In practice, some local governments, in order to attract investment, grant the land use right through auction and listing in accordance with the law, and then return the land grant payment in the form of support, incentives, subsidies, etc. However, due to the huge amount of land grant payment, whether to offset the land price has a significant impact on the capital cost of enterprises. However, due to the huge amount of land rebate, whether or not to offset the land price in the land value-added tax settlement has a significant impact on the capital cost of enterprises. At present, the national level has not yet clarified the land value-added tax treatment of land rebates, but some localities have made provisions for the deduction of land rebates from the corresponding land costs. Enterprises that do not deduct the land value from the rebates and include the full amount of the land premiums paid in the land costs are exposed to the risk of recovering the land value-added tax.

I. Basic facts of the case

(I) Facts of the case

After Company A was established in April 2007, it acquired 50.99 acres of state-owned construction land in Q Town, County H by way of concession to develop the "First Street" real estate project. Company A paid a total of RMB 158.3 million to the Land and Resources Bureau of County H. In December 2009 and January 2010, the Finance Bureau of County H granted incentives of RMB 16 million to Company A. As at 31 December 2013, Company A had not received any incentives from the Land and Resources Bureau of County H for the development of the project. As of December 31, 2013, the project was sold to the outside world for 27,237.97 m2 , and 42,415.75 m2 was invested in shares with real estate to the outside world.From March 10 to June 10, 2014, S Local Tax Inspection Bureau inspected the tax-related situation of Company A during the period of January 1, 2010 to December 31, 2013, and determined that there were violations of law in the land value-added tax claims of Company A. The tax treatment decision was issued by the Tax Treatment Decision. Company A was found to have violated the law in respect of land value-added tax declaration and issued a Decision on Tax Treatment, requiring Company A to pay land value-added tax of RMB192,827,778.61.

Company A was dissatisfied and applied for reconsideration to S City Local Taxation Bureau. on December 1, 2014, S City Local Taxation Bureau made an administrative reconsideration decision and upheld the decision on land value-added tax clearance made by S Local Taxation Inspection Bureau. company A was dissatisfied with the reconsideration decision and filed an administrative litigation in S City Intermediate People's Court, which rejected the litigation claim of company A. company A was still dissatisfied and filed an appeal in J Province Higher People's Court. Company A appealed to the Higher People's Court of Province J.

(II) Focus of Dispute

Whether the government incentives involved in the case reduced the land price paid for the land use right?

(III) Opinions of the Parties

The enterprises considered that the RMB 16 million rewarded by the People's Government of County H belonged to the reward for the construction of the "First Street" project rather than the reward for the purchase of land, and did not relate to the premium paid for the acquisition of the land use right, and it was inappropriate for the Local Tax Inspection Bureau of County S to adjust down the RMB 16 million from the premium paid by Company A for the acquisition of the land use right, as the premium paid by Company A should be regarded as the premium paid for the land ownership. The premium paid by Company A should be recognized in full as the amount paid for the land use right.

The tax authorities held that the government incentive of RMB 16 million was in the nature of land premium incentive and should be deducted from the premium paid for the land use right when calculating the land value-added tax.

The Court held that the information note of H County Finance Bureau and the minutes of the meeting of CPC H County Committee were sufficient to prove that the incentive payment of RMB 16 million obtained by Company A was the land premium incentive paid by H County Government to the Appellant. According to Item (4) of Article 5 of the Announcement of the Local Taxation Bureau of Jiangsu Province on Relevant Operational Issues Concerning Land Value-added Tax (Suzhou Local Taxation Regulation [2012] No. 1), "The land premium paid by a taxpayer for the acquisition of the right to use the land shall be reduced by the actual payment of the land premium (including the land premium made up for payment at a later stage) by the taxpayer in the calculation of the land value-added tax due to the assignment of the The economic benefits paid to the taxpayer by the government of the land in various forms shall be recognized." In its tax processing decision under appeal, the S Local Tax Inspection Bureau accordingly deducted the RMB16 million land premium incentive payment from the land price paid for the acquisition of the land use right when calculating the land value-added tax (VAT), which was in compliance with Article 6(1) of the Provisional Regulations of the People's Republic of China on Land Value-added Tax as well as Article 7 of the Implementing Rules of the Provisional Regulations of the People's Republic of China on Land Value-added Tax.

(IV) Judgment Result

The appeal was dismissed and the judgment was affirmed.

II. Is it legal to return the land grant in the form of government incentives?

(I) State Office Development [2006] No. 100 Prohibits All Kinds of Reduction or Exemption of Land Grant Revenue

According to Article 1 of the Circular of the General Office of the State Council on Regulating the Management of Income and Expenditure from the Granting of State-owned Land Use Rights, "The income from the granting of state-owned land use rights (hereinafter referred to as the income from the granting of land) is the entire land price obtained by the government by way of granting and other means of allocating state-owned land use rights, including the compensation paid by the transferee for the expropriation of land and demolition and relocation, the costs of pre-development of the land and the proceeds of land grants. Any region, department or unit shall not reduce or waive the land price in the name of 'investment promotion', 'old city transformation', 'restructuring of state-owned enterprises' and so on. No area, department or unit may reduce or waive land grant revenues in the name of 'investment promotion', 'old city transformation', 'restructuring of state-owned enterprises', etc., and implement 'zero land value' or even 'negative land value', or reduce or waive land grant revenues in disguised form by exchanging land for projects, levying first and then returning it to the landowner, subsidizing, etc.". " By no coincidence, the same provision is also made in Article 10 of the Circular of the Ministry of Finance, the Ministry of Land and Resources, and the People's Bank of China on the Issuance of the <Measures for the Administration of Revenues and Expenditures on the Concession of the Right to Use State-Owned Land> (Cai Guangzhi [2006] No. 68). Accordingly, no region or department shall reduce or exempt taxpayers' land costs in disguised form by way of government incentives or subsidies.

(II) (2020) Supreme Court Xing Shen 13016 ruled that the land premium incentives can be revoked

The Supreme Court held that the land premium paid by the enterprise in question due to the adjustment of the plot ratio was included in the "land price that should be paid back", but the incentive funds allocated by the county government to the enterprise in question were expended from the Dao County Branch of the State Treasury, and were arranged through the budget of the local fund from the revenue of the state-owned land use right, and the summary of the voucher was recorded as "land premium", which was also recorded as "land premium". The summary of the appropriation voucher was also recorded as "land premium subsidy", and the funds expended should be land premium. The behavior of the county government was a disguised reduction of land grant revenue in the form of levy and then return, which violated the provisions of Guo Ban Fa [2006] No. 100 and Cai Guang [2006] No. 68, and harmed the national and public interests. The administrative organ to revoke the reward decision and collect the reward money issued in violation of the law, belongs to the ex officio to correct the violation of the reward behavior. It can be seen that part of the land premium returned in the form of incentives does not belong to the economic benefits that should be recognized as income.

(III) Compliance with the return of land premiums for specific purposes

According to the aforementioned provisions, the land premium is not allowed to be reduced or disguised in any form, and the land premium income shall be paid to the finance and local treasury in a timely manner. The use of land grant revenues, on the other hand, should be included in the budget for land acquisition and demolition compensation expenditures, land development expenditures, agricultural support expenditures, urban construction expenditures and other expenditures. Therefore, if an enterprise obtains the right to use land by paying the land grant premium, and obtains a certain amount of rebate funds for the purpose of undertaking land requisition and demolition and relocation compensation, land development and urban construction, which should be the responsibility of the government or its departments, the enterprise obtains the rebate in compliance with the provisions of the law, and the specific circumstances include, but are not limited to, the following situations:

1.Construction of public supporting facilities such as schools, hospitals, kindergartens, stadiums, etc. within the development project and obtaining government incentives or subsidies;

2.Construction of guaranteed rental housing and resettlement housing repurchased by the government, demolished residents, collectives or other units;

3. For land acquisition, compensation for demolition and relocation, and urban construction.

It can be seen that none of the above return funds are a reduction or disguised reduction of land premiums, but have a specific purpose in line with the scope of use of land grant revenue. （It was also pointed out in Judgment No. 1047 (2019) that Company L actually undertook the construction of the project's infrastructure and ancillary facilities that should have been constructed by the Management Committee, in which case the Management Committee undertook to return the difference in the land premium used for the "construction of the project's infrastructure and ancillary facilities", which was in line with the relevant provisions of the law. Therefore, the return of land premium for specific purposes is permitted.

(IV) Summary: land grant refund is prohibited as a principle, and permitted as an exception

As mentioned above, any region, department and unit shall not reduce or disguisedly reduce the behavior of the enterprise land premium, the Supreme People's Court Civil Division 2021 23rd Judges' Meeting Minutes Discussion also believes that the land premium refund agreement is invalid due to the violation of the mandatory provisions of the law and damage to the national interest. The land rebate obtained by the taxpayer does not constitute its legitimate economic interest and should neither be recognized as income nor adjusted for cost. However, if the enterprise uses the funds returned by the government for a specific purpose and meets other legal conditions, it is legal for it to obtain the return.

III. From the central to the local level: recognition of amounts paid by taxpayers to acquire land use rights

(I) Central: the land value-added tax treatment of land rebate payments has not yet been clearly defined

According to the Provisional Regulations on Land Value-added Tax ("LVAT") and its Implementing Rules, LVAT is calculated and levied on the basis of the value-added amount of the income derived from the transfer of real estate by a taxpayer, less the amount of prescribed deductions, and at a prescribed tax rate. Among them, the amount paid for the acquisition of land use right refers to the land price paid by the taxpayer for the acquisition of land use right and the relevant fees paid in accordance with the unified regulations of the State.

According to the logic of the principle of actual occurrence in tax collection and management, the basis for determining the cost of land for the purpose of land value-added tax clearance should be the price actually paid by the enterprise after deduction of the land rebate. Therefore, the land premium refund obtained by the enterprise in various names should be deducted from the land cost.

Currently, in respect of enterprise income tax, the Ministry of Finance and the State Administration of Taxation have issued the Circular on the Issues of Enterprise Income Tax Treatment for Fiscal Funds for Special Purposes (Cai Shui [2011] No. 70), in which an enterprise that obtains fiscal funds that simultaneously satisfy the requirements of fund appropriation documents, specialized departmental management and separate accounting can be regarded as nontaxable income and deducted from the total amount of income when calculating taxable income. However, the General Administration has not yet made clear provisions on the tax treatment of land grant rebates in respect of the liquidation and management of land value-added tax.

(II) Localities: Some localities have stipulated that the land premium refund must be offset against the cost of land

From the viewpoint of local regulations, most of the localities have not made clear provisions, but some localities have stipulated that when calculating the land value-added tax, the refund of land premium must be deducted from the cost of land. The details are as follows:

(III) Summary: Land premium refund should be offset against the cost of land

In the enterprise to obtain the refund but there is no construction of resettlement housing, construction projects related to infrastructure and public facilities or for demolition and relocation compensation, etc., the government to give the enterprise the land premium refund is essentially the government to give the enterprise the discount of the price of the land, the return of part of the money is no longer belongs to the "acquisition of the land use right to pay for the amount of money "category, so the simple land premium refund should be deducted from the cost of land.

In this case, the government reward obtained by Company A was a refund of the land premium, which was a preferential policy granted by the local government to Company A based on the difference between the land transaction price and the starting auction price, which in effect reduced the land cost of Company A. According to this, the Local Tax Inspection Bureau of Jiangsu Province based on the Announcement of the Local Taxation Bureau of Jiangsu Province on the Relevant Operational Issues of Land Value-added Tax on the Land Value-added Tax, the land value-added tax incentive of RMB16 million should be deducted from the land value-priced amount paid for obtaining the right to use the land. Announcement of Jiangsu Local Taxation Bureau on Relevant Operational Issues of Land Value-added Tax, which also follows the principle of actual occurrence. Therefore, it was not improper to deduct the incentive fund from the land premium paid by Company A when determining the land price.

IV. Tax-Related Risks and Responses of Real Estate Development Enterprises in Recognizing Deduction of Land Premium in Violation of the Rules

In practice, due to the fact that the tax treatment of land value-added tax (LVAT) on land premium refund is still in a blank state at the national level, there are disputes as to whether the amount of "the amount paid for the acquisition of land use right" should be deducted from the amount of land premium refunded by an enterprise that has obtained the land premium refund in various names when accounting for the deductible items. Some enterprises have included the full amount of land premium paid in the land cost when clearing the land value-added tax, and if the tax authorities consider that they have underpaid the tax after investigation, it will lead to the risk of paying land value-added tax and other taxes. Moreover, the failure to deduct the land cost from the refund may be recognized as "over-listing of costs" as stipulated in Article 63 of the Tax Collection and Management Law, and may be recognized as tax evasion, which will result in a fine of more than 50% and less than 5 times of the amount of tax paid, in addition to the payment of back taxes and late payment fees, and may even be investigated for tax evasion as a criminal liability.

Taxpayers engaged in real estate development should check whether, in the process of acquiring land use rights, in addition to the payment of land premiums, they themselves or their affiliates have obtained various economic benefits in the form of support, rewards, subsidies and other forms of economic benefits given by the government or relevant units and departments, and whether the relevant rebates need to be reduced by the amount of deductible items. If it is difficult to determine the scope of deduction, taxpayers should actively consult with tax authorities or professionals or seek tax counseling to prevent tax-related risks.