Buy Condo, 2 Cheques, Land Dept?

[morris78]

My associate is buying a condominium from a developer. They have signed a Purchase Agreement already, which has the developer's company name as the seller, i.e., "between Acme Co., Ltd., as represented by Mr. Somchai Sribangkok and Mr. Somejoe Sukhumvit" and the newby expat buyer John Smith. Of course, all names are fictitious but that's the wording in the legal contract.

The selling price is 4.9 million baht in the Purchase Agreement. However, the seller has asked the buyer to make two cheques, come into the Land Department with one cheque for 3.5 million baht to Acme Co., Ltd., and outside give the other cheque for 1.4 million baht to Mr. Somchai Sribangkok afterwards. The seller does not want to declare the selling price for the unit as 4.9 million baht to the Land Department but instead as 3.5 million baht, as witnessed by the 3.5 million baht cheque to Acme Co., Ltd., and the other 1.4 million baht cheque the Land Department would never see and it would be made out to Somchai Sribangkok. The unit is government appraised at much less than 3.5 million baht.

Thereafter, the buyer will have on record that he bought the place for 3.5 million baht as far as the Land Department can see.

The Land Department will never see the Purchase Agreement, which says 4.9 million baht.

The concern of the buyer is twofold:

1. If he sells the unit in a few years, will he pay more taxes?

2. Is there anything that can go wrong, or is likely to go wrong, as regards securing the unit in his possession this way?

The company has offered to amend the Purchase Agreement in these terms, whereby the 1.4 million baht would be the fitout and furnishing cost, separate from the 3.5 million baht for the purchase of the unit.

The buyer is an investor, and does not otherwise live, work, or have any documentation in Thailand, though he plans to live in the unit for parts of the year as he has properties in several countries. He will come in on a visa-on-arrival this time.

Particularly useful would be peoples' experiences in buying and reselling this way, and what you've heard firsthand from others as well who have done this. From what I've heard thus far, this two-cheques method is not an uncommon way to purchase, but I want to protect my associate the buyer from any realistic problems in Thailand as well as future taxes.

Thanks. Great forum here!

[Irene]

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My comments to the two questions are as follow:

1. If he sells the unit in a few years, will he pay more taxes?

The answer is "NO" for an individual buyer. Because taxes on gain on an individual seller are based on an assumed gain. An assumed gain is based on a percentage of the declared sale value which shall be considered as cost. The percentage is based on a number of years of ownership. The law is not interested on the past actual cost. This is applicable to an individual only. But for a corporation, the law requires proof of actual cost of purchase. So, if the seller is a corporation, then your future tax will be more if you agree to under-declare the sale value now.

2. Is there anything that can go wrong, or is likely to go wrong, as regards securing the unit in his possession this way?

The practice of under-declaration is common and also accepted by most buyers because of the above comments under (1). However, from my experience, I have never heard of a corporate developer asking for this device of under-declaration since it will involve a great number of buyers. Mostly, it will be asked by small housing development companies.

There is no harm under the normal environment. However, there is a legal and theoretical point of concern that a buyer could be accused as accessory to a tax evader in reducing his tax liabilities. But this occurrence is likely only if a case is investigated and evidences are readily available for the case to pursued. From my recollection, I have never heard of the authority having an interest in this common misdeed. It is one of the areas in Thailand where the law is there but people do otherwise with no harm. The likelihood of exposure is only when an individual or his corporation has stepped on someone's toes and that someone is a high power individual. Then you will see how the authority will throw the books at you just like in the case of Thaksin for tax on share sale and Temasek on alien business law.

In your friend's case, to mitigate the effects on your friend if he is in agreement to go along with the seller's request, at least the second cheque should be drawn in the name of the developer only. At least, he could have a defence, if there is ever such a case, since his payments are still made to an actual seller.

Aside to this concern, I am somewhat concerned with such a developer who seems not to be interested in his image with a great number of people in the know. May be it is too late for your associate to do anything but, as a forewarning to him, the developer is not the type you like to shake hand with for any future transactions since he is not likely to be the type who would care for his clean image or honour his commitments professionally. You could go along in one deal just to get what you like and accept the risk.

If I am not clear or if you do have other questions, please let me know.

[tominchaam]

As said by Irene this is common practice if you buy from a private seller. But here you buy from a Developer.

If the original Contract is with the Developer and states only one price I suggest you insist on sticking to this. If the Contract states you have to pay part of the fees at the Land Office it means you have to pay a little bit more compared to if you under declare. Hereby you never risk the Developer (= the Company) one day will come back to you asking for the remaining amount (those money paid with the second check) should foul play be involved.

Another reason I have heard is that if the rules for capital gain tax will be changed in the future it might be that the declared value at the Land Office will be important – today it is not.

[tangoll]

I've never heard of this done by a developer (company or corporation) on a new built. What the effect is:

1. The transfer tax of 2% based on purchase price will be slightly less.

2. Your FETF (Foreign Exchange Transaction Form) need to cover only the lesser amount. You can still get an FETF for the excess amount to be used for another purchase in the future, so you would need to split your funds transfers into the appropriate amounts.

I think the developer's suggestion of splitting the purchase price into two parts -- the flat itself and furnishings/fitting -- is not bad if the proportions are reasonable. But the developer's warranty should cover the furnishings/fittings part as well.

If the 2nd cheque is to be made out to an individual, then I would ask for a separate letter from the individual guaranteeing the developer's obligations under the purchase contract.

I hope the Lands Department doesn't monitor this site.

Me, I would probably not agree to this kind of request from the developer. In any event, your associate should still be holding the original purchase contract showing the full amount, and he can insist on complying with the original contract. The developer shouldn't object to that. On the other hand, maybe you can suggest to the developer to give you a 10% reduction in price to go along with his plan.

[Irene]

I hope the Lands Department doesn't monitor this site.

This is a common knowledge and already known to the Land Department. This has been practised for decades.