Whether the overdue interest on the execution return is taxable: A review through this retrial case
Tax Analysis Based on Cases
Tax Analysis of Judicial Execution (1): Are the debt interest during the delayed performance period and the interest in the sense of tax law the same thing?
Foreword
On November 8th, the Nanning Procuratorate's official account on WeChat published an article entitled "Wuming District Procuratorate Successfully Handles the First Public Interest Litigation Case Regarding Private Lending Interest Tax in the Region." The article detailed how, through pre-litigation procuratorial recommendations, the tax authorities were prompted to collect over 22,000 yuan in owed taxes after two applicants in a private lending case obtained court-ordered interest payments. This served as an opportunity to assist local tax authorities in conducting case-by-case verification of private lending cases, further strengthening the collection and management of private lending interest tax, and contributing to the strategy of strengthening the capital city and serving Nanning's economic construction. To enhance judicial protection of national tax revenue, some regions are also continuously exploring and attempting to build contact mechanisms between tax authorities, courts, and other relevant units to expand tax revenue sources through judicial execution. Previously, the official account published several articles on disputes and even criminal cases caused by private lending interest tax, providing detailed information on the tax implications of interest. In the following articles, the author will use court precedents to discuss the tax-related aspects of various payments in judicial rulings, including the principal debt in loan disputes, general debt interest, doubled debt interest during the delayed performance period, relevant expenses for realizing the debt, as well as liquidated damages, capital occupation fees, and delayed performance fees in contract disputes, etc., to provide a reference for providing effective tax-related legal services.
1. Case Brief
On September 27, 2000, Hengyang Rongsheng Real Estate Development Co., Ltd. (hereinafter referred to as "Rongsheng Company") issued dividend IOUs to Chen Mouping and Zhang Moujin, but only paid 40,000 yuan of dividends by May 25, 2006. For this reason, Chen Mouping and Zhang Moujin filed a civil lawsuit with the Shigu District People's Court of Hengyang City. The Hengyang Intermediate People's Court made a civil judgment ([2011] Hengzhongfa Civil Second Final No. XXX) on August 15, 2011, ordering Rongsheng Company to pay Chen Mouping and Zhang Moujin a dividend of 160,000 yuan and interest. During the execution of the case, the Shigu District People's Court of Hengyang City issued a report on January 14, 2015, regarding the interest calculation in the case of Chen Mouping and Zhang Moujin versus Hengyang Rongsheng Real Estate Development Co., Ltd. for profit distribution. Rongsheng Company (later renamed Hengyang Shunxiang Trading Co., Ltd.
Before the retrial of this case, Chen Mouping and Zhang Moujin raised an objection to the execution of the profit distribution dispute case between them and Rongsheng Company. On December 14, 2015, the Shigu District People's Court of Hengyang City made an execution ruling ([2015] Shi Zhi Zi No. XXX), rejecting the objection application of Chen Mouping and Zhang Moujin. On April 7, 2016, the Hengyang Intermediate People's Court made an execution ruling ([2016] Xiang 04 Zhi Fu Zi No. XXX), revoking the above-mentioned execution ruling.
2. Judicial Ruling Opinions
The first-instance court held that: Chen Mouping and Zhang Moujin obtained a total of 396,441 yuan in dividends from Rongsheng Company and interest generated from the delayed payment of dividends based on the investment relationship. Rongsheng Company, as the withholding agent, has the obligation to truthfully declare to the tax authority and report and pay taxes at a rate of 20%.
The second-instance court held that: The item of tax withheld and paid in this case is the execution payment of dividends and interest generated from the delayed payment of dividends confirmed by the people's court's judgment. According to Article 2 (7) of the Individual Income Tax Law of the People's Republic of China, income from interest and dividends shall be subject to individual income tax. Therefore, the withholding agent Rongsheng Company declared to the Shigu District Taxation Bureau and withheld and paid the tax, and the Shigu District Taxation Bureau issued a tax payment certificate for this purpose, which is not contrary to the law.
The retrial court held that: The focus of the dispute in the second instance of this case is the legality of the Shigu District Taxation Bureau's act of levying 79288.2 yuan of individual income tax on Chen Mouping and Zhang Moujin. The income of Chen Mouping and Zhang Moujin is the interest and dividend income determined by the effective judgment of the court, which falls within the scope of individual income tax levy. Chen Mouping and Zhang Moujin, who obtained interest and dividend income, are taxpayers of individual income tax and have a statutory obligation to pay individual income tax to the state, which is not exempted due to the compulsory execution of the people's court. When paying interest and dividends, Rongsheng Company, as the "unit paying income," declared and paid taxes on behalf of the company. The Shigu District Taxation Bureau, which has the statutory duty to carry out tax collection and management within its jurisdiction, accepted and collected the taxes and issued tax payment certificates in accordance with the law, which complies with the law. The Hengyang Intermediate People's Court ruled to revoke the execution ruling ([2015] Shi Zhi Yi Zi No. XXX) of the Shigu District People's Court of Hengyang City, which led to a change in the amount of taxable interest or an undetermined state after the tax levy occurred. However, because the revocation ruling was made after the Shigu District Taxation Bureau levied the tax involved in the case, it does not affect the legality of the Shigu District Taxation Bureau's previous tax levy. In summary, the reasons for the retrial application are not tenable, the facts found in the original first and second instance judgments are clear, the applicable laws are correct, and they should be upheld in accordance with the law.
3. Tax Lawyer Analysis
Regarding the issue of interest, dividends, and dividend income tax in contract disputes, previous official account articles have introduced it in detail in combination with cases. This issue analyzes the development and changes of the above-mentioned administrative litigation cases to explore whether the debt interest during the delayed performance period, which is commonly known as overdue interest, is taxable.
1. Although the retrial in this case upheld the original judgment, it substantially shook the tax base
This administrative lawsuit went through a first instance where the plaintiff's claim was rejected, a second instance where the original judgment was upheld, and finally a retrial procedure was initiated with great difficulty, but the outcome was still to uphold the original judgment. All three judgments supported the tax authority's legal collection of individual income tax on dividends and interest obtained by the original plaintiff, which was withheld and paid by the withholding agent at a rate of 20%. However, a careful study of the retrial judgment reveals that the biggest difference from the first and second instance judgments is that it confirms that the taxable amount is still in an undetermined state, and clarifies that after the final determination of the taxable amount, if Chen Mouping and Zhang Moujin believe that they have paid more tax than the taxable amount, they can request the Shigu District Taxation Bureau to refund the overpaid tax in accordance with the law, and the Shigu District Taxation Bureau should also actively fulfill the relevant statutory refund obligations.
2、The key to initiating a retrial in this case is the miscalculation of overdue interest
The first and second instance judgments in this case determined the amount of dividends and overdue interest based on the "Interest Calculation Report on the Case of Chen Mouping, Zhang Moujin and Hengyang Rongsheng Real Estate Development Co., Ltd. on Surplus Distribution" issued by the People's Court of Shigu District, Hengyang City during the execution of the case. After reviewing the execution documents of the case, it was found that although Chen Mouping and Zhang Moujin raised objections on the grounds of incorrect interest calculation and that individual income tax should not be withheld, the executing court held that the interest calculation in the case was based on the amount determined by the effective civil judgment, and calculated according to the standards of the People's Bank of China's current deposit and loan interest rates and the calculation method determined by the execution ruling, The assessed interest already includes general debt interest and overdue doubled debt interest. The dividends and interest obtained by the applicants for enforcement, Zhang Guangjin and Chen Liping, fall within the scope of legally paying individual income tax, so the ruling rejected the application for objection.
Zhang Moujin and Chen Mouping filed an application for reconsideration with the Hengyang Intermediate People's Court against the execution ruling. The reconsideration court held that if the property of the person subject to execution is insufficient to pay off all debts, the monetary debts determined by the effective legal documents should be paid off first, and then the doubled part of the debt interest should be paid off. The executing court failed to calculate the amount of monetary debt and the doubled part of the debt interest determined by the effective legal documents that the person subject to execution should pay off in accordance with the above provisions, and should be corrected in accordance with the law. Therefore, the ruling revoked the Execution Ruling No. 10 of Shizhixiyi Zi (2015) of the People's Court of Shigu District.
During the first and second trials of this administrative litigation case, no assessment was made on the significantly changed execution ruling and the possible changes in the taxable amount. Therefore, the Hunan High People's Court held that Zhang Moujin and Chen Mouping's application for retrial met the circumstances stipulated in Article 91 (3) of the "Administrative Procedure Law of the People's Republic of China", that is, the main evidence on which the original judgment and ruling were based was insufficient, had not been cross-examined, or was forged, the people's court should retry the case, and ruled that the High People's Court should hear the case.
3、Overdue interest does not necessarily belong to the interest in the tax law sense
Article 253 of the "Civil Procedure Law" stipulates that if the person subject to execution fails to perform the obligation to pay money within the period specified in the judgment, ruling and other legal documents, he shall pay double the interest on the debt for the period of delayed performance. The "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Calculation of Debt Interest During the Period of Delayed Performance in the Execution Procedure" (Fa Shi [2014] No. 8) stipulates that the debt interest during the period of delayed performance after double calculation as stipulated in Article 253 of the Civil Procedure Law includes the general debt interest and the doubled part of the debt interest during the period of delayed performance. The general debt interest during the period of delayed performance shall be calculated according to the method determined by the effective legal document; if the effective legal document does not determine the payment of the interest, it shall not be calculated. The calculation method for the doubled part of the debt interest is: Doubled part of the debt interest = Monetary debt determined by the effective legal document that the debtor has not yet paid off, excluding general debt interest × 0.000175 per day × Period of delayed performance.
It can be seen from this that the interest on delayed performance of debt is divided into two types: general debt interest and doubled part of debt interest. There is no difference in concept between general debt interest and the interest recognized in tax law. They are both remuneration obtained by the fund owner for lending funds, and are generally higher than the time value of funds. However, the doubled part of the interest is relatively fixed, and the annualized rate of return is 6.36%. It has the nature of both fund occupation fee and liquidated damages. In particular, Article 4 of the Judicial Interpretation Fa Shi [2014] No. 8 stipulates that if the property of the person subject to execution is insufficient to pay off all debts, the monetary debts determined by the effective legal documents shall be paid off first, and then the doubled part of the debt interest shall be paid off, unless the parties agree otherwise on the order of payment. This is inconsistent with the order of payment stipulated in Article 561 of the "Civil Code", that is, if the debtor should also pay interest and relevant expenses for realizing the creditor's rights in addition to performing the principal debt, and his payment is insufficient to pay off all debts, unless the parties agree otherwise, the performance shall be in the order of relevant expenses for realizing the creditor's rights, interest, and principal debt. This also shows that the doubled part of the debt interest is not the same in nature as the general interest.
For delayed performance of debt, regardless of whether general debt interest is generated, doubled part of debt interest will inevitably be generated. When the executed property is insufficient to pay off all debts, according to the current judicial interpretation, this part of the amount will be converted into a part of the principal debt. In this case, although the name is still interest on delayed performance of debt, its nature has been changed to repayment of the lent funds, and of course it does not fall within the taxable scope of value-added tax and income tax. In this case, because the executing court initially simply regarded all overdue interest as interest, without considering the actual situation of whether the property executed in this case could pay off all debts, after the execution review ruling corrected this practice, part of the overdue interest should be regarded as repayment of the principal, so the original tax base also changed accordingly.
In the next issue, we will combine a case where the determination of tax evasion was revoked by the court in accordance with the law to discuss whether the amount of interest determined by the judiciary should be declared, what is the time limit for tax obligations, and how to understand the order of payment stipulated in Article 561 of the "Civil Code" from a tax perspective. Please pay attention.
IV. Reference Cases
1. Chen Mouping and Zhang Moujin refused to accept the first instance administrative judgment on the administrative certificate of tax payment of the Local Taxation Bureau of Shigu District, Hengyang City, Hunan Province and the administrative reconsideration decision of the Local Taxation Bureau of Hengyang City, Hunan Province (2016) Xiang 0408 Xingchu XXX
2. Administrative judgment of the second instance of tax administration and administrative reconsideration decision between the appellant Chen Moumou, Zhang Moumou and the appellee Local Taxation Bureau of Shigu District, Hengyang City, Hunan Province, and the Local Taxation Bureau of Hengyang City (2016) Xiang 04 Xingzhong XXX
3. Administrative ruling on retrial of tax administration (taxation) between Chen Mouping, Zhang Moujin and the Local Taxation Bureau of Shigu District, Hengyang City, Hunan Province, and the Local Taxation Bureau of Hengyang City, Hunan Province (2016) Xiang Xing Shen XXX
4. Administrative judgment on retrial of tax administration (taxation) between Chen Mouping and Zhang Moujin (2018) Xiang Xingzai XXX
5. First instance ruling on the case of dispute over surplus distribution between Zhang Moujin, Chen Mouping and Hengyang Rongsheng Real Estate Development Co., Ltd. (2015) Shizhixiyi Zi No. 10
6. Execution Ruling on the Profit Distribution Dispute between Zhang Moujin, Chen Mouping, and Hengyang Rongcheng Real Estate Development Co., Ltd. (2016) Xiang 04 Zhi Fu No. 8
