Editor's Note: On October 25, the Ministry of Finance released the fiscal revenue and expenditure situation in the first three quarters of 2024, and the statistics show that the national tax revenue from January to September decreased by 5.3% year-on-year, and the property tax among the land and real estate-related taxes was 311.8 billion yuan, an increase of 19.9% year-on-year, and the land value-added tax (VAT) was 400 billion yuan, a decrease of 7.8% year-on-year. VAT, land value-added tax and other transaction-related taxes and fees are hotspots of long-term concern for the real estate industry, and in the context of significant changes in the supply and demand relationship in the housing market at present, enterprises should also focus on property tax, urban land use tax and other taxes and fees in the real estate holding segment. Recently, a listed company in Inner Mongolia announced that its subsidiaries conducted self-inspection and verification of property tax returns according to the requirements of the local tax bureau, and due to the inconsistent understanding of the tax basis, the subsidiaries were required to make up for a total of 111,059,700 yuan of property tax and late payment fees from December 2018 to June 2024, which was expected to affect the net profit attributable to shareholders of the listed company for the year 2024 of approximately 80.69 million yuan. Based on the main controversial issues of property tax in practice, this article selects three typical cases to analyze the application and understanding of policies and other issues by cases for readers' reference.

I. Underground parking lot leased to an affiliate, rental or ad valorem property tax?

Company A is mainly engaged in the business of real estate development and operation. 2021, Company A leased the underground parking lot of the commercial building it developed to its affiliate, Company B, which carried out the business of underground parking lot, and Company A calculated and paid the property tax on the rental income obtained. During a recent tax inspection, the local inspection bureau considered that Company A was essentially operating the parking lot business on its own and that property tax should be levied on an ad valorem basis, and demanded Company A to pay property tax of more than RMB10 million plus late payment fees.

The main dispute between the two parties was whether the leasing of the underground parking lot to a related company should be subject to property tax on a rental or ad valorem basis. For the property tax of the underground parking lot, the Ministry of Finance, the State Administration of Taxation on the function of the underground buildings with housing property tax notice (Cai Shui [2005] No. 181) provides that, “First, all in the scope of the property tax levied with the function of the underground buildings with housing, including underground buildings connected to the ground housing, and completely built in the ground below the building, Underground human defense facilities, etc., shall be subject to property tax in accordance with the relevant provisions. The above underground buildings with the function of houses refer to those with roofs and maintenance structures, capable of sheltering from wind and rain, in which people can produce, operate, work, study, entertain, live or store materials ...... Third, the underground buildings for rent are calculated and levied property tax in accordance with the relevant provisions on the rental of above-ground housing buildings “. From the provisions of the 181st, the underground building in line with the provisions of the property tax should be levied for rental, the rental income as the basis for the calculation of property tax. In addition, due to the special nature of the property rights of underground parking lots, some local tax bureaus have made it clear that underground parking lots are levied on a blanket basis from rent, such as the Shenyang Tax Bureau, which pointed out in the Approval Response on the Taxation of Underground Parking Spaces of Shenyang Airline (Shenyang) Properties Company Limited (Shen Di Shui Huan [2013] No. 54) that, “for underground manned defense projects which do not meet the requirements of the Approval Response of the Liaoning Provincial Bureau of Local Taxation on Temporary Exemption from Approval of Liaoning Local Taxation Bureau on Temporary Exemption of Underground Human Defense Works from Property Tax“ (Liaodi Taxation Letter [2011] No. 183), it was stated that ‘all underground parking spaces not in compliance with the provisions of ’Liaoning Provincial Local Taxation Bureau on Temporary Exemption of Underground Human Defense Works from Property Tax” (Liaodi Taxation Letter [2011] No. 183) shall be subjected to property tax on a rental basis”.

Returning to the dispute in this case, Company A and Company B entered into a lease contract for an underground parking lot and leased the underground parking lot to Company B to carry out its business, which should be levied on a rental basis in terms of the application of the law. It is worth noting that another key issue in this case is the affiliation between Company A and Company B, when the local tax bureau that Company A actually owns the possession, use, income and other rights of the underground parking lot, which constitutes the parking lot of its own use, the parking lot leased to the affiliates for tax planning purposes, Company B did not actually operate the parking lot business. The author believes that the transactions between related enterprises should have a reasonable business purpose and follow the principle of fair trade, the associated companies need to actually undertake the operation of the parking lot, such as hiring employees for management, maintenance, etc., and the associated parties to meet the fair market pricing of the rent. In the aforementioned circumstances, if the enterprise does not hide the income, not listed, understated income, false tax returns and other tax evasion subjective malice or abuse of private law autonomy to avoid tax obligations, the tax authorities should respect the contractual relationship established in accordance with civil and commercial law, should not interfere with the normal transaction behavior with the principle of substantive taxation, otherwise it will give the stability of the civil order of the transaction and the rights and interests of the parties involved in the impact.

II. the real estate development enterprise in the accounting for investment property treatment, whether to pay property tax?

Company C is a real estate development enterprise, a commercial plaza project was completed in 2012, and some of the commercial real estate has been leased out. on June 30, 2013, Company C will be the commercial real estate from “inventory goods - development products”, “production costs - development costs “ to the cost of investment properties and the accounting account of change in fair value of investment properties.In August 2017, the local inspection bureau carried out a tax inspection of Company C, and considered that it had transferred the development cost of RMB367 million to investment properties in June 2013, and paid the relevant taxes and fees according to the rental income obtained on the leasing of part of its investment properties, but it did not declare and pay the relevant taxes and fees on the unleased portion of investment properties as required. The Company decided to recover the underpaid property tax of more than RMB8 million from Company A. The Company C disagreed and claimed that it was the owner of the investment property and that it was the owner of the investment property. Company C refused to accept the decision and claimed that its accounting accounts were wrongly handled and the property in question was not investment property and should not be subject to property tax. Company C filed a lawsuit after reconsideration and maintenance, and the court of first and second instance rejected its lawsuit request.

The main point of contention in this case was the understanding of the policy of the Circular of the State Administration of Taxation on the Relevant Policy Provisions of Property Tax City and Town Land Use Tax (Guo Shui Fa [2003] No. 89), which stipulated that “[g]iven that a commodity house developed by a real estate development enterprise is, before it is sold, a product to the real estate development enterprise, a commodity house constructed by the real estate development enterprise is a product to the real estate development enterprise. commercial house before it is sold, no property tax shall be levied; however, property tax shall be levied in accordance with the regulations on the commercial house that has been used or rented or lent by the real estate development enterprise before it is sold.” Company C argued that it was only due to the error in accounting treatment, which did not constitute the actual use of real estate, and was in line with the non-taxation circumstance stipulated in Circular No. 89, whereas the Audit Bureau held that the reason for Company C's claim of “incorrect accounting” could not be substantiated, and that the property in question, after being used for investment real estate management, was no longer in line with the non-taxation provision and should be subject to the property tax. The court of first and second instance held that investment real estate refers to real estate held for earning rent or capital appreciation or both, and Company C managed and accounted for the property in question as investment real estate, and the value of this part of the real estate changed with the market, and the nature of the property was investment real estate, and Company C's behavior constituted the actual use of the property in question, and the property in question did not fall under the provisions of Article 89. Therefore, the property in question does not belong to the products exempted from property tax under Article 89.

The purpose of Article 89 is to consider the attributes of the real estate enterprises themselves, and if the real estate held for sale is regarded as self-use and levied on the basis of price is not in line with the purpose of property tax, nor is it in line with the principle of fairness in taxation, but the existing tax laws and regulations do not clarify what is “use or lease or loan” stipulated in Article 89, which leads to a lot of disputes between the tax enterprises and the tax enterprises in the practice. However, the existing tax laws and regulations do not clarify the meaning of “use or lease, loan” as stipulated in the No.89, which leads to many disputes between the two parties in practice. The inspiration of this case is that real estate development enterprises should understand the basis of property tax accurately, make clear what impact the accounting treatment will have on the tax obligation, and make accounting treatment based on the real sale or use or lease of real estate to fulfill the tax obligation in time, so as to avoid the risk of paying back tax and charging late payment fee.

III. whether real estate development enterprises need to pay property tax for mortgaging real estate for sale?

Due to the long development cycle of real estate, housing market supply and demand changes in uncertainty and other reasons, some real estate enterprises in the development and completion of the opening of the sales situation is not satisfactory, affecting the return of corporate funds, in order to improve the cash flow situation, real estate enterprises will be part of the unsold property first right to their own name for mortgage loans, in order to obtain the cash flow to maintain business operations. For real estate enterprises to sell real estate to mortgage constitutes the use of real estate, can be applied to the provisions of Article 89 of the non-taxation, there are also many controversies.

An article published by a local court referred to a case in which the local inspection bureau found in a tax inspection that a real estate company had developed and completed 16 villas, applied for property certificates and registered them in its own name, and used them for bank mortgages. The inspection bureau considered that the real estate company had under-declared the property tax payment of 661,090.3 yuan, and requested the enterprise to pay the tax and add late payment fees. The real estate company appealed to the court after the review was upheld. As to whether the mortgage of real estate for sale by the real estate company constitutes the “use” and collection of property tax as stipulated in Article 89, there are views that, in accordance with the provisions of Article 89, the property tax is not levied on the commercial properties before they are sold, and the 16 villas in this case belong to the pre-sale of the commercial properties, and the real estate company is the original registrant for the real estate company. The real estate company has not changed the nature of ownership, real estate development enterprises mortgaged in the bank property still belongs to the property for sale, does not belong to the property for personal use, so do not need to pay property tax; and there is a view that the real estate company will be the commercial housing for the real estate certificate and registered to their own name, has been held in the legal sense of the commercial housing, and then used in the bank mortgages, the amount of the loan is larger, the nature of the commercial housing has been will be pre-sale Commodity housing into self-use housing, in line with the provisions of the 89th “but the real estate development enterprises have been used before the sale or rental, lending of commodity housing should be in accordance with the provisions of the property tax” situation.

In the author's view, according to the provisions of the Civil Code, the owner of the real estate enjoys the right of “possession, use, income and disposal”, from the relationship between the change of property rights, the mortgage belongs to the right of other property rights, the setting of mortgage is to play the real estate “disposal” of power From the principle of property tax levy, unless there is evidence to prove that the enterprise has used the property, such as office, production and operation in the property, or has rented it out, if the enterprise has only used the property, the enterprise will not be able to use the property for the purpose of property tax levy. From the principle of property tax, unless it is proved that the enterprise has used the property, such as working in the property, carrying out production and operation, or renting out the property, it is inappropriate to levy property tax on the property if it is only mortgaged and actually vacant.

Summary

Although property tax is a “small tax”, it is levied based on the holding of properties. If enterprises do not properly understand the tax obligation, tax basis, ad valorem or ad valorem rent of property tax, they will face the risk of a long period of tax reimbursement and extremely high late payment fee. Therefore, enterprises should correctly understand each element of property tax, grasp the essence of the business, actively communicate with each other in the face of disputes between taxpayers and enterprises, and appropriately resolve the disputes to reduce the risks of back taxes and late payment fees.