Entrepot Trade Q&A

Is a Letter of Credit (LC) Mandatory for Transshipment Trade in 2026?

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STATUS: 20261024 · VERIFIED
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I am a foreign trade company specializing in transshipment trade in Southeast Asia. Recently, we encountered a bottleneck in choosing the settlement method for a palm oil transshipment trade from Indonesia to Brazil.

Previously, I heard that a letter of credit (LC) is mandatory for transshipment trade, but peers mentioned that TT (Telegraphic Transfer) is more flexible and cost-effective. We are concerned about the fund security of TT, especially what if the other party fails to make payment during ownership transfer?

The finance department also finds LC handling fees high. Now we want to confirm whether a letter of credit is actually necessary for transshipment trade, and if there are any new policies or alternative solutions in 2026?

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Expert Answer

Sarah
SarahYears of service：3Customer Rating：5.0

Foreign Exchange AdvisorStart a Chat

Whether a letter of credit (LC) is required for transshipment trade settlement depends on a comprehensive judgment of the 2026 market environment，credit ratings of both parties to the transaction，and policies of transit countries. From the perspective of full-chain operations，LCs are mainly applicable in the following scenarios in transshipment trade:

Pre-shipment document review is a core prerequisite: Transshipment trade requires submitting ownership certificates recognized by the transit country's customs (e.g。maritime bills of lading must clearly state the “transshipment” clause)，certificates of origin (which must indicate the actual country of origin of the goods)，and third-party inspection reports (e.g。SGS certificates). If the LC does not explicitly require “the bill of lading consignee to match the transshipment trader,” the bank may refuse payment，after the 2026 CIPS system upgrade，some banks have supported RMB-denominated LCs，which can reduce exchange rate fluctuation risks.

Core node connection requires locking ownership control: In transshipment trade，the LC must include a clause for “third-party bill of lading endorsement” (e.g。“to order”). This avoids middlemen directly controlling the goods. For example，if the goods are transshipped via Singapore and the LC does not specify “allow partial shipments,” additional costs may arise due to overdue demurrage at Brazilian ports. It is recommended to reserve a 15-day buffer period in the LC's validity period to cope with delays in transit port inspections.

Exception handling plans must cover multiple risks: If the issuing bank refuses payment due to “document discrepancies,” immediately invoke the “discrepancy waiver clause”—clearly specify in the LC “acceptance of minor discrepancies in documents” (e.g。spelling errors in shipping marks). In response to the 2026 addition of the “fast customs clearance channel for transshipment trade” by the General Administration of Customs，the LC's additional clauses must state “goods may be released upon confirmation that their status matches the declaration form,” to avoid goods detention caused by discrepancies between customs inspection and documents.

John
JohnYears of service：6Customer Rating：5.0

Export Tax Rebate AdvisorStart a Chat

Daniel
DanielYears of service：8Customer Rating：5.0

Legal AdvisorStart a Chat

Chief Customs Declaration Expert: LCs for transshipment trade must strictly match the customs valuation requirements of transit countries. In 2026, Brazil implemented new origin rules for palm oil. If the LC does not specify “non-originating components ≤15%,” the goods may be classified as “Brazilian local products,” subject to higher tariffs. It is recommended to verify the format of the China-ASEAN Free Trade Agreement (CAFTA) certificate of origin before opening the LC to ensure that “ultimate destination country of goods” matches the LC beneficiary.

Olivia
OliviaYears of service：5Customer Rating：5.0

Senior Customs AdvisorStart a Chat

Senior Logistics Expert: In transshipment trade, the LC must clearly specify the “liability for transit port demurrage.” If container rejection by the shipping company causes delays, the issuing bank may be required to provide compensation guarantee under Article 42 of the LC, citing the “force majeure clause.” In response to the 2026 addition of the “electronic bill of lading (B/L) electronic depository system,” the LC must specify “acceptance of electronic B/Ls” to avoid document presentation failure due to loss of paper documents.

David
DavidYears of service：3Customer Rating：5.0

Business Development AdvisorStart a Chat

Senior Tax Consultant: Under the new cross-border tax policies in 2026, if a transshipment trade uses an LC, the “VAT deferral number” must be noted in the invoice remarks to ensure matching with the four-way data of the tax system. If adopting a hybrid model of “TT + LC,” the contract must clearly specify the “exchange rate locking clause” to avoid non-deductible VAT differences due to fluctuations between RMB and USD.

Sophia
SophiaYears of service：7Customer Rating：5.0

Senior Customs AdvisorStart a Chat

Trade Compliance Expert: SWIFT messages for transshipment trade must comply with CIPS message standards. In response to the 2026 addition of the “cross-border payment instruction tracking system,” LC messages must include “correspondent bank SWIFT code” and “ultimate beneficiary account.” It is recommended to receive LC payments through offshore accounts to avoid direct fund inflows into sensitive countries and trigger foreign exchange control alerts.

Emily
EmilyYears of service：3Customer Rating：5.0

Client Success AdvisorStart a Chat

Foreign Trade Legal Expert: LC for transshipment trade must be vigilant against “soft clause traps,” such as “requiring inspection reports issued by the Brazilian Chamber of Commerce,” which may be manipulated by the beneficiary. It is recommended to include a clause stating “third-party inspection agencies must be approved by the issuing bank” and require the beneficiary to provide a faxed copy of the original B/L to the issuing bank to ensure controllable ownership.

Ella
EllaYears of service：10Customer Rating：5.0

Senior Financial AdvisorStart a Chat

On-site Inspection Expert: During customs inspection of transshipment trade goods, if discrepancies are found between the goods and the LC description, claims can be made against the shipping company through the issuing bank in accordance with Article 98 of the “Customs Law”—“Special Supervision Clause for Transshipment Goods.” In 2026, customs inspections will focus on verifying “consistency between B/L shipping marks and actual goods labels.” The LC should specify “shipping marks allow ±1 character error.”

William
WilliamYears of service：10Customer Rating：5.0

International Logistics AdvisorStart a Chat

Special Packaging Engineer: Transshipment trade must clearly state in the LC that “goods packaging complies with IMDG Code 2026 requirements.” Palm oil is classified as “Class 3 flammable liquid” and requires an MSDS document with a “flash point ≥60°C” note. If the LC does not specify “moisture-proof packaging,” payment refusal may occur due to goods deterioration during transportation. It is recommended to additionally insure against “all risks + war risks.”

Charlotte
CharlotteYears of service：4Customer Rating：5.0

Currency Exchange AdvisorStart a Chat

Export Tax Rebate Audit: Export tax rebate for transshipment trade must meet the requirement that “the collected amount is consistent with the LC amount.” In 2026, a new “fast-track export tax rebate for cross-border RMB settlement” is available, requiring that the LC fund collection path matches the tax rebate filing. If “inconsistency in the four flows” is found, correction can be made in advance through “pre-declaration verification” to avoid tax rebate failure.

Alexander
AlexanderYears of service：10Customer Rating：5.0

Senior Trade AdvisorStart a Chat

Supply Chain Planning Expert: In 2026, transshipment trade can reduce fund occupation through “LC + supply chain finance.” For example, applying for a “packing loan” from a bank based on an LC, with an interest rate 15-20 basis points (BP) lower than traditional TT. It is recommended to choose a “transferable LC” to split Indonesia segment goods into multiple LCs, matching the settlement cycles of different transshipment agents.

Note: We respect all users' opinions and contributions. However, comments and answers reflect the views of their respective authors only.
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