regarding foreign costs related to the implementation of bidding packages through international bidding according to the provisions of the Bidding Law, contractors are allowed to bid in foreign currency and receive payment in foreign currency by bank transfer from the investor private sector, main contractor for payment, disbursement and transfer abroad.
  • Regarding the implementation of bidding packages according to the provisions of the law on oil and gas: contractors are allowed to bid in foreign currency and receive payment in foreign currency by transfer from the investor and main contractor for payment and move abroad.
  1. Residents who are insurance enterprises transact and receive payments in foreign currency by transfer from the insurance buyer for goods and services that must be reinsurance purchased abroad.
  2. Residents are organizations trading in duty-free goods according to the provisions of the law on duty-free sales.
  3. Residents are organizations providing services in quarantine areas at international border gates, or organizations doing bonded warehouse business.
  4. Residents who are organizations acting as agents for foreign carriers based on an agency contract signed between the two parties shall comply with the following regulations:
  • To quote, set prices, and record prices in contracts in foreign currency on behalf of foreign carriers for international freight charges. Payment must be made in Vietnamese Dong;
  • Receive payments on your behalf in foreign currency by transfer to pay for goods and services at international seaports and quarantine areas at international airports;
  • Be allowed to pay foreign currency in cash to pay salaries, bonuses, and allowances to non-residents authorized by foreign shipping lines.
  1. Residents who are export processing enterprises when purchasing goods from the domestic market to produce, process, recycle, and assemble goods for export or export, except for goods banned from export and when selling goods for export processing enterprises and transactions with other export processing enterprises.
  2. Residents who are business organizations in the fields of air transportation, hotels, and tourism may list and advertise prices of goods and services in Vietnam Dong and equivalent foreign currencies on electronic news websites. Specialized publications (excluding menus and service price lists) only use foreign languages.
  3. Residents and non-residents are organizations that are allowed to negotiate and pay salaries, bonuses, and allowances in labor contracts in foreign currency by transfer or cash to non-residents and foreign residents. work for that organization.
  4. Non-residents are diplomatic and consular agencies.
  5. Non-residents comply with the following regulations:
  • Transfer money in foreign currency to other non-residents;
  • To record prices in contracts in foreign currency and pay for the export of goods and services in foreign currency by transfer to residents. Residents are quoted and priced in foreign currency and receive payment in foreign currency by transfer when providing goods and services to non-residents.
  • Foreign investors are allowed to deposit and deposit in foreign currency by transfer when participating in the auction to buy shares and capital contributions in state-owned enterprises, state-owned enterprises undergoing divestment, or enterprises State investments in other enterprises carry out divestment approved by the Prime Minister.
  1. For cases related to security, national defense, oil and gas, and other necessary cases, organizations are allowed to use foreign exchange in the territory of Vietnam after being considered by the State Bank of Vietnam. , approved in writing based on the actual situation and necessary nature of each case according to the documents, order, and procedures specified in Article 4a of the Circular.

Thus, only if a contract has an agreement to pay in foreign currency that falls into one of the 17 cases above, it can be paid in foreign currency in Vietnam.

The concept of a contract with an agreement to pay in foreign currency may be void

According to Clause 1, Article 117, and Article 123 of the 2015 Civil Code, the conditions for the validity of a transaction or contract are as follows:

“a) The subject has civil legal capacity and civil act capacity appropriate to the established civil transaction;

  1. b) Subjects participating in civil transactions are completely voluntary;
  2. c) The purpose and content of the civil transaction do not violate prohibitions of the law or violate social ethics.”

And that transaction or contract does not fall into the case of “Civil transactions whose purpose and content violate the prohibition of the law are void”.

According to the Civil Code 2005 (effective before January 1, 2017), conditions for contract validity include: “a) Transaction participants have civil act capacity; b) The purpose and content of the transaction does not violate legal prohibitions or is not contrary to social ethics; c) Participants in the transaction are completely voluntary”. Civil transactions whose purpose and content violate legal prohibitions are void.

It can be seen that the phrase “violating the prohibitions of the law” of the Civil Code 2005 has replaced the phrase “violating the prohibitions of Law” of the Civil Code 2015. Accordingly, the term “the prohibitions of the law” is understood as legal regulations that do not allow subjects to perform certain acts. Regulations on these “prohibitions” may exist in laws or sub-law documents such as Decrees, Circulars, and Ordinances. Meanwhile, “prohibitions of Law” are provisions of the law that do not allow subjects to perform certain acts only in legal documents promulgated by the National Assembly.

In addition, according to Article 4 of the Law on Promulgation of Legal Documents 2015, ordinances and circulars are not legal documents. Therefore, transactions/contracts whose object is foreign exchange, specifically negotiating prices and payment methods in foreign currency, are prohibited acts in the Foreign Exchange Ordinance:

  • If the Civil Code 2005 is applied, it will be determined to be invalid.
  • If the Civil Code 2015 is applied, it will not be determined to be invalid because this case is not a violation of the law’s prohibitions.

If there are disputes related to the validity of the contract, the contracting parties need to pay attention to the time of entering into the contract, as well as the governing law that the parties choose.

If you have any questions about civil, contract, or business law, or need advice on drafting a contract with contractual payment terms in foreign currency in Vietnam complying with the law, please contact Viet An Law Firm for our best support!

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