Real estate being sold off to avoid PIT

Many real estate owners are trying to sell off their assets in order to avoid paying the 25 percent personal income tax (PIT) which will be imposed on real estate assignments as of September 26. The Ministry of Finance has released Circular 161 on imposing the 25% PIT on the profit people get from real estate assignments, meaning the margin between sale and purchase prices.

Analysts have reported a ‘strong wave’ of selling off property to avoid PIT. Real estate brokerage offices these days boast a lot of attractive advertisements for houses and apartments for sale. All of the ad pieces emphasise that property owners want to sell properties as soon as possible.

“We need to sell a land lot at Him Lam-Kenh Te project in district 7 at 43 million dong per square metre. The price will be valid for one week only,” says one ad.

“The surprisingly low price of 14-16 million dong per square metre is now being offered for land lots at J, H, K blocs of Thai Son 1 project in district 7, HCMCity,” another ad piece reads.

Lam Hoang, the owner of a real estate brokerage office, said that he has never seen such a high fever in the real estate market. “Most property owners say it would be better to sell properties at low prices than pay the 25 percent of PIT.”

Hoang related that a land lot with the area of 90 square metres at Him Lam-Kenh Te project was priced at 8 million dong per square metre previously and now it is priced at 43 million dong. This means that a seller would have to pay 756 million dong in tax if they sold the land lot after September 26, 2009.

Hoang said that the PIT tax will make many real estate traders suffer losses. The problem lies in the fact that properties have gone through many buyers before going to the final buyers, but the sellers and buyers did not fulfill the ownership transfer procedures for previous deals. This means that the final sellers will have to bear high taxes, since the gaps between the initial and the final prices are very big.

Hoang said that in this case, in order to ease the tax burden on real estate buyers, government agencies should consider allowing the sellers to pay two percent on the sale prices instead of 25 percent on the margin of sale and purchase prices. If so, the tax sum the seller would have to pay in the above case would be 80 million dong instead of 756 million dong.

Circular has more power than law?

Most real estate brokers believe that the 25 percent tax would have big impacts on the market and that the tax is unreasonable.

The newly released circular stipulates that the 25 percent tax will also be imposed on the contracts on capital contributions to real estate projects, which are understood as sales contracts in nature.

In reality, real estate projects’ investors do not have enough capital for implementing entire projects and they have to mobilise capital from potential buyers under the mode of ‘capital contribution contracts’. Therefore, the ‘capital contribution contracts’ are understood as sales contracts, and those, who transfer the contracts, will be taxed as stipulated by the Government’s circular.

However, experts believe that these contracts should be considered financial investment contracts rather than sales contracts.

Under the current laws, real estate investors are not allowed to sell real estate products on paper. Therefore, by collecting PIT from ‘capital contribution contracts’, the ministry is in a manner legalising the sale of real estate projects on paper.

This means that there is a contradictory point in the real estate law and circular 161. People still don’t know which legal document to follow. However, in principle, a law has more legal authority than a circular.

P.V – L.D