A sham contract is an important legal concept, particularly in the fields of civil and commercial law. This type of contract is one where the parties involved do not genuinely intend to fulfill the commitments outlined in the agreement. Instead, the contract is used to conceal another real transaction or to avoid legal obligations, such as taxes or regulatory requirements. Apolo Lawyers will help you recognizing and understanding sham contracts to protect the rights of the parties involved but also prevents fraudulent and deceptive practices in commercial transactions.
A sham contract is a concept in civil law, used to describe contracts whose content does not genuinely reflect the true intent of the parties involved. The parties create such a contract not to fulfill the agreed terms but primarily to conceal another transaction or to avoid certain legal obligations. Sham contracts can be employed in various situations, such as circumventing laws, evading taxes, or bypassing legal regulations.
Under Vietnamese law, a sham contract is considered void, meaning it has no legal effect from the moment it is created. When a contract is discovered to be a sham, the rights and obligations of the parties are restored to the state they were in before the contract was signed. The use of a sham contract not only undermines transparency in transactions but can also lead to serious legal consequences, including liability for damages and penalties for violations.
Example: Mr. A wants to give a piece of land to his son but wishes to avoid paying gift tax. Instead of drafting a gift contract, Mr. A and his son create a sales contract for the land at a low price. In reality, they have no intention of carrying out the sale; the sham contract is used to conceal the gift transaction. If discovered, this contract would be deemed void, and Mr. A could face legal consequences as stipulated by law.
In real estate, a sham contract may be employed to hide the true value of a transaction, such as reporting a lower sale price to evade taxes or regulatory requirements. For example, a property might be sold at a nominal value in a sham contract while the actual consideration is much higher, allowing the parties to avoid paying taxes based on the true value of the property.
In illegal lending practices, sham contracts might be used to disguise high-interest loans as legitimate transactions. For instance, a loan agreement might be presented as a sale or lease of assets, with the real terms and conditions of the loan being hidden. This allows lenders to evade legal limits on interest rates or other regulatory constraints, effectively engaging in predatory lending practices under the guise of a legitimate contract.
Risks of establishing a a Sham Contract to Evade the Law
Sham contracts often appear in real estate transactions when the seller wants to conceal the true value of the transaction to reduce the taxes owed. Specifically, the parties draft a contract for the transfer of real estate with a value lower than the actual price. In reality, they have agreed on a much higher amount. This tactic helps both the seller and the buyer evade personal income tax and registration fees. However, it also reduces the transparency of the transaction and can lead to legal disputes if the contract is later discovered to be a sham.
Example: Mrs. B wants to sell a piece of land for 5 billion VND, but in the notarized contract, she lists the price as only 2 billion VND to reduce the tax payable. The parties then privately agree on the difference in price. If this transaction is uncovered, the contract may be deemed void, and the parties could face legal consequences, including tax arrears and potential fines.
In illegal lending practices, sham contracts are often used to disguise usurious loans. Instead of creating a straightforward loan agreement with illegal high interest rates, the parties draft a contract for the transfer of assets or a sale agreement with a condition that the assets will be returned once the loan is repaid. In reality, this contract serves as a facade to conceal the predatory lending.
Example: Mr. C needs to borrow 1 billion VND from a usurer. Instead of drafting a loan agreement, Mr. C and the lender create a contract for the sale of the MrC. house for 1 billion VND. The contract states that if Mr. C repays the loan and interest within the specified period, the house will be transferred back to him. If Mr. C fails to repay the debt, the lender will keep the house. This is a form of disguised illegal lending under the guise of a sham contract, which severely violates legal regulations and can lead to significant legal disputes.
The establishment of a sham contract constitutes a legal violation, and Vietnamese law imposes strict penalties for such actions. Here are the potential penalties that can be applied when a contract is identified as sham:
Risks of establishing a Sham Contract to Evade the Law
Overall, engaging in sham contracts not only undermines the integrity of legal and financial transactions but also exposes individuals and entities to significant legal risks and penalties. In conclusion, sham contracts represent a serious legal issue that can lead to significant repercussions for those involved. These contracts, created with the intent to evade legal obligations or conceal the true nature of transactions, not only undermine the integrity of legal and financial systems but also expose individuals and entities to severe penalties. From being declared void and facing financial penalties to enduring legal disputes and potential criminal charges, the risks associated with sham contracts are considerable. It is crucial for all parties to conduct transactions with transparency and adhere to legal requirements to avoid the pitfalls associated with sham contracts and ensure the legality and integrity of their business dealings.
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