LEGAL NEWSLETTER NO.11 - 9/2020: Legal issues arise when the price of transferring the land use righ

PART 1: RESEARCH & EXCHANGE

Legal issues arise when the price of transferring the land use right in the notarized contract is lower than the agreed price

 In fact, with many different purposes such as transferring land to relatives and friends, transferring land urgently to handle personal or family affairs,... or with a negative reason to avoid obligation to State agencies, parties involved in the transaction have agreed on a land price lower than the price prescribed by the State according to the Decision of the Provincial People's Committee at the time of transfer. In this article, the author focuses on analyzing the legal issue that in case there is an agreement that the notarized land price is lower than the actual land price agreed by the parties and whether the notarized land use right transfer contract is determined to be invalid.

1. Legal provisions on land prices, personal income taxable prices and registration fees

According to the 2012 Price Law and the 2013 Land Law, the State shall promulgate land price brackets and tables, and decide on specific land prices. Land price tables, specific land prices issued by the State will be used as a basis for the cases specified in Article 114 of Land Law 2013 such as calculating land use fees, land use tax, charges in land management and use, fines for administrative violations in the field of land... According to these provisions, the land price when the parties transfer, purchase, and sell land will not be required to comply with the land price issued by the State, the land price will be agreed upon by the parties. However, unlike other activities of buying and selling ordinary assets, when the parties transfer the land use rights, there will be an obligation to pay personal income tax, corporate income tax (in case the transferor is an enterprise), registration fee, in which, land price is one of the important basis for determining these taxes and fees.

Currently, according to Point a, Clause 1, Article 17 of Circular No. 92/2015/TT-BTC amending and supplementing Article 12 of Circular No. 111/2013/ TT-BTC on basis for calculating tax on incomes from real estate transfer:

“a) The price of transfer of right to use land without constructions thereon is the price written on the transfer contract at the time of transfer.

If transfer contract does not specify the price or the price written on the transfer contract is lower than the land prices imposed by the People’s Committee of the province at that time, the land price imposed by the People’s Committee of the province at that time shall apply.”

Thus, when determining the financial obligations of the transferors, the State Agency will base on the prices in the Transfer Contract. In case the transferred land price is lower than the land price bracket issued by the Provincial People's Committee at the time of transfer, it will be determined according to the land price table issued by the provincial People's Committee at the time of transfer.

Normally, the actual land price of the transferors will always be much higher than the land price prescribed by the State, but most of the parties will agree to write the price the same as the State land price in the notarization contract. As mentioned above, the parties will be charged personal income tax and registration fee at the State price, from which each party will benefit from paying lower tax and fee.

2. Actual settlement of disputes on land use right transfer contracts

In fact, these "two-price" transfers are very common and virtually undetected if the parties do not dispute. There are often cases in which one of the transferors requests the court to declare a land use right transfer invalid on the grounds of a falsification contract in order to evade obligation to a third party (namely tax obligation to State agencies). Currently, in order to deal with these disputes, the Court still has 02 viewpoints:

Viewpoint 1: Not determined notarized land use right transfer contracts invalid due to falsification.

This viewpoint is based on the grounds that the transfer of land use rights is lower than the price regulated by the State, but the tax authority has considered and applied the law to determine financial obligation. The parties have fulfilled the tax obligation at the unit price set by the State, so they can not declare the signed contract invalid. Some examples are shown in the following verdict:

The verdict 01/2018/HC-ST dated February 12, 2018 of the People's Court of Phuc Yen town, Vinh Phuc province on the request to cancel the certificate of land use rights, the court stated that: Regarding transfer price: The contract represents the transfer price of VND 50 million. However, in fact, the two parties agreed and paid for VND 650 million and the transferor received the full amount of VND 650 million according to the minutes of money delivery and transfer of land use rights dated September 24, 2014, and real estate transfer paper dated October 21, 2014 before. Therefore, the agreement on the above transfer price is implemented according to Article 690 of the 2005 Civil Code. However, when entering into a contract at the notary office, the price is lower than the actual price agreed by the parties for tax reduction when carrying out the name transfer procedure. The writing of a lower amount in the contract is also not considered by the Tax Department, but the Tax Department charges according to the price set by the State as the basis for tax calculation. Thus, it does not affect the agreement of the two parties in the contract on price terms.”

The verdict 152/2019/DS-PT dated July 1, 2019 of the People's Court of Binh Duong province[1] about disputes on land-use rights transfer contracts, the court stated: “The Department of Civil Judgment Execution of District D finds that the contract has tax evasion fraud (agreed price is VND 750 million but the contract is only VND 30 million), request to review the illegality of the contract, that the transfer price in the contract is lower than the actual transaction price is not a condition for the contract to be invalid, when the involved parties do not write equal to the land use right price at the price set by the State, the tax agency will force the obligor to pay tax at the land use right price set by the State.

This point of view is based on the legal provisions about the calculation of taxes and fees when transferring land-use rights. Therefore, although the tax declaration is lower than the actual price, in which the parties have fulfilled all their financial obligations per the law, the contract is still valid.

Viewpoint 2: Determining the land use right transfer contract with "two prices" invalid

This view is based on an argument about the validity conditions of the contract, namely the "purpose" of the contract in the transaction. When the parties entering into a falsification civil transaction to evade obligations to a third party, such civil transaction will be invalid.[2]

For example, in the case of a land use right dispute between claimant Le Thi Thanh H and Mr. Nguyen Van D, defendant Mr. Le Tr and Ms. Tran Thi X were tried at first instance by the People's Court of district N. The Court of First Instance stated that “The price in the transfer contract is VND 50 million for tax evasion, so this is a falsification contract that violates the prohibition of the law; Ms. H is also at fault because she knows this is the disputed land but still agrees to transfer” and the Court of First Instance accepted the request to initiate a lawsuit and declared the Contract invalid. However, after that, the Ninh Thuan Provincial People's Court on appellate trial rejected this argument of the Court of First Instance, revised the first-instance judgment with the statement “According to Article 18 of Land Law 2013, The State exercising management rights over land is: The State issues the land price brackets and tables and decides the specific land price for each land plot location. According to the principle of tax calculation, in case of transferring land-use rights, the parties in the contract specify a price lower than the land price prescribed by the State, land prices set by the State will be applied for tax calculation. Therefore, that the Court of First Instance stated the involved parties are underpricing for tax evasion to violate the prohibition of the law is not true.”

According to the author, on the legal consequences of the contract when the actual price is lower than the state price, it is necessary to base on the purposes of the parties when entering into the contract. In case the two parties voluntarily agree not to violate prohibitions of law and not to be contrary to social morality, to ensure the form of the contract (notarized at a notary public organization), fully declare and fulfill financial obligations to the State agencies according to the land price bracket issued by the Provincial People's Committee, this contract will not be invalidated per law.

In case the parties enter into a contract and declare a price lower than the actual price in order to reduce the payable tax, the author agrees with the second viewpoint about declaring the contract invalid. At present, the parties' financial obligation when participating in land use right transfer transactions is not based on the land price bracket issued by the Provincial People's Committee, but on the transfer price that the parties agreed. When there are enough evidences to prove that the land use right transfer contract has the price agreed in the contract lower than the actual price in order to reduce the tax or fee, the parties are considered to evade their obligation with the third party - State, so this is a falsification contract and it will be invalid. The hidden transaction is still legally valid, if it meets all legal conditions, the related parties still comply with the provisions of the law, it means that they must declare the actual value of the contract and pay personal income tax and registration fee. At the same time, they must be held administrative or criminal responsibility depending on the severity of the violations they cause:

Under the provisions of Clause 5, Article 143 of the Law on Tax Administration 2019: “Use of documents that do not truthfully reflect the nature of the transactions or their values which leads to decrease in the tax payable or increase in the tax eligible for remission, refund or cancellation.” According to the provisions of Point c, Clause 2, Article 6 of Circular No. 166/2013/TT-BTC, “The fine for tax evasion and tax fraud shall be 1 to 3 times the tax arrears. The fines in Article 13 of this Circular are incurred by organizations, which are twice the fines incurred by households and individuals.”

Besides, in accordance with Article 200 of the Criminal Code 2015, amended and supplemented in 2017, in case of tax evasion from VND 100,000,000 to less than VND 300,000,000, a fine range from VND 100,000,000 to VND 500,000,000 or a penalty of 03 - 24 months' imprisonment will be imposed. A fine range from 500,000,000 VND to 1,500,000,000 VND or a prison term of between 1 year and 3 years will be imposed if tax evasion is from VND 300,000,000 to less than VND 1,000,000,000. Committing the crime of tax evasion with an amount of VND 1,000,000,000 or more, the offender shall be subject to a fine of from VND 1,500,000,000 to VND 4,500,000,000 or a penalty of imprisonment between 02 years and 07 years. In addition, offenders may also be subject to a fine range from VND 20,000,000 to VND 100,000,000, prohibited from holding certain posts, practicing occupations or doing certain jobs from 1 to 5 years, or partly confiscated or all assets.

If the transfer is completed, the parties have completed the registration of ownership at a competent state agency, the transferee has transferred to a bona fide third party and this person based on such registration to establish and perform transactions, transactions with third parties will not be invalid.[3]

3. Legal solutions to protect parties when participating in land use right transfer transactions

As the above mentioned provisions, when participating in a transfer transaction, the land price stated in the contract is lower than the actual price. If it falls into the case of declaring two prices to avoid liability, the transaction is likely to be declared invalid. Thus, the transferee will easily face with the risk "Land is not available, but it’s difficult to take money back". In order to ensure the correct implementation of the law and avoid unnecessary legal risks, the parties involved in land use right transfer transactions should:

- - Agree clearly about the actual price, payment method between the parties in each transaction, don’t act for the immediate small benefit of tax reduction but declare the wrong price compared with the actual value. After fulfilling the payment obligation, a receipt from the purchaser or a money transfer receipt is required if the transaction is made through the bank.

- Comply fully with the regulations on the order and procedures for the transfer, and registration of land use rights at the competent authorities and fulfill all financial obligations under the law.

Ngo My Tram - FDVN Law Firm

References:

[1]. Civil Code 2015

[2]. Civil Procedure Code 2015

[3]. Law on Personal Income Tax 2007, amended and supplemented in 2012

[4]. Law on Tax administration 2019

[5]. Decree No. 140/2016/ND-CP on registration fee

[6]. Circular No. 92/2015/TT-BTC, amending and supplementing Article 12 of Circular No. 111/2013/TT-BTC

[7]. Criminal Code 2015, amended and supplemented 2017

[8]. Verdict 01/2018/HC-ST dated 12/02/2018 of the People's Court of Phuc Yen town, Vinh Phuc province regarding the request to cancel the land use right certificate,

https://thuvienphapluat.vn/banan/ban-an/ban-an-012018hcst-ngay-12022018-ve-yeu-cau-huy-giay-chung-nhan-quyen-su-dung-dat-14151.

[9]. Verdict 152/2019/DS-PT dated July 1, 2019 of the People's Court of Binh Duong province on disputes on land use right transfer contracts,

https://thuvienphapluat.vn/banan/ban-an/ban-an-1522019dspt-ngay-01072019-ve-tranh-chap-hop-dong-chuyen-nhuong-quyen-su-dung-dat-99571

[10]. Verdict No. 32/2018/DS-PT dated July 31, 2018 on the dispute over the contract of land use right transfer by the People's Court of Ninh Thuan province,

http://congbobanan.toaan.gov.vn/5ta153250t1cvn/AN_HOAI TRAN_.pdf