Question: Why can an amount described by the parties as a “deposit” still be regarded by the authorities as an advance payment or an unlawful capital-raising activity?
Answer
Under Article 328 of the Civil Code 2015, a deposit is a security measure intended to secure the conclusion or performance of a future contract. In principle, a deposit is neither an advance payment nor a source of funding for project development.
However, in practice, the competent authorities assess the substance of a transaction rather than its title. If a deposit is paid in instalments linked to the project’s implementation schedule, offset against the payment obligations under the principal contract, or used to finance the project, it may be regarded as an advance payment or a form of capital raising.
This approach is also reflected in Official Letter No. 75543/CT-TTHT dated 20 November 2017 issued by the Hanoi Tax Department. According to the guidance, where funds are collected in accordance with the project’s implementation or contractual payment schedule, the enterprise is required to issue a VAT invoice upon receipt of the payment, even if the payment is described as a “deposit”.
Accordingly, when structuring a Deposit Agreement, businesses should carefully consider the payment mechanism, the intended use of the funds, and the implementation of the transaction to reduce the risk of the deposit being recharacterized as an advance payment or unlawful capital raising.
Conclusion
The term “deposit” does not determine the legal nature of a transaction. Instead, the competent authorities will assess the actual substance of the arrangement based on its terms and implementation. A carefully drafted Deposit Agreement can help minimize potential legal risks.
