A contract is an agreement between parties or between two parties to establish, modify, or terminate a civil relationship. A contract established in accordance with the law is protected by law. If disputes arise over tax-related matters during the performance of the contract, the agreement shall prevail; if there is no agreement, the tax law shall be followed. See the official account article for details. Is it possible to claim that taxes and fees not stipulated in the contract should be borne according to trade practices? In practice, many tax-related disputes arise from unclear and imprecise agreements. The purpose of the author's selection and analysis of this case is to enable readers to understand the judicial authorities' criteria for judging whether tax-related clauses are clearly agreed upon, and to promote more rigorous drafting of contract clauses to prevent risks.

On June 20, 2013, Wang Zhitai (Party A) and Weihai Yimin Traditional Chinese Medicine Hospital (Party B) signed a 'House Lease Contract,' stipulating that Party B would lease the property in question; Clause 3, Section 2 stipulated '...the taxes and fees incurred for issuing formal invoices and the property tax generated by this house in the future shall be borne by Party B...'; Clause 4, Section 5 stipulated 'During the lease period, the property lease tax generated by the house and the industrial, commercial, tax and other expenses generated by Party B's operation shall be paid by Party B.' On June 20, 2018, Wang Zhitai paid 124623.07 yuan for urban land use tax, 48846.76 yuan for late payment of land use tax, 100500 yuan for property tax, and 44013.42 yuan for late payment of property tax, totaling 322483.25 yuan, for the leased property. After negotiation, Weihai Yimin Traditional Chinese Medicine Hospital paid Wang Zhitai the property tax. Disputes arose between the two parties over tax matters, and Wang Zhitai sued Weihai Yimin Traditional Chinese Medicine Hospital to the court, requesting Weihai Yimin Traditional Chinese Medicine Hospital to pay the urban land use tax of 124623.07 yuan, the late payment fee for land use tax of 48846.76 yuan, and the late payment fee for property tax of 44013.42 yuan, totaling 217483.25 yuan, which he had already paid.

The court of first instance held that the focus of the dispute was that the 'property lease tax' stipulated in Clause 4, Section 5 of the lease contract between the two parties was not an accurate tax concept, and the taxpayer of the urban land use tax in question should be determined according to tax law. The second focus of the dispute was that Clause 3, Section 2 stipulated that 'Party B shall bear the property tax generated by this house in the future,' which was clearly and effectively agreed upon. The late payment fee for the property tax in question was caused by Weihai Yimin Traditional Chinese Medicine Hospital's breach of contract and should be borne by Wang Zhitai as compensation. Therefore, the judgment was: Weihai Yimin Traditional Chinese Medicine Hospital shall pay Wang Zhitai 44013.42 yuan for late payment of property tax; Wang Zhitai's other claims were rejected.

  Both the plaintiff and defendant in the first instance were dissatisfied with the judgment and appealed. Wang Zhitai's grounds for appeal were: the contract was a text written by Weihai Yimin Traditional Chinese Medicine Hospital. As an ordinary person who does not specialize in house leasing, Wang Zhitai had no way of knowing what kind of tax items would occur in house leasing. The original intention of the 'property lease tax' agreed in the contract between the two parties should be that all taxes during the house lease period should be paid by Weihai Yimin Traditional Chinese Medicine Hospital, so Weihai Yimin Traditional Chinese Medicine Hospital should bear the urban land use tax and the late payment fee incurred during the lease period. Weihai Yimin Traditional Chinese Medicine Hospital appealed, claiming that Wang Zhitai is the legal taxpayer of property tax. Wang Zhitai never claimed to Weihai Yimin Traditional Chinese Medicine Hospital that the property tax should be paid by Weihai Yimin Traditional Chinese Medicine Hospital for a period of 5 years. Wang Zhitai was negligent in fulfilling his obligations and has an unshirkable responsibility for the late payment fee. Weihai Yimin Traditional Chinese Medicine Hospital paid Wang Zhitai the full amount of property tax in mid-November 2018, fulfilling its obligation to bear the tax. The first instance judgment that Weihai Yimin Traditional Chinese Medicine Hospital should bear all the late payment fees for property tax is unfair.

  The second instance court held that the 'property lease tax' agreed upon by both parties in the house lease contract is not an accurate tax concept. Now the two parties have objections to the scope of the property lease tax, and there is no clear agreement on the sharing of the urban land use tax of the property in question, which is an unclear agreement. Therefore, the urban land use tax should be shared in accordance with the law. Wang Zhitai, as the owner of the property in question, should be the taxpayer of the urban land use tax. Because the types of taxes that may be generated in the process of house leasing include business tax (note by the author: now value-added tax), property tax, urban land use tax, stamp duty, individual income tax, urban maintenance and construction tax and other taxes and surcharges, Wang Zhitai's claim that he is only an ordinary person and has no ability to know the specific names of lease-related tax types and uses this inaccurate general expression to replace the tax types related to house leasing is insufficient and will not be adopted; Because the lease contract is reached after negotiation between the two parties, even if Weihai Yimin Traditional Chinese Medicine Hospital is the provider of the contract text, both parties should have the obligation to review the relevant clauses of the contract. Now the two parties have not clearly agreed on the urban land use tax, and the first instance's determination of the tax subject in accordance with the law is not inappropriate and will be maintained. Wang Zhitai, as the owner of the property in question, is legally obligated to pay property tax, but Weihai Yimin Traditional Chinese Medicine Hospital, as the user of the property in question, can also be the taxpayer. The two parties establish a contractual debt through the autonomy of will between equal subjects, transferring Wang Zhitai's tax obligation to Weihai Yimin Traditional Chinese Medicine Hospital, which does not harm national interests or violate the mandatory provisions of the law. Weihai Yimin Traditional Chinese Medicine Hospital should pay property tax to the tax authority in accordance with the contract. Even if what Weihai Yimin Traditional Chinese Medicine Hospital said is true, it has sufficient conditions to inform Wang Zhitai and request authorization to pay the tax, so the late payment fee for the property tax in question was caused by Weihai Yimin Traditional Chinese Medicine Hospital's breach of contract. Weihai Yimin Traditional Chinese Medicine Hospital's claim that Wang Zhitai was negligent in fulfilling his obligations and should bear the late payment fee is inappropriate and will not be supported. Therefore, the judgment was: the appeal was rejected and the original judgment was upheld.

1. The name of the tax in the contract should be accurate.

  Currently, 18 tax types have been established in my country in accordance with the law, of which 11 tax types have completed legislation and are called the 'XX Tax Law of the People's Republic of China'. The remaining tax types still exist in the form of administrative regulations before the legislation is completed and are called the 'Provisional Regulations on XX Tax of the People's Republic of China'. The 18 tax types are: value-added tax, consumption tax, enterprise income tax, individual income tax, resource tax, urban maintenance and construction tax, property tax, stamp duty, urban land use tax, land value-added tax, vehicle and vessel use tax, ship tonnage tax, vehicle purchase tax, customs duty, cultivated land occupation tax, deed tax, tobacco leaf tax, and environmental protection tax. The 'property lease tax' agreed in the contract in this case is not an accurate tax name, and it is impossible to infer the specific tax types included in the 'property lease tax' based on the content of the contract. Therefore, the people's court determined that this situation belongs to an unclear agreement and the tax liability should be confirmed according to the statutory tax obligation.

   2. General agreements on taxes and fees may cause disputes.

In contract practice, many parties are unaware of the specific names of tax categories and use general descriptions to replace the relevant taxes involved, simply agreeing that "all taxes and fees incurred" shall be borne by the other party, which is a common practice. Since the legal taxpayers are different for different tax categories, taking a lease contract as an example, some taxes are related to the lessor's leasing behavior, such as property tax calculated based on rent and value-added tax generated from leasing; some taxes are generated due to the lessee's behavior, such as value-added tax and income tax generated from production and operation, while some taxes are not entirely related to rental income, such as the lessor's income tax, which can only be accurately calculated after comprehensively considering other income and deducting costs and expenses. Therefore, simply making a general agreement on the tax and fee burden in the contract can easily lead to disputes. For example, the statement "all taxes and fees incurred shall be borne by the lessee" can be understood by the lessor as the taxes and fees incurred from the leasing behavior and during the lease period shall be borne by the lessee; while the lessee can understand it as being responsible for the taxes and fees generated from their own production and operation after the occurrence of the lease. See the public account article for relevant content. Are the property taxes for contracted operation and leased operation the same?

3. Failure to fulfill tax and fee agreements may result in late payment fees or even fines.

Article 584 of the Civil Code stipulates that: If one party fails to perform its contractual obligations or the performance of contractual obligations does not comply with the agreement, causing losses to the other party, the amount of compensation for losses shall be equivalent to the losses caused by the breach of contract, including the benefits that can be obtained after the performance of the contract; however, it shall not exceed the losses that the breaching party foresaw or should have foreseen at the time of concluding the contract that may be caused by the breach of contract. Article 64, Paragraph 2 of the Tax Collection and Administration Law stipulates that: If a taxpayer fails to file a tax return, or fails to pay or underpays the tax payable, the tax authority shall recover the tax payable that has not been paid or underpaid, late payment fees, and impose a fine of not less than 50% but not more than five times the amount of tax that has not been paid or underpaid. Our country adopts the principle of full compensation for compensation for breach of contract losses in contract disputes. The tax payable that needs to be paid, the late payment fees incurred, and even fines, are losses suffered by the legal taxpayer due to the breach of contract, and the legal provisions are matters that everyone should know, and do not exceed the scope of losses that both parties foresaw or should have foreseen at the time of concluding the contract that may be caused by the breach of contract. Therefore, in the absence of fault on the part of the non-breaching party, the breaching party's failure to bear the tax as agreed shall bear full compensation liability, including not only the tax but also late payment fees and even fines.

In summary, the tax and fee burden agreement clauses in the contract will not change the statutory tax obligations, but transferring the tax payable to the counterparty of the contract does not harm the national interest, nor does it violate the mandatory provisions of the law, and is a valid agreement. When formulating a contract, pay attention to using the standard names of tax categories, try to avoid general agreements, and clearly state the possible taxes and fees in the contract, so that both parties to the contract can reasonably estimate the final transaction costs to be borne, and avoid disputes in the future.

Reference Case: Wang Zhitai, Weihai Yimin Chinese Medicine Hospital Housing Lease Contract Dispute Case Second Instance

Case No.: (2019) Lu10 Min Zhong 876