In cases where the trading parties only generally agree on the apportionment of transaction costs without specifying the specific composition of the transaction costs, there are disputes in practice as to whether the tax burden in dispute belongs to the transaction costs and how it should be allocated. The court of first instance followed strict standards and held that it should be borne by the tax subject prescribed by law; the second instance court followed loose standards and recognized the validity of the general agreement; the court of retrial focused on whether it belonged to the ambiguity of the agreement during the explanation, and judged the validity of the agreement based on the nature of the transaction and the behavior of both parties. By studying the adjudication ideas of the people's courts at all levels in this case, it is very enlightening for us to understand and grasp the boundaries of unclear tax agreement under different transaction characteristics.

 The defendant, Huangping Xin Yuan Jia Investment Co., Ltd. (referred to as the investment company), is a natural person investment or holding enterprise invested by the Huangping County People's Government through investment promotion. Due to difficulties in capital turnover and debt repayment, it was decided to transfer its operating motor vehicle inspection station to the plaintiff, Xin Yuan Jia Motor Vehicle Inspection Co., Ltd. (referred to as the inspection company). On December 25, 2015, the defendant, as the seller (Party A), and the plaintiff, as the buyer (Party B), entered into the "Huangping County Xin Yuan Jia Motor Vehicle Inspection Station Transfer Contract", in which Article 3 of the "Contract" stipulated that the transfer fee of the inspection station property rights should be shared equally by Party A and Party B. The plaintiff paid taxes and processing fees of 299,716.43 yuan in the process of handling the transfer. In addition, the plaintiff also advanced 122,273.93 yuan to the defendant to pay taxes through bank transfer at the request of the defendant. On April 24, 2019, the defendant also paid value-added tax of 494,285.71 yuan and value-added surtax of 49,428.57 yuan to the Huangping County Tax Authority. On September 27, 2019, the defendant issued a receipt to the plaintiff, stating "Today received half of the transfer fee of Huangping County Xin Yuan Jia Inspection Station Co., Ltd. 421,440.35 yuan, Huangping Inspection Station paid 299,166.43 yuan on April 26, 2019, and the remaining fee is 122,273.93 yuan, and the excess will be refunded and the deficiency will be compensated after clarifying the specific amount to be borne by each party". Afterwards, the plaintiff and the defendant had a dispute over the composition of the transfer fee and which should be shared equally as agreed in the process of settling taxes and fees.

 The court of first instance held that: on the premise that the contract is legal and valid, according to the provisions of the "Law on the Administration of Tax Collection" and the "Implementation Rules", the plaintiff and defendant respectively enjoy the obligation to pay different types of taxes; secondly, although the parties agreed in the "Contract" that "the property transfer fee shall be shared equally by Party A and Party B", the agreement did not explicitly agree whether the "property transfer fee" includes the taxes that each party should pay in the transaction process. Therefore, the taxes generated by both parties in this transaction should be paid by themselves in accordance with national laws and regulations. Therefore, the court did not support the plaintiff's claim that the defendant should bear half of the deed tax, stamp duty, etc. At the same time, the court also did not adopt the defendant's defense that the plaintiff should bear half of the value-added tax and surtax it paid. However, the defendant should return to the plaintiff the fee of 122,273.93 yuan transferred by the plaintiff to the defendant to pay taxes at the request of the defendant. Both the plaintiff and the defendant filed an appeal against the first instance judgment of the Huangping County People's Court.

 The second instance court held that: on the premise that the parties to the contract do not violate the aforementioned laws and administrative regulations, they themselves do not infringe upon the national interests of China regarding tax collection and management. In this case, both parties have fully paid the taxes payable to the national tax authorities before the lawsuit, and there is no unauthorized decision to levy, suspend, reduce, exempt, refund, supplement taxes and other decisions that conflict with tax laws and administrative regulations, and the purpose of the state's tax collection and management has been achieved. Based on the facts of this case, the first instance court cited Article 4 of the "Law of the People's Republic of China on the Administration of Tax Collection" and elaborated on the payers of business tax, individual income tax, land value-added tax, deed tax, and stamp duty, which is a misinterpretation of laws and administrative regulations, and thus led to errors in the application of law in this case, which is also obviously contrary to the contractual agreement between the two parties, and the second instance corrected it. Therefore, the original plaintiff's appeal request to the first instance defendant to bear half of the transfer fee of the motor vehicle inspection station involved in the case, which is 299666.4 yuan, that is, 149833.2 yuan, was rejected, and the first instance defendant's appeal request that the first instance plaintiff should bear half of the value-added tax and surtax it had paid in accordance with the contract was supported. The appellant, Huangping County Xin Yuan Jia Motor Vehicle Inspection Co., Ltd., dissatisfied with the second instance judgment of the Qiandongnan Miao and Dong Autonomous Prefecture Intermediate People's Court, applied to the Guizhou Provincial High People's Court for retrial.

 The court of retrial held that: the legal effect of the transfer of ownership of the inspection station involved in the case must be achieved through the parties fulfilling their corresponding tax obligations in order to achieve the purpose of the contract. According to Article 3.3 of the "Huangping County Xin Yuan Jia Motor Vehicle Inspection Station Transfer Contract" signed by both parties, "the property transfer fee shall be shared equally by Party A and Party B." From the content of the agreement, it is not clear that the transfer fee specifically refers to specific items, so the second instance's determination that Xin Yuan Jia Motor Vehicle Inspection Company has fulfilled half of the total transfer fee of the inspection station of 421440.35 yuan in accordance with the agreement based on the actual tax payment situation of both parties has factual basis. However, Xin Yuan Jia Motor Vehicle Inspection Company claimed that the value-added tax, value-added tax surtax and other expenses borne by Xin Yuan Jia Investment Company should not be included in the transfer fee agreed in the contract, but in the actual transaction process, Xin Yuan Jia Motor Vehicle Inspection Company not only paid the deed tax, stamp duty, and processing fees that it should bear, but also transferred 122273.93 yuan to Xin Yuan Jia Investment Company for the payment of taxes that the company should bear, Xin Yuan Jia Investment Company issued a receipt stating that it had received half of the transfer fee of 421440.35 yuan borne by Xin Yuan Jia Motor Vehicle Inspection Company, indicating that Xin Yuan Jia Motor Vehicle Inspection Company was aware of and recognized the composition of the transfer fee. Although there is content at the end of the receipt that "the excess will be refunded and the deficiency will be compensated after clarifying the specific amount to be borne by each party", the evidence submitted by Xin Yuan Jia Motor Vehicle Inspection Company cannot prove that the amount it paid to Xin Yuan Jia Investment Company has exceeded the transfer fee it should bear. Xin Yuan Jia Motor Vehicle Inspection Company's claim that the transfer fee should not include the taxes paid by the other party after actively fulfilling the obligation to bear the transfer fee agreed in the contract clearly violates the principle of good faith, and the second instance judgment's determination of the facts is not inappropriate, so the application for retrial was rejected.

  1. Whether transaction costs include taxes and fees should be judged in combination with the nature of the transaction.

In contract practice, many parties agree on clauses for bearing “transaction costs,” but it is often unclear whether these costs include taxes and, if so, which taxes. In the event of a dispute, unless the true intention can be proven from the contract terms or relevant evidence, many cases will be handled as an unclear agreement, i.e., the tax liability is determined according to the tax law. The reason why this case changed the first instance's handling approach of considering the relevant tax burden as an unclear agreement is the consideration of the composition and role of transaction costs under different types of transactions. That is to say, whether transaction costs include taxes depends on whether the taxes involved will affect the realization of the contract's purpose. Generally, for land, buildings (structures), trademarks, patents, equity, vehicles, and vessels that require changes in ownership registration to effectuate the legal effect of ownership transfer, both parties should pay the corresponding taxes according to relevant tax laws before completing the change registration, i.e., fulfilling the corresponding tax obligations to achieve the contract's purpose. In this case, the transaction costs generally agreed upon in the contract should include not only the costs of ownership change registration but also the taxes generated by the transaction. For transactions that can be realized without registration, such as lease contracts, contracting contracts, undertaking contracts, brokerage contracts, and ordinary commodity sales contracts, whether or not taxes are paid does not affect the performance of the contract. If the transaction costs do not clearly specify which taxes are involved, disputes are likely to be handled as an unclear agreement.

  2. The state of unclear agreement can be changed through actual performance.

Article 511 of the Civil Code stipulates: After a contract takes effect, if the parties have not agreed on or have not clearly agreed on the content of quality, price or remuneration, place of performance, etc., they may agree to supplement it. When the parties expressly or tacitly accept the performance of the other party on matters with unclear agreements, it is deemed that the parties have made a new agreement on the behavior, and once the parties perform, it will take effect, and the original unclear matters will be re-clarified with the actual performance.

Reviewing this case, the plaintiff, the testing company, as the transferee of the real estate, should bear the deed tax and stamp duty according to tax laws; the defendant, the investment company, as the transferor, should bear the value-added tax, value-added tax surcharge, land value-added tax (if any), stamp duty, and corporate income tax. Through actual performance, the parties have reached a new supplementary agreement, that is, on the basis that the parties initially agreed to share the property transfer fees equally, the amount of the transfer fees was confirmed to be 842,000 yuan, including the 299,000 yuan of deed tax, stamp duty, and processing fees paid by the testing company; and the 543,000 yuan of value-added tax and value-added tax surcharge paid by the investment company. The plaintiff testing company's transfer of funds to the defendant investment company, plus the taxes and fees it had previously paid, is exactly half of 842,000 yuan, which also shows that both parties recognize the agreement to bear half of the taxes and fees.

Therefore, the evaluation of the retrial court is: After the testing company actively fulfilled the obligation to bear the transfer fees agreed in the contract, it then claimed that the transfer fees should not include the taxes paid by the other party, which is obviously contrary to the principle of good faith.

  3. Enlightenment of this case on the review of general agreements on transaction costs.

The principle of autonomy of will and the principle of legality of taxation both play a role in the contract. When the tax agreement in the contract is clear, the corresponding tax amount after bearing the tax obligation according to the tax law can be determined according to the agreement; when the tax agreement in the contract is unclear, the tax liability of the parties is determined according to the tax law. Whether the general agreement on transaction costs in the contract includes transaction taxes and fees should be considered from three aspects.

First, it is necessary to consider whether the relevant taxes and fees will affect the realization of the contract's purpose. Generally, for transactions that can only be realized after fulfilling the tax obligation first, the transaction costs should include transaction taxes and fees. In this case, the principle of autonomy of will can be followed to recognize the validity of the general agreement; otherwise, it should be regarded as an unclear agreement, and the principle of legality of taxation should be applied to determine the tax burden.

Secondly, attention should be paid to the degree of correlation between specific taxes and fees and the transaction. Generally speaking, the main taxes that can only be registered after tax payment involve tax types directly calculated based on the transaction amount, such as value-added tax, value-added tax surcharges, deed tax, stamp duty, and individual income tax withheld and paid on behalf of others; while tax types calculated based on transaction income, such as corporate income tax and land value-added tax, are combined with cost expenses after the transaction is completed. The degree of association with transaction costs is low, and at the same time, it is difficult to provide evidence to distinguish which of these tax payments comes from this transaction. Simply including it in the transaction costs can easily cause greater controversy.

Finally, it is necessary to review whether the state of unclear agreement has ended through supplementary agreements or actual performance during the performance of the contract, so as to judge whether the parties have reached a new agreement on the tax burden, and not only to judge whether the relevant tax burden agreement is clear and definite based on the original contract.

  Reference case: Retrial Review and Trial Supervision Civil Ruling on the Dispute over Sales Contract between Huangping Xinyuanjia Motor Vehicle Testing Co., Ltd. and Huangping Xinyuanjia Investment Co., Ltd.

  Case number: (2020) Qian Min Shen No. 2318