Changjiang Company (Party A) and Chen Xibo (Party B) signed the "Business Plan" and "Second Round Business Plan" on September 26, 2007, and October 25, 2010, respectively, stipulating that: the business scope is pig slaughtering, wholesale and retail, and market property leasing. Party B operates independently and must operate legally in accordance with national policies, abide by regulations 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 in property tax and late payment fees for the Taishan Changjiang Food Co., Ltd. Duanfen Branch, which was originally contracted by Chen Xibo, according to the amount determined 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 in 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 "Business Plan" states that Chen Xibo is only responsible for operating taxes, not including property tax; the tax authority's tax payment certificate indicates 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 the operation period, and the tax in question was concealed during his contract operation period and was not paid, so he should be responsible for it.

The second instance court held that: Regarding the issue of whether the property tax and 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 and fees under Changjiang Company's name. The property tax and fees to be paid to the tax authority in this case 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 and 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 and fees in question to the tax authority, it sought recourse from the contractor Chen Xibo in accordance with the contract operation contract. Therefore, the date on which Changjiang Company paid the tax and fees in question to the tax authority is the date on which it knew or should have known that its rights were infringed, and the statute of limitations shall be calculated from the next day, and has not exceeded the three-year statute of limitations period.

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

 Contracting operation is a business model in which an enterprise is contracted to other units or individuals, and the contractor engages in business in the name of the contractor or in its own name, and the contractor's income is directly linked to the contracting operation results. Leasing operation is a business model in which an enterprise is leased to other units or individuals for operation, and the lessee engages in business in the name of the lessor or in its own name. Regardless of the operating 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 operating results.

 Article 49 of the "Detailed Rules for the Implementation of the Tax Collection and Administration 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 contracting 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 contracting fees or rents to the contractor or lessor shall, within 30 days from the date of signing the contracting and leasing contract, declare tax registration to the tax authority where their contracting and leasing business occurs, and obtain a temporary tax registration certificate and a copy.

 According to the above tax laws, regulations, and rules, whether it is a contracting operation or a leasing operation, the contractor or lessee must simultaneously meet three conditions to independently bear tax liability: first, independently engage in production and operation in its own name; second, independently account for finances; and third, regularly submit contracting 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 proportionally 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, in terms of taxation, whether it is a contracting operation or a leasing operation, only consider who should bear the taxes and fees generated by the operation based on 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, it involves contracting operations under someone else's name, where the contractor operates independently and handles their own accounting, but still declares and pays taxes under the name of the contract issuer. In this case, the contract issuer is responsible for the taxes and fees generated by the production and operation, and the contracting behavior is regarded as part of the production and operation. Property tax is calculated and levied based on fixed income from rent, or based on the remaining value of the property if the income is uncertain, and should be regarded as taxes and fees generated from production and operation.

  Third, it involves leasing operations under someone else's name, where the lessee pays a fixed rent and declares and pays taxes under the name of the lessor. In this case, regardless of whether the lessee operates independently and handles their own accounting, the lessor is the taxpayer, and property tax is calculated and levied based on the rent. This should be regarded as taxes and fees generated from production and operation.

  Fourth, it is nominally contracting but actually independently leasing operations, where the contractor operates independently and handles their own accounting, declares and pays taxes under their own name, and regularly delivers a fixed income regardless of the operating results. In this case, the contract issuer has already obtained income by granting the right to use the property, and the property tax involved should be calculated and levied by the contract issuer based on the corresponding income amount from rent. It has nothing to do with the contractor's production and operation and should not be regarded as taxes and fees for 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, according to the principle of autonomy of will, it is very common for the taxpayer and the counterparty to agree that the counterparty or a third party pays the tax. When signing contract clauses on the undertaking of tax and fees in contracting or leasing contracts, the following three issues should be noted regarding property tax.

  First, it should be clearly agreed who will bear the property tax, and it should not be vaguely expressed as bearing "all taxes and fees" or "operating taxes and fees." As mentioned above, production and operation taxes and fees do not necessarily include property tax. When the counterparty independently produces and operates and declares and pays taxes on its own, the property tax that should be paid by the contract issuer and 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 operation belongs to contracting operation under someone else's name, 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 based on rent or based on value. There are two ways to levy property tax. Specifically, when it comes to contracting and leasing operations, contracting or leasing to collect fixed fees should be regarded as obtaining rental income and paying property tax at 12%; contracting fees are linked to operating results and are not fixed, and taxes are paid in the name of the contract issuer, it should be regarded as self-use and calculated and paid at 1.2% after deducting the prescribed proportion from the original value of the property. Different models have different tax burdens, which means that the operating costs of the contract issuer and lessor are also different. Advance knowledge helps to formulate contract prices and tax and fee undertaking clauses, and to take the initiative in commercial negotiations.

  Third, it is necessary to distinguish between contracting and leasing operating 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 original Anhui Local Taxation Bureau mentioned in the "Notice on Clarifying Several Policy Issues Concerning 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 distinguish 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 and levied as the tax base with reference to the local rent level of similar properties or at a certain proportion.

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

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

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