Preface

Property tax is generally paid by the property owner. In practice, the property owner, being in a dominant position, often broadly stipulates that the other party shall bear the operating taxes and fees in contracting or leasing operations. Can these clauses in the contracts regarding the bearing of operating taxes and fees play a role when disputes arise in contracting or leasing? How should it be agreed upon to achieve the intention of the contractor or lessor? This article, combined with relevant judicial judgment cases, sorts out the tax treatment basis of property tax in contracting and leasing operations, and puts forward suggestions for improving relevant agreements and tax and fee bearing clauses.

 

Case Brief

Changjiang Company (Party A) and Chen Xibo (Party B) signed the "Operating Plan" and "Second Round Operating Plan" on September 26, 2007, and October 25, 2010, respectively, stipulating that: the operating business is pig slaughtering and wholesale and retail and market property leasing, Party B operates independently, Party B must operate legally in accordance with national policies, abide by laws and pay taxes, and all taxes shall be borne by Party B, for a total of 6 years. On May 24, 2019, Changjiang Company paid a total of 12268.03 yuan for the property tax and late payment fees for the Duanfen Branch of Taishan Changjiang Food Co., Ltd., which was originally contracted by Chen Xibo, according to the amount recognized by the tax authorities. The two parties disputed who should bear the property tax and whether it exceeded the statute of limitations, and then sued to the court. The court of first instance, based on the "Provisional Regulations of the People's Republic of China on Property Tax" and the agreement between the two parties, determined that the property tax should be borne by Chen Xibo, and the time when Changjiang Company's rights were infringed should be calculated from the time when the tax and late payment fees were paid, and did not exceed the statute of limitations.

 

  Chen Xibo refused to accept the first instance judgment and appealed, arguing that: Changjiang Company knew or should have known at least four years ago that Chen Xibo had not paid the property tax in this case, and its lawsuit had exceeded the statute of limitations; according to the property tax regulations, Chen Xibo is not the taxpayer of the property tax in this case and has no obligation to pay this tax; all monthly accounting statements and tax declarations have been confirmed by Changjiang Company's seal, and Chen Xibo has paid all taxes payable during the contract operation period; the "Operating Plan" states that Chen Xibo is only responsible for operating taxes, excluding property tax; the tax authority's tax payment certificate shows that it is property tax "levied from rent", that is, levied from the lessor, not from the lessee. Changjiang Company argued that: Chen Xibo and Changjiang Company clearly agreed in the enterprise contract that Chen Xibo is responsible for all taxes involved during his operation period, and the tax involved was concealed during his contract operation period and was not paid, so he should be responsible for it.

 

Judicial Judgment Opinion

The second instance court held that: Regarding the issue of whether the property tax fees incurred by Changjiang Company during Chen Xibo's contract operation period should be paid by Chen Xibo. The contract operation contract signed between Changjiang Company and Chen Xibo stipulates that all taxes during the contract operation period shall be borne by Chen Xibo. This agreement does not exclude the property tax fees under Changjiang Company's name. The property tax fees to be paid to the tax authority were incurred during Chen Xibo's contract operation period, and the property under Changjiang Company's name involved has been delivered to Chen Xibo for operation and use. Chen Xibo shall bear the obligation to pay the property tax in accordance with the contract agreement. Real estate belongs to real property rights, and the taxpayer can certainly be the owner of the property rights, but the law does not prohibit the owner of the property rights from agreeing that the counterparty shall bear the burden when disposing of the real property rights. Therefore, the agreement between Changjiang Company and Chen Xibo that Chen Xibo shall bear the tax fees is a valid agreement and is legally binding on Chen Xibo, and Chen Xibo shall bear the obligation to pay. Chen Xibo's appeal reason that the contract only stipulates operating tax and does not include property tax has no factual basis and is not adopted. Regarding the issue of whether Changjiang Company's lawsuit has exceeded the statute of limitations. After Changjiang Company paid the tax fees involved to the tax authority, it sought recourse from the contractor Chen Xibo in accordance with the contract operation contract. Therefore, the date when Changjiang Company paid the tax fees involved to the tax authority is the date when it knew or should have known that its rights were infringed, and the statute of limitations is calculated from the next day, which has not exceeded the three-year statute of limitations period.

 

Tax Lawyer Analysis

1. Understand contracting and leasing operations from a tax perspective.

 Contracting operation is an operation model in which an enterprise is contracted to other units or individuals, and the contractor engages in operation in the name of the contractor or in his own name, and the contractor's income is directly linked to the contracting operation results. Leasing operation is an operation model in which an enterprise is leased to other units or individuals for operation, and the lessee engages in operation in the name of the lessor or in his own name. Regardless of the operation results, the lessee pays rent to the lessor. The most obvious difference between the two is whether the income of the lessor and contractor is fixed and whether it is linked to the operation results.

 Article 49 of the "Implementation Rules of the Tax Collection and Management Law" (State Council Decree [2002] No. 362) stipulates that if the contractor or lessee has independent production and operation rights, independently accounts for finances, and regularly submits contract fees or rents to the contractor or lessor, the contractor or lessee shall pay taxes on its production, operating income and income, and accept tax management. Article 10, Paragraph 4 of the "Tax Registration Management Measures" (State Administration of Taxation Order No. 7 of 2003) stipulates that contractors and lessees who have independent production and operation rights, independently account for finances, and regularly submit contract fees or rents to the contractor or lessor shall, within 30 days from the date of signing the contract, declare tax registration to the tax authority where their contract business occurs and obtain a temporary tax registration certificate and a copy.

 According to the above tax laws and regulations, whether it is contracting or leasing operation, the contractor or lessee must meet three conditions at the same time to independently bear the tax liability: first, independently engage in production and operation in its own name; second, independently account for finances; and third, regularly submit contract fees or rents. As long as one of the above conditions is not met, such as still operating in the name of the lessor or contractor, the financial affairs still rely on the name of the lessor or contractor for various declarations, and the income is also paid in proportion according to the operating situation and is not fixed, the contractor or lessee is not required to declare and pay taxes by itself. In this case, the contractor or lessor shall bear the tax obligations for the production, operation, income and income of the contractor or lessee. That is to say, in terms of taxation, whether it is contracting or leasing operation, only consider who should bear the taxes and fees generated by the operation according to what conditions.

  2. The business model affects the determination of whether property tax belongs to "operating taxes and fees".

  According to the property tax regulations, the contractor and lessor who own the property rights are the taxpayers. For different situations that occur in contracting and leasing operations, from the perspective of the relationship between property tax and production and operation, the following four situations can be further subdivided.

   First, internal contracting operation, distributing income according to operating results, and still engaging in production and operation in the name of the original enterprise externally. In this case, the taxes and fees generated by production and operation shall be paid by the contractor, and the property tax involved in the actual use of the property by the contractor shall be regarded as a part of the taxes and fees generated by production and operation, and shall be levied ad valorem based on the remaining value of the property.

  Second, contracting business in the name of another person, where the contractor operates independently and handles accounting separately, but still declares and pays taxes in the name of the contract issuer. In this case, the contract issuer is responsible for the taxes and fees generated from production and operation, and the contracting behavior is regarded as part of the production and operation. Property tax is calculated and levied on the basis of fixed income from rent, or on the basis of the remaining value of the property when the income is uncertain, which should be regarded as the taxes and fees generated from production and operation.

  Third, leasing business in the name of another person, where the lessee pays a fixed rent and declares and pays taxes in the name of the lessor. In this case, regardless of whether the lessee operates independently and handles accounting separately, the lessor is the taxpayer, and the property tax is calculated and levied on the basis of rent, which should be regarded as the taxes and fees generated from production and operation.

  Fourth, nominally contracting but actually independently leasing business, where the contractor operates independently and handles accounting separately, declares and pays taxes in his own name, and regularly delivers fixed income regardless of the operating results. In this case, the contract issuer has obtained income by transferring the right to use the property, and the property tax involved should be calculated and levied by the contract issuer on the basis of the corresponding income amount from rent, which has nothing to do with the contractor's production and operation, and should not be regarded as the taxes and fees of production and operation.

   3. Precautions for property tax in contracting and leasing contracts.

  China's laws and regulations on tax administration clearly stipulate the taxpayer, but do not make mandatory or prohibitive provisions on who actually pays the tax. In practice, in accordance with the principle of autonomy of will, it is very common for the taxpayer to agree with the counterparty to the contract that the counterparty or a third party pays the tax. When signing the tax and fee bearing clauses of the contracting or leasing contract, the following three issues should be paid attention to regarding property tax.

  First, it should be clearly agreed who should bear the property tax, and it should not be generally expressed as bearing "all taxes and fees" or "operating taxes and fees." According to the foregoing, production and operation taxes and fees do not necessarily include property tax. When the counterparty to the contract independently produces and operates and declares and pays taxes on its own, the property tax payable by the contract issuer and the lessor does not belong to the production and operation taxes and fees. This case is a contract dispute caused by unclear agreement. The involved contracting business belongs to contracting business in the name of another person, and the property tax belongs to production and operation taxes and fees. Based on this, the people's court determined that the agreement between Changjiang Company and Chen Xibo that Chen Xibo should bear the operating taxes and fees was a valid agreement, and Chen Xibo should bear the obligation to pay property tax. If Changjiang Company had clearly agreed that the other party should bear the property tax when signing the contract, a lawsuit might have been avoided.

  Second, it is necessary to distinguish in advance whether the property tax is calculated and levied on the basis of rent or on the basis of price. There are two ways to collect property tax. Specifically, when contracting and leasing business, the contracting or leasing charges a fixed fee, which should be regarded as the rental income and 12% of property tax should be paid; the contracting fee is linked to the operating results and is not fixed, and the tax is paid in the name of the contract issuer, which should be regarded as self-use and 1.2% of property tax should be paid after deducting the prescribed proportion of the original value of the property. Different models have different tax burdens, which means that the operating costs of the contract issuer and the lessor are also different. Advance knowledge helps to formulate contract prices and tax and fee bearing clauses, and to take the initiative in commercial negotiations.

  Third, it is necessary to distinguish between contracting and leasing income other than house rent. In fact, contracting fees and leasing fees are not entirely house rent income, but also include rental income from movable properties such as equipment and tools, and rental income from intangible assets such as land use rights, patent rights, trademark rights, and franchise rights. For income that does not fall within the scope of property tax, it needs to be distinguished in the contracting fee and leasing fee income. The former Anhui Local Taxation Bureau mentioned in the "Notice on Clarifying Several Policy Issues on Property Tax, Land Appreciation Tax and Other Taxes": For enterprises that lease out properties in the form of contracting operations, if the total rent paid by the contractor can clearly divide the property rent, property tax should only be levied on the property rent part; if the division is not clear, the property rent can be assessed as the tax base by referring to the local rent level of similar properties or by a certain proportion.

  In summary, although there is only one word difference between contracting business and leasing business, the actual business model is different, and the tax obligations of the two parties to the contract are also different. Before formulating a contracting or leasing contract, it is necessary to fully understand the other party's business model, predict the possible tax burden in advance, and solve the corresponding operating cost problems through contract prices or rigorous tax and fee bearing agreements. In addition, as a contract issuer and lessor, it is necessary to recognize the tax object of property tax, and do not treat income unrelated to the house as house rent and pay "unjustified tax."

 

Case Reference

Case: Second Instance of Contract Dispute Case between Chen Xibo and Taishan Changjiang Food Co., Ltd.

Case No.: (2020) Yue 07 Min Zhong No. 412