Editor's Note: On July 24, 2023, the Political Bureau of the Central Committee of the Communist Party of China held a meeting to analyze and study the current economic situation, pointing out that at present, the supply and demand relationship in China's real estate market has undergone significant changes. Against the background of the impeded operation of the real estate market and the continued downturn in real estate development investment, real estate development enterprises are facing different degrees of capital pressure. At present, housing prices around the world continued to decline, property transactions plummeted, real estate development enterprises sales revenue is far lower than expected at the beginning of the project development, the project profit shrinks significantly. In the past, many real estate development enterprises acquired land use rights in the form of transferring the equity of the project company through open share field transactions, in which the transferor did not pay the land value-added tax, and the subsequent project company needed to bear a huge amount of land value-added tax due to the extremely low land price paid for the land use rights in real estate liquidation. When the real estate price was high, the project company was still able to bear the cost of real estate development including the tax burden. Now that the real estate market is in the doldrums and the profitability of the project has been greatly reduced, the real estate development company may face the risk of not being able to pay the huge amount of land value-added tax. At the same time, according to the previous tax collection and management practice, the transferor of the land use right in the field of explicit shares is also facing the risk of being penetrated to collect land value-added tax or even characterized as tax evasion. In addition, the legal risks faced by the transferring parties are also more complicated due to the different operations of enterprises in the process of land acquisition, establishment of project companies and equity transfer. Based on this, this paper analyzes the tax risks of the equity transferor and transferee in the field transaction of explicit shares based on the current situation of real estate market for readers' reference.

I. The field transferor of open shares faces the risk of penetrating and pursuing land value-added tax, characterizing tax evasion and even touching the crime of tax evasion

According to the Provisional Regulations on Land Value-added Tax (LVAT), the unit transferring real estate is the taxpayer of LVAT, and the LVAT is calculated and paid according to the tax rate determined by the ratio of the value-added amount to the deducted items, with the tax rate of up to 60%. The real estate market has been booming in the past few years, and land prices have risen in response. The direct transfer of land use rights will bring a heavier burden of land value-added tax, and the transaction of transferring the equity of a project company after investing in the land as shares has appeared in practice. Such transactions are either to avoid the payment of land value-added tax, or to pay off the land premium, or because the original developer is unable to continue the development, for various reasons. Among the above transactions, clear share field transactions for the purpose of paying less tax carry a higher risk of tax penetration:

One viewpoint is that the field transaction of explicit shares is essentially the transfer of land use rights by the equity transferor, and the transferor should pay the tax on the change of land ownership, which is also supported by relevant approvals of the State Administration of Taxation and judicial cases. For example, in the administrative litigation case between Company A and the tax bureau on whether the field of express shares should be taxed through and through ((2018) Su Xing Shen No. 626), the court determined that Company A, as the true transferee of the land parcel in question, alienated its equity interest in the project company by means of equity transfer, which essentially constituted the alienation of the right to use the land, and it should pay land value-added tax and other taxes and fees, and that Company A, under the name of equity transfer Moreover, Company A hid the fact of land transfer in the name of equity transfer, did not list the income from land transfer in the books of account, and avoided the taxes payable in the process of land transfer, and its behavior belonged to the situation of "not listing the income in the books of account", which constituted tax evasion.

However, there are also views that the transfer of equity and land use rights are different and independent of each other, and should fully respect the form of private law under the autonomy of meaning. The transfer of land use right did not take place during the transfer of equity, and should not be penetrated into the transfer of land use right for taxation, and the project company will eventually pay the land value-added tax at the initial cost price and the final sales price, which will not result in the loss of the land tax.

It is because of the aforementioned controversy between the policy and the tax administration practice that there are many tax-related risks in the field transaction behavior of the Mingshu. After the project company's property development and sales involved in land tax clearance, and in the context of the current downturn in the real estate market, the income from the sale of property is not optimistic, and because of the initial cost of land and property sales price of the calculation of the payment, the value-added amount is too large, it is very easy to apply a higher rate of land tax, the project company is faced with the inability to pay a large amount of land tax, which may lead to the potential tax risks of the previous field transaction of the Ming Shijiazhuang field transaction. If the equity transferor's clear-cut field transaction is penetrated as a transfer of land use rights, in addition to facing the risk of paying land value-added tax and other taxes and fees, as well as late payment fees, as in the previous case, it may also face the risk of being characterized as a tax evader, and if the transferor fails to settle the tax, late payment fees and fines within the prescribed period, it may also face the risk of criminal liability for tax evasion. Therefore, the tax risk of explicit shares being penetrated into the transfer of land use rights should not be ignored.

II. The field transaction of open shares meets these three characteristics easily be penetrated for the transfer of land use rights

The State Administration of Taxation (SAT) has made the approval of Guo Shui Han [2000] No. 687, Guo Shui Han [2009] No. 387, Guo Shui Han [2011] No. 415, which specifies that the field transaction of Ming Shares should be taxed as transfer of land use right, and the approvals of such individual cases have reflected the understanding and adjustment of the application of the law by the practice of tax collection and management, and the tax authorities, in the process of law enforcement, may refer to the spirit of the aforesaid approvals to levy land value-added tax and other taxes for the transferring party of equity shares through. In the course of law enforcement, the tax authorities may also refer to the spirit of the aforesaid approval to levy land value-added tax and other taxes on the transferor of equity. Combined with the aforesaid approval, from the viewpoint of practice cases, tax authorities or judicial authorities usually judge whether the essence of the equity transfer is the alienation of land use right from the following aspects:

First, the actual control right of the equity transferor over the land in question. The Reply on Tax Issues Related to the Transfer of Land without Land Use Right (Guo Shui Han [2007] No. 645) stipulates that "a land user transfers, mortgages or replaces land, regardless of whether he or she has obtained a certificate of right to use the land, and regardless of whether he or she has handled the change of the certificate of right to use the land with the other party during the process of transferring, mortgaging or replacing the land" (Guo Shui Han [2007] No. 645). Regardless of whether the land user has obtained the land use right certificate or not, and regardless of whether the land user and the other party have changed the land use right certificate during the process of transferring, mortgaging or exchanging the land, as long as the land user enjoys the right to possess, use, gain or dispose of the land, and there is evidence such as contracts showing that the land user has transferred, mortgaged or exchanged the land in substance and has obtained the corresponding economic benefits, the land user and his/her counterparty shall pay the relevant taxes such as the business tax, the value-added tax on land and the deed tax in accordance with the provisions of the tax law. It can be seen from the approval, even if the land ownership is registered in the name of the project company, as long as the equity transferor actually enjoys the right to possess, use, gain or dispose of the land, it is possible to be judged as the land in question has the right to actual control, the transfer of equity constitutes a transfer of the right to use the land.

Secondly, the basis for determining the price of the equity transfer. In the aforementioned case, the court found that company a obtained equity transfer is based on the area of the land, plot ratio and other calculations, the value of the transfer of equity actually reflects the value of the land, confirming the transfer of equity transfer for the transfer of land use right. In the equity transfer transaction for the purpose of land use right transfer, most of the project company's assets are basically reflected in the value of the land in question, the equity transfer price is equal to or close to the real estate appraisal value, in this case, it is very easy to be judged as a transfer of land use right.

Thirdly, the intention of the parties to the transfer is to cooperate. The project company is usually a "shell" company used by the transferor to place the land for subsequent transfer arrangements, and in addition to the land, the project company has almost no other assets, goodwill, etc., and may not have carried out any production operations. In other words, if the project company does not own the land use right in question, the transferee of the equity interest will not cooperate with the transferor in the equity transfer transaction, in which case the reasonableness of the equity transfer transaction may be easily questioned.

If the equity transfer transaction of the project company by the transferor has the above characteristics, it should pay full attention to the relevant tax-related risks and deal with them appropriately and in a timely manner.

III. The project company pays too low a price for the land and has to bear a huge amount of land value-added tax.

In the open field transaction, the equity transferor usually puts the land into the project company at a low price, or places the land into the project company in the form of asset transfer, etc., and some of the land is even low-value industrial land before the investment in the equity transfer, which is reflected in the accounts of the project company with a very low taxable base. In the subsequent equity transfer, the transferee actually acquired the land use right and carried out land development by way of explicit shares, and was required to pay land value-added tax according to the value-added portion between the final real estate sales price and the deducted items in the liquidation, as the land price was a very important part of the deducted items and the amount paid by the transferee to acquire the land use right was too low, resulting in the low taxable base reflected in the accounts of the project company. As the land premium is a very important part of the deduction item, and the "amount paid for the acquisition of land use right" of the transferee is too low, the value-added amount obtained by the transfer of real estate by the project company is too high, and the land value-added tax burden avoided by the former transferor in the field of Mingsha was transferred to the transferee. Against the background of the current downturn in the real estate market, the transferee's income from project development is far from expectation and it is feared that it lacks sufficient funds to pay the huge amount of land value-added tax, which will affect the continued operation of the enterprise.

According to the current tax law, land value-added tax is payable on the transfer of land use rights by housing and development enterprises, and the land value-added tax paid by the housing and development enterprises as the transferor that did not pay on the change of ownership of the land use rights in the field transaction of the Ming Shares was transferred to the project company, and in the current downturn of the real estate market, the project company either could not afford to pay a huge amount of land value-added tax or applied a low rate to pay the land value-added tax due to the low value-added amount, which resulted in the difficulty in paying the state taxes in full and timely, and the related state taxes were not paid on time. As a result, it will be difficult for the state tax to be paid in full and on time, and the potential tax risks associated with the transferor's open share field transactions are very likely to erupt. We suggest that enterprises should pay full attention to the tax risks involved when there are open share field transactions or when they face related disputes, sort out related business processes and business information, fully identify risks and liabilities, and actively communicate with the administrative authorities to safeguard their legitimate rights and interests in respect of disputed tax and enterprise contents.