Tiếng Việt
中文 (中国)
日本語
In recent years, the Vietnamese real estate market has experienced significant growth, attracting the attention of many domestic and foreign investors. However, alongside these positive signals, the market still faces numerous challenges, among which the issue of real estate transactions involving two different prices on two contracts has become a major concern.
The use of two different price levels—one for tax declaration and another for the actual transaction between the buyer and seller—not only leads to tax revenue losses for the government but also poses many legal risks and negatively impacts market transparency. This article will analyze the consequences of this situation and propose solutions to address these issues, aiming towards a healthier and more transparent real estate market.
Current Status of Real Estate Transactions with Two Prices on Two Contracts
The phenomenon of real estate transactions involving two prices on two contracts is a pressing issue and a source of much controversy in Vietnam’s real estate market. This is a common occurrence where the parties involved in the transaction deliberately use two contracts with different price levels to minimize tax costs and exploit legal loopholes.
Specifically, one contract states a price lower than the actual transaction value for tax reporting purposes (referred to as the “low-price contract“), aiming to reduce the tax payable. The other contract reflects the actual value agreed upon by both parties and is used for internal purposes or only between the buyer and seller (known as the “real-price contract“).
The low-price contract is typically used for transferring property, and it is notarized and legally certified, while the real-price contract is mostly handwritten, not notarized, and only confirmed between the two parties as a last resort if either party fails to fulfill their payment obligations.
Due to the nature of the underground transactions between the parties, there are currently no accurate statistics on how many real estate transactions in Vietnam involve two different prices on two contracts. However, this situation persists in reality and is quite common due to the disparity between the state-assessed land prices and the actual market values.
According to Article 29 of the Personal Income Tax Law 2007 (No. 04/2007/QH12), individuals earning income from the sale of houses or transferring real estate must pay a personal income tax at a rate of 2% of the transfer value. Therefore, if the actual transfer value is declared on a single contract, the seller will incur a significant additional tax burden.
For example, if the real-price contract states a property transfer value of 10 billion VND, the seller would have to pay 200 million VND in personal income tax. However, if they create a low-price contract notarized at a value only slightly above the state land price of about 1 billion VND, they would only need to pay 20 million VND in personal income tax.
In this example, the government would lose 180 million VND in tax revenue.
Furthermore, even though the law stipulates that this is a payment obligation solely for the seller due to their income from the transfer transaction, the social norm in Vietnam has gradually normalized the concept that both the buyer and seller should share this payment equally, meaning each side pays 1% of the transfer value. This incentivizes buyers to also find ways to lower the transfer value stated in the notarized real-price contract to evade their tax obligations.
According to data from management agencies, the phenomenon of having two different price contracts remains prevalent in society, with the rate of low-price declarations in real estate transactions potentially reaching 20-30% in many localities.
Reports from the General Department of Taxation and other authorities indicate that the tax losses from low-price declarations in real estate transactions are significant, severely impacting the national budget. This situation has been reflected in audits, where agencies discovered numerous cases declaring the transaction value in low-price contracts as only 1/10 or 1/20 of the value on the real-price contract.
Consequences of Dual Pricing Transactions on the Economy and Society
The issue of real estate transactions involving two prices on two contracts is not only a legal problem but also causes many serious consequences for the economy and society. These negative impacts not only affect state budget revenue but also undermine market transparency, creating many risks for the parties involved in transactions.
One of the most apparent consequences of dual pricing transactions is the loss of tax revenue for the state. When parties agree on a contract value lower than the actual value, the personal income tax the seller must pay, as illustrated above, and the registration fee the buyer must pay will both decrease. This leads to a significant loss of revenue for the state budget from real estate business activities.
This situation is particularly serious in Vietnam, where, as a developing country, the real estate sector accounts for a high proportion of the Vietnamese economy. According to the Vietnam Real Estate Association, the real estate sector represented 20.8% of the total economic assets in Vietnam in 2020 (205 billion USD out of 986 billion USD). It is projected that by 2025, this proportion will rise to 21.2%, and by 2030, it will reach 22%.
If the situation involving two contract prices in real estate transactions is not controlled, the government will lose a substantial revenue that could be used for expenditures and investments in essential areas such as healthcare, education, and fire safety to support the livelihoods of citizens, develop social infrastructure, and reduce financial resources for public projects, thereby affecting overall socio-economic development.
In addition to reducing budget revenue, in many cases, the parties involved in real estate transactions even use the low-price contract as legal grounds for bank mortgage transactions, causing the loan value to not accurately reflect the actual value of the asset. This situation can create individual financial risks, as well as risks for banks, along with other unpredictable consequences negatively affecting the economy.
Legal Risks from Having Two Different Real Estate Contracts
The practice of engaging in real estate transactions with two different prices poses numerous legal risks for both buyers and sellers. In the event of a dispute, the low-price contract is often used as a legal basis because it has been notarized and thus holds legal value. This can disadvantage the seller, as the asset’s true value may not be recognized, complicating their ability to claim their rights. The buyer may also encounter risks if the property is undervalued, which can affect their ability to secure financing or mortgage the asset later.
Conversely, the real-price contract, which is not notarized, lacks reliable legal value. Similar to contracts that are ostensibly for gifting assets to evade personal income tax when transferring real estate, the real-price contract essentially represents a form of contract establishing a sham transaction to conceal another civil transaction. This type of contract is still governed by the general regulations regulating civil transactions.
According to Article 124, Clause 1 of the 2015 Civil Code (No. 91/2015/QH13), when the parties establish a sham civil transaction to conceal another civil transaction, the sham civil transaction is void, while the concealed civil transaction remains valid unless that transaction is also void according to the provisions of this Code or other relevant laws.
This leads to two scenarios:
- Low-Price Contract is Valid: Even with both a real-price and a low-price contract, if a dispute arises, the low-price contract will be effective and legally protected due to its notarization, while the real-price contract may be considered a “sham contract.” As a result, the risk to the transferring party (the seller) increases in disputes, as the receiving party may refuse to pay or delay payment of the differential amount. The court would then base its judgment on the low-price contract, which has significantly lower value.
- Risk for the Receiving Party: The receiving party, who actively participates in creating two different contracts, bears the risk. If the contract is declared invalid, according to Clause 2, Article 131 of the 2015 Civil Code, the parties are obliged to return what they have received. Given that the low-price contract is considered the only legal contract, the receiving party will only receive the lower amount stated in that contract, leading to substantial losses if they had previously provided a larger sum to the transferring party.
Disputes over land and real estate are often challenging to resolve due to the inconsistencies between the two contracts, and proving the existence of a real-price contract becomes complicated when it has not been declared to the authorities. This easily results in risks for both parties. Furthermore, such disputes can lead to a breakdown of trust between the parties, negatively affecting relationships and cooperation in future transactions.
Solutions to Address Dual Pricing Transactions and Promote Market Transparency
To rectify the situation of real estate transactions with two different prices on two contracts and move toward a more transparent market, a series of comprehensive solutions need to be implemented.
- Legal System Improvement: Refining the legal framework is crucial for addressing dual pricing transactions. Tax regulations need to be clearer and more stringent, including explicit guidelines on how to assess asset value and related tax obligations. Specific provisions should be established to prevent the declaration of low values for tax evasion.
- Strict Penalties for Violations: The legal system must include strict penalties for violations that deter parties from noncompliance. Penalties should be clearly defined and consistently enforced, alongside administrative or criminal measures if necessary to ensure compliance with regulations.
- Public Disclosure of Transaction Information: Implementing a practical solution for ensuring transparency in the real estate market involves establishing a publicly accessible database of real estate transactions, including information on transaction values, participant details, and related contracts. This system should be designed for easy public and investor access, allowing them to verify information readily. Public disclosure helps prevent false value declarations and allows participants to make informed transaction decisions based on accurate and transparent data.
- Mandatory Transactions Through Real Estate Exchanges: Requiring transactions, sales, and transfers of real estate to occur through regulated real estate exchanges and mandating payment via banks for verification can effectively control the situation involving two different prices. This would ensure that all transaction information is listed and publicly accessible, providing transparency. Bank transactions would help track the flow of funds, avoiding situations of dual pricing, money laundering, and tax revenue losses. Additionally, accurate data can be aggregated for statistical purposes, leading to better planning and development strategies in the future.
By implementing these solutions, Vietnam can work toward a more transparent and reliable real estate market, reducing the risks associated with dual pricing transactions and promoting trust among participants.
ASL LAW is the top tier Real Estate law firm in Vietnam. If you need any advice, please contact us for further information or collaboration.
