Risk of recording lower transaction prices than actual in house and land purchase and sale contracts in Vietnam

Judgment 113/2017/DS-PT dated November 29, 2017 on the dispute over the land use right transfer contract and the property purchase and sale civil contract dispute, with the following contents:

“On September 28, 2016, Mr. Dao Anh N and Mrs. Dinh Thi D received a transfer from Mr.Trinh Quang H and Mrs. Bui Thi L with an area of ​​​​747m2 of land in parcel 586, map number 7, located in Hamlet LN, PT commune, LH district with the transfer price of 580,000,000 VND. After the transfer agreement, Mr. N and Ms. D deposited for Mr. H and Ms. L 20,000,000 VND and written a written deposit.

On October 12, 2016, Mr. N, Ms. D and Mr. H, Mrs. L wrote a handwritten note to transfer the above land area in the amount of VND 150,000,000 for the purpose of tax evasion. Then Mr. H, Ms. L and Mr. N, Ms. D went to the LH Notary Office to make a contract to transfer the land use right according to regulations, in this contract, the transfer price is only VND 50,000,000 for the purpose of tax evasion, on the same day, October 12, 2016, Mr. N, Ms. D, and Mr. H, Ms. L submitted all transfer documents to the one-stop department of LH District People's Committee, The appointment form will return the results by November 3, 2016. This appointment form will be kept by Mr. and Mrs. L.

On October 17, 2016, Mr. H and Ms. L went to the one-stop shop to withdraw all the land transfer documents and declared that they would not transfer to Mr. N and Ms. D anymore, so Mr. N and Ms. D filed a lawsuit to request Mr. H. Ms. L continued to maintain the land use right transfer contract made on October 12, 2016 between Mr. N, Ms. D and Mr. H and Ms. L."

The People's Court of Lam Dong province has decided: Continue to maintain the notarized contract of transferring land use rights and assets attached to the land. Mr. Dao Anh N, Mrs. Dinh Thi D and Mr. Trinh Quang H and Mrs. Bui Thi L are responsible for going to the competent State agency to carry out procedures for transferring land use rights in accordance with the law.

It is very common to write down the value in the house and land transfer contract much lower than the actual value in order to evade taxes. Why are these cases:

Firstly, According to the provisions of:

Article 29. Tax on income from real estate transfer

Tax on income from the transfer of real estate in Vietnam of a non-resident is determined by the real estate transfer price multiplied by the tax rate of 2%.

In addition, according to Article 4, Law on Personal Income Tax 2007, the following 2 incomes from the transfer will be exempted from tax.

Article 4. Tax-exempt income

1. Income from the transfer of real estate between husband and wife; natural father and mother and biological child; adoptive father, adoptive mother and adopted child; father-in-law, mother-in-law and daughter-in-law; father-in-law, mother-in-law and children son-in-law; grandfather, grandmother with grandson; grandfather, grandmother with grandchild; brother, sister, and brother to each other.

2. Incomes from the transfer of houses, residential land use rights and assets attached to residential land of individuals in case the individual has only one house or residential land."

If not subject to tax exemption, the seller must pay a tax equal to the real estate transfer price multiplied by the tax rate of 2%. This tax is calculated based on the real estate transfer value that the parties have agreed to in the transfer contract. Therefore, the amount of fish income tax paid by the seller is very high. Because they want to reduce the deposit amount to a low level, the seller and the buyer do not hesitate to write a virtual transaction value lower than the actual value. Above all, by signing this contract, the beneficial party is the seller and the buyer does not have any damage. Sometimes two parties have agreed to reduce a part of the money for the buyer so that the buyer can sign a virtual contract.

Secondly, the notarization of the contract of sale and purchase of land use rights and assets attached to the land is completely based on the records and documents provided by the two parties involved, in addition, there is no other verification mechanism. So it is easy to notarize the contract with the actual value.

Therefore, although knowing there will be many risks, because of the immediate benefit of avoiding paying high taxes, both the buyer and the seller implicitly acknowledge that the seller declares the value in the contract lower than the actual price paid to buy the right to use that house or land. Only when the parties have a dispute and initiate a lawsuit in court, will the virtual transactions be revealed.

According to article 124 of the Civil Code 2015 on Civil Transactions invalid due to forgery:

1. When the parties artificially establish a civil transaction in order to conceal another civil transaction, the forged civil transaction shall be invalidated, while the concealed civil transaction shall still be valid, except for the following cases: such transaction is also invalid under the provisions of this Code or other relevant laws.

2. In case a fake civil transaction is established in order to evade obligations towards a third party, such civil transaction shall be invalid.

When the parties artificially establish a civil transaction in order to conceal another civil transaction, the fake civil transaction shall be invalidated; and concealed civil transactions are still valid unless such transactions are also invalid under the provisions of this Code or other relevant laws.

Making another agreement to conceal the transfer contract is a civil law violation. Once the fake transaction is declared invalid, the concealed transaction is still valid and the related parties still comply with the law, that is, declare correctly the actual value of the contract and pay personal income tax in accordance with the law, and the parties must properly perform their rights and obligations based on the actual contract.

When a concealed contract is invalidated in accordance with the law, the Court shall issue a decision to cancel the contract in accordance with the provisions of:

Article 427. Consequences of contract cancellation

"1. ….

2. The parties must return to each other what they have received after deducting reasonable expenses in contract performance and costs of property preservation and development.

Refund is made in kind. In case it is not possible to return it in kind, the money value will be refunded."

Therefore, the seller will refund the entire amount to the buyer and the buyer will return the land use rights and other papers and certificates received. However, verifying the correct amount of money that the buyer has delivered to the seller is very difficult if the parties do not have another agreement signed by the parties that is merely an oral agreement. At that time, it is not easy to get the buyer's money back, so the buyer needs to be alert when signing large-value transaction contracts.

In order to avoid unfortunate consequences for the parties, both the buyer and the seller should think about the actions of forging the transaction contract or transferring the land use right. Don't dodge the law for the immediate benefit, and then there will be disputes and unfortunate legal consequences later.

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