Authorization of real estate purchase and sale is obliged to personal income tax (PI) payment?

WHAT IS AUTHORIZATION?

Article 562 of the Civil Code 2015 stipulates:

“Authorization contract means an agreement between parties whereby an attorney has the obligation to perform an act in the name of a principal. The principal shall only be required to pay remuneration if so agreed or so provided by law”.  

Authorization means an individual or organization (the principal) assigns another individual or organization to perform one or a number of certain tasks on their behalf.

In fact, for real estate-related transactions, authorization is quite common: authorization to purchase, sell, transfer, convert, mortgage, inherit, give, contribute capital, lease; to perform other related tasks such as measuring, extracting documents, paying taxes, etc.

FORMS OF AUTHORIZATION CONTRACT.

An authorization contract must be made in writing, notarized and authenticated to be legally valid. The attorney only sub-authorize its authorization to a third person with the consent of the principal.

IS REAL ESTATE PURCHASE AND SALE SUBJECT TO PIT?

In fact, there are many cases of real estate purchase and sale through authorization contracts with the purpose of evading tax obligations to the State. For example:

– The person who owns real estate authorizes another person who has right to transfer such real estate;

– The attorney is also the real estate buyer but does not want to carry out the procedures for transferring the name, therefore he/she makes an authorization contract and waits for the next buyer to sign real estate sale contract.

From the above practice, Circular 111/2013/TT-BTC stipulates:

“If the person authorized to manage real estate has the right to transfer real estate or similar rights as those of the real estate owner, the taxpayer is the real estate authorizing person.”

In addition, in 2011, the General Department of Taxation has issued Official Dispatch No.1133 and No.3373 to guide the calculation of PIT for real estate transfer through authorization contracts.

Most tax authorities consider the authorization contract (with the content of authorization to purchase and sell real estate, authorization to use, dispose of real estate) as real estate purchase and sale contract which is subject to PIT as regulated. When the attorney makes a contract to transfer real estate to the next person, this transaction will continue to be subject to PIT. Person who makes tax declaration when registering and transferring his/her name shall declare and pay PIT for both transactions: authorization, purchase and sale (if the authorization transaction has not yet been declared tax), unless otherwise exempted from PIT as prescribed by law for each transaction.

Thus, the person who is obliged to declare and pay PIT when authorizing the transfer of real estate is the principal if the nature of the authorization contract is the purchase and sale contract or the real estate transfer contract.

AUTHORIZATION OF REAL ESTATE TRANSFER IS NOT SUBJECT TO PIT PAYMENT

Cases of authorization related to real estate but not a purchase, sale, transfer transaction are not subject to PIT payment as prescribed above. The essence of these authorization contracts is a real authorization, even though the authorization relates to the sale or transfer of real estate.

For example, because of going on a business trip and not being present in Vietnam as a result, etc., the owner cannot personally conduct the purchase, sale and transfer of real estate. He/she must authorize another person (usually a relative) for implementation on behalf of him/her. At that time, to prove that the authorization is a real one, not a purchase and sale transaction, the tax declaration submitted to the tax authority has to be enclosed with papers and documents proving the reason for not directly carry out the procedures of the owner (such as working papers, documents proving that he/she is not present in Vietnam at the time of carrying out the procedures, etc.), documents proving the personal relation between the principle and the attorney, authorized remuneration payment documents (if any), payment transfer receipts for real estate sales. The tax authority will base on such documents to consider and if there is a basis to determine that this is not a real estate purchase and sale transaction, PIT payment shall not be required.

If the person does not agree with the tax authority’s PIT collection for the authorization contract, he/she is entitled to initiate a lawsuit to request the court for settlement. In fact, in Ho Chi Minh City, there have been many lawsuits related to this issue and many of them against tax authorities because of PIT was imposed to real estate purchase and sale authorization contracts while the nature of these transactions are not estate purchase and sale, transfer.

RICKS WHEN PURCHASING AND SELLING REAL ESTATE BY AUTHORIZATION CONTRACT.

As analyzed above, many real estate transfer transactions “dodge” taxes by authorization contracts and these transactions are actually considered as counterfeit transactions to hide the main purpose of purchasing and selling real estate. This will entail certain risks as follows, in addition to the common risks as other transactions:

– If the principal dies, the authorization is no longer valid. The authorization contract will automatically terminate and the real estate will remain under the ownership of the principal.

– The attorney cannot be the owner of the real estate through the authorization contract;

– Counterfeit transactions shall be invalid when dispute arises.

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