Legal status of foreign bank branches in Vietnam

The expansion of Vietnam's financial market is a testament to international integration when foreign banks have been tending to expand their operations in Vietnam, and  the  expansion  of  foreign bank branches  in Vietnam has become an inevitable trend. However, the shapingof the legal way of   branches of  foreign banks operating in the Vietnamese financial system poses many issues related to the rights and obligations of these organizations, especially the legal status in legal relations, including procedural activities.

1. Current regulations on legal status of foreign bank branches

According to Clause 1, Article 74 of the 2015 Civil Code, an organization is recognized as a legal person when it meets the conditions to recognized by law as an independent, structured entity, with  separate assets, legal rights and obligations and the ability to   participate in transactions on their own behalf. However, for foreign bank branches operating in Vietnam, thebranch is not considered a completely independent legal entity but an "extension" of the foreign bank, this factor is reflected in the provisions of the Law onCredit Institutions 2024. In Clause 5, Article 4   of the Law on Credit Enforcement 2024, it is stipulated: "A foreign bank branch is an economic organization without legal person status and a dependent unit of a foreign bank, guaranteed by the foreign bank to be responsible for all obligations,  commitment of the branch in Vietnam".

In addition, according to the provisions of Clause 1, Article 7 of Circular 56/2024/TT-NHNN, the establishment of a foreign bank branch in Vietnam must go through the procedures for granting a license to establish a foreign bank branch instead of registering the establishment of an enterprise under the Law on Enterprises 2020. This regulationmeans that foreign bank branches are also not recognized  as legal persons according to the provisions of the Law on Enterprises.

One aspect that needs to be clarified is the difference between a foreign bank branch and a 100% foreign-owned bank. While a foreign bank branch operates on the principle of "representation" for a foreign bank  and does not have independent legal status, a 100% foreign-owned  bank is established in the form of a separate legal entity in Vietnam. The 100% foreign-owned  bank has an independent internal management system, is able to sign contracts on its own and is directly legally responsible. A key factor in determining the legal status of a branch is the legal relationship between the branch and the foreign bank. Although the foreign bank  branch is given certain autonomy in the operation of daily activities such as authorizing the signing of transaction contracts, handling basic administrative procedures and implementing business plans authorized by  the foreign bank (parent bank  ),  Important strategic decisions and business directions may still  have to be approved by the parent bank. Furthermore, all liabilities arising from the operation of the branch, including commercial disputes and violations of the law, are transferred to the parent bank in accordance with the law.

Thus, it can be seen  that a foreign bank branch in Vietnam is a dependent unit of a foreign bank, without legal status, therefore, a foreign bank branch is not considered an independent legal entity according to the Vietnamese legal system.

Source: Cathay United Bank Ho Chi Minh City Branch

2. Determination of the legal status of a foreign bank branch when participating in legal proceedings

Before the Law on Credit Institutions 2010 came into effect, the Law on Credit Institutions 1997 did not mention the legal status of foreign bank branches. Therefore, the legal status of a foreign bank branch when participating in legal relations is determined according to the Civil Code and the Law on Enterprises. Later,  the Law on Credit Institutions 2010 officially recognized  the expenditure  of foreign banks without legal  status in Clause 9, Article 4 and  this spirit continues to be maintained in Clause 5, Article 4 of the Law on Credit Institutions 2024.

In that spirit, it can be understood that a foreign bank branch in Vietnam is not considered an independent legal entity, but only a subordinate part of a foreign bank. Accordingly, the activities of the branch must be carried out within the framework set by  the foreign bank  and subject to the supervision of the state management agency. Therefore, when there is a dispute or violation of the law arising from the operation of the branch, the final legal liability belongs to the  foreign bank, through these activities it is once  again affirmed that  the foreign branch does not have independent legal status.

The fact that foreign bank branches do not have legal status may cause many difficulties in procedural activities, especially for foreign bank  branches that were legally established at the time before the Law on Credit Institutions 2010 took effect. According to Articles 86 and 87 of the Civil Code 2015, legal entities have civil legal capacity and civil liability, so they can participate in procedural activities to protect their legitimate rights and interests. Without legal status, a foreign bank branch cannot participate in the proceedings on its own as an independent subject.

Practiceshows that the legal status of foreign bank branches also makes it difficult to understand and apply the provisions of the law from the competent authorities and courts. Regarding the case related to Bank C Limited – Ho Chi Minh City Branch, the People's Court of Binh Duong province rejected the bank's petition because it believed that the foreign bank's branch did not have legal status to participate in the proceedings. Meanwhile, according to the Certificate of Business Registration (first registered in 2002), NWarehouse C Co., Ltd . is identified as a single-member limited liability company. According to Clause 2, Article 74 of the Law on Enterprises 2020, a single-member limited liability company has legal status from the date of issuance of the Enterprise Registration Certificate.[1]

In addition, according to Official Letter No. 09928/DKKD-T6 dated December 15, 2023,  the Business Registration Office - Department of Planning and Investment of Ho Chi Minh City. Ho Chi Minh City also responded that this agency does not have the authority to confirm the legal status of foreign  bank branches, but needs to refer to Clause 8,  Article 4 of the Law on Credit Institutions 2010.

In the face of unclarity in determining the legal status of foreign bank branches, Official Letter 2526/BKHDT-DKKD dated April 4, 2024 of the Ministry of Planning and Investment also affirms that  this agency does not have the function of determining the legal status of enterprises. However, the Ministry of Planning and Investment said that based on Article 3 of the Law on Enterprises 2020, in case there are specific regulations on the establishment, management, reorganization, dissolution and operation of enterprises, the provisions of specialized laws will be applied; therefore,  the legal status of a foreign bank branch in Vietnam is determined according to Clause 9, Article 4 of the Law on Credit Institutions 2010, without legal status. Therefore, the Ministry of Planning and Investment also has the same view on the legal status of foreign bank branches as the People's Court of Binh Duong province that foreign bank branches do not have legal status.

Through the above practice, it can be seen that the legal status of foreign bank branches in Vietnam is built on a solid legal foundation of specialized legal documents. Although the branch enjoys a certain autonomy in its daily operations, all legal responsibilities still belong to the foreign bank. It should be noted that the legal status of a foreign bank and a foreign bank's branch are separate, avoiding confusion betweendetermining the legal status of a foreign  bank and the status of  a 100% foreign-owned bank may affect the branch  's operation in practice.

In the current context of international competition and economic integration, it is important to understand and properly apply the legal status of branches, specifically branches of foreign banks inVietnam,  so  that branches, foreign banks as well as individuals working at these units can properly implement and  all rights and obligations have beengiven to their units by the law, avoiding unnecessary errors.