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Does the auction payment paid by the buyer in judicial auction to the court already include the transfer taxes payable by the transferor?

Editor's Note: Recently, there have been frequent occurrences of companies falling into operational difficulties and being unable to repay debts, leading creditors to apply to the court for forced auction of the debtor's assets. During the execution of auctions by the people's courts, disputes over the tax and fee obligations of the transferor have arisen continuously due to the clause in the bidding announcement formulated by the executing court stating that "all taxes and fees related to the transfer of real estate shall be borne by the buyer." This article takes a case of tax recovery for the forced auction of real estate by the court as an example, analyzes the tax obligations and collection difficulties in judicial auctions based on legal principles and policy regulations, and finally provides suggestions to buyers to help them reduce tax risks and minimize similar disputes.

01 Case Introduction: Execution of Judicial Auction of Property with Subsequent Lawsuit for Tax Recovery by the Debtor against the Buyer after Payment of Transfer Taxes

Company A owed Company B 30 million yuan in construction funds due to a contract dispute. After the judgment became effective, Company B applied to the court for the execution of Company A's real estate. The court issued a "Bidding Announcement," which specifically stated that "the transfer registration formalities for the subject matter shall be handled by the buyer themselves, and all taxes and fees involved shall be borne by the buyer." Company C successfully bid at the highest price and signed a "Auction Confirmation" with the court, agreeing that the transaction price was 270 million yuan, and that all taxes and fees related to the transfer of the auctioned property would be borne by the buyer, with no involvement of the auctioneer in any inability to transfer ownership arising from this. (The "Bidding Announcement" and the "Auction Confirmation" are collectively referred to as the "Auction Documents" hereinafter.)

Company C actively communicated and cooperated with the tax authorities at the location of the real estate to handle the tax payment matters for both parties. The tax authorities calculated the various taxes and fees required for the transfer of the real estate for both parties. However, due to the fact that the debtor was out of contact, it was not possible to accurately calculate the corresponding taxes and fees for the transferor. Therefore, only an estimated total amount of approximately 30 million yuan for various taxes was calculated, including the transferor's value-added tax, urban maintenance and construction tax and surcharges, land value-added tax, and stamp duty. Subsequently, Company C communicated with the tax authorities and paid the auction price to the court in two installments. The first payment was 240 million yuan, and the second payment was 30 million yuan. Company C informed the court that the second payment should be used by the debtor to pay the corresponding taxes, and after paying the taxes, the debtor should promptly issue an invoice for the transfer of the real estate to Company C for accounting purposes. The tax authorities approved Company C's plan and, after Company C completed the payment of the two installments, assisted Company C in completing the transfer formalities for the auctioned property at the real estate registration center and obtaining a new property ownership certificate.

After receiving the auction price paid by Company C, the court clearly informed Company A that the second payment should be used to pay various taxes and fees. Subsequently, the tax authorities issued a tax payment notice to Company A, and Company A paid the taxes and fees of 30 million yuan according to the tax payment notice of the tax authorities. However, Company A later objected, believing that according to the agreement in the Auction Documents, all taxes and fees should be borne by the buyer, Company C. Therefore, Company A initiated a lawsuit against Company C for the recovery of taxes paid.

02 Can the Tax Obligation of the Transferor Be Transferred in Real Estate Auctions?

In practical situations, there is no dispute that the statutory taxpayers for taxes such as value-added tax, urban construction tax and surcharges, land value-added tax, and stamp duty are the transferors. However, there are differing opinions on whether the tax obligation can be transferred. One argument holds that according to Article 4 of the Tax Administration Law: "Units and individuals who are legally obligated to pay taxes as stipulated by laws and administrative regulations are taxpayers. Taxpayers and withholding agents must pay taxes, withhold and remit taxes, and collect and remit taxes in accordance with the provisions of laws and administrative regulations." In essence, the taxpayers for each type of tax are designated by laws and administrative regulations, and the tax obligation cannot be transferred. Taxpayers must pay taxes in accordance with the law.

Another perspective suggests that the function of taxation is to organize fiscal revenue, implement macroeconomic regulation, and so on. Agreements between parties regarding the burden of taxes and fees represent a consensus on the ultimate bearer of such taxes and fees. The fact that the ultimate bearer is determined by agreement does not alter the mandatory, gratuitous, and fixed nature of tax laws and will not affect the fulfillment of tax functions.

The author believes that taxation possesses both the mandatory nature of public power in the sense of administrative law and the autonomy of creditor's rights in the sense of civil law. From the perspective of transactions, taxes, like other transaction costs, represent an outflow of economic benefits, and the burden of taxes and fees is the result of negotiations among various parties. In a seller's market, it is not uncommon for the buyer to bear all taxes in real estate transactions. Similarly, in corporate acquisitions, tax transfer clauses may arise due to disparities in market position.

To date, China's existing laws and regulations do not restrict the transfer of tax burdens in transactions. Clauses regarding the transfer of tax burdens in contracts represent the agreement of the parties and are effective for the parties to the contract. However, the autonomy of civil subjects cannot overrule the statutory nature of taxpayer status. In cases where no one pays taxes, the tax authorities will pursue tax payments from the statutory taxpayers. After paying the taxes, taxpayers may then seek civil relief procedures to recover the creditor's rights arising from the payment of taxes from the other party.

03  Does the Auction Documentation Constitute an Expression of Intent by the Debtor and Buyer to Transfer Tax Obligations?

Given that laws and regulations do not place restrictions or prohibitions on the transfer of tax obligations, does the tax-related clause in the auction documents in the case constitute an expression of intent by Company A and Company C to transfer the tax burden? The answer is no, and the reasons are as follows:

Part one,, in judicial auctions, the debtor is not the subject of the auction documents and does not have autonomy of will.

  1. Judicial auction is a compulsory enforcement activity carried out by the court, rather than an auction activity in the general sense. According to the "Notice of the Supreme People's Court on Printing and Issuing the Opinions on Strengthening and Regulating the Work of Online Judicial Auction by the People's Courts" (Law [2015] No. 384), Article 1 stipulates that "All levels of people's courts should attach great importance to the work of online judicial auction. Online judicial auction is a judicial act carried out by the people's courts in accordance with legal provisions to auction litigation assets openly on the internet platform, and is an important part of enforcement work." Furthermore, Article 6 of the "Provisions of the Supreme People's Court on Certain Issues Concerning Online Judicial Auction by the People's Courts" (Judicial Interpretation [2016] No. 18) stipulates that the people's courts shall fulfill the following duties in online judicial auctions:

(1) Prepare and publish auction announcements

(2) Ascertain the current status of the auctioned property, its rights and obligations, and provide explanations accordingly;

(3) Determine the reserved auction price, the amount of deposit, and the tax burden;

(4) Determine the payment methods for the deposit, auction proceeds, and other related matters;

(5) Notify the parties involved and those with preferential purchase rights;

(6) Prepare rulings on the successful auction;

(7) Handle the delivery of the property and issue assistance execution notices for the transfer of property rights certificates;

(8) Establish dedicated accounts for online judicial auctions;

(9) Perform other duties assigned to the people's courts by law.

The rights and obligations of the person subject to execution in judicial auctions are stipulated in Article 15 of Judicial Interpretation [2016] No. 18, which reads: "The person subject to execution shall provide relevant information and explanations on the quality of the auctioned property." The document also stipulates that parties and interested parties may raise objections to any conduct that seriously violates the auction procedures and harms the interests of the parties or bidders, and request the cancellation of online judicial auctions.

According to the above provisions, online judicial auctions are judicial acts and an integral part of the court's execution work. The people's court assumes responsibilities such as preparing and publishing auction announcements, determining reserved prices, etc., akin to the role of the consignor in the Auction Law. The person subject to execution does not have the rights of a consignor and is only responsible for providing property descriptions and raising objections to violations of auction procedures in judicial auctions.

2. The "Bidding Announcement" and "Bidding Instructions" issued prior to the auction are invitations to bid and manifestations of the executing court fulfilling its duties as a consignor.

According to Article 473 of the Civil Code: "An invitation to offer is an expression of willingness to invite others to make offers to oneself. Auction announcements, bidding announcements, prospectuses, bond offering circulars, fund prospectuses, commercial advertisements and promotions, and mailed price lists are invitations to offer. If the content of commercial advertisements and promotions meets the conditions for an offer, it shall constitute an offer." The "Bidding Announcement" and "Bidding Instructions" are invitations issued by the executing court to uncertain market entities to participate in the auction, with the primary purpose of widely informing about the basic situation of the auctioned item. They are informative acts. The parties involved in this issuance include the executing court and all bidders, excluding the person subject to execution. The auction documents are binding on the parties involved.

3. The "Auction Confirmation Letter" is a confirmation act by the executing court and the buyer regarding the transaction details of the auctioned item, which is only binding on the parties involved and has no contractual effect on the person subject to execution.

The parties to the "Auction Confirmation Letter" are the executing court and the buyer, and both parties are bound by the terms and conditions listed in the document. The person subject to execution is not a party to the confirmation letter, and the tax-related clauses listed in the document have no contractual effect on them. They cannot exercise the rights or fulfill the obligations of a party.

In summary, judicial auctions are part of the court's execution work. The executing court controls the auction activities by preparing auction announcements, determining reserved prices, etc. Buyers make representations through participation in the auction and bidding behavior, and both parties have autonomy in the auction activities. However, the person subject to execution is only the owner of the auctioned item, not the consignor of the judicial auction or any other party, and has no right to enjoy the rights and obligations listed in the auction documents.

Part two,Essence of Tax-Related Clauses in the Auction Confirmation is Not Tax Liability but Exemption from Liability in Property Transfer by the Executing Court

As mentioned above, the tax-related clauses in the Auction Confirmation represent an agreement reached between the executing court and the buyer. The clause stating that "all taxes and fees related to the transfer of the auctioned item shall be borne by the buyer, and any inability to complete the transfer due to this shall not be the responsibility of the auctioneer" is intended to reduce unnecessary liability for the executing court. By requiring the buyer to bear the relevant taxes and fees, the court aims to avoid being held liable if the buyer subsequently fails to complete the transfer due to tax issues. This clause is not intended to divide the tax liability between the executed party and the buyer, as detailed below:

1. As a judicial organ, the executing court cannot and will not redraw the lines of tax liability when there are already clear regulations governing the tax burden in judicial auctions. According to Article 30 of the Supreme People's Court's Provisions on Matters Relating to Online Judicial Auctions by People's Courts (Legal Interpretation [2016] No. 18), "Taxes arising from online judicial auctions shall be borne by the corresponding subjects in accordance with relevant laws and administrative regulations. Where there are no regulations or the regulations are unclear, the people's courts may determine the relevant subjects and amounts of tax liability based on legal principles and the actual situation of the case." Taxes arising from judicial auctions are already stipulated in separate laws and regulations such as the Provisional Regulations on Value-Added Tax. All parties need only comply with these legal provisions. How could the executing court, under such clearly defined circumstances, violate the law and arbitrarily redraw the lines of tax liability between the executed party and the buyer?

2. As a civil entity, the executing court has no authority to make civil legal acts on behalf of the executed party, unless it has received legitimate authorization from them. This includes transferring tax obligations to the buyer. Obviously, the executing court would not enter into an Authorization and Delegation Agreement with the executed party, whereby the court accepts the executed party's commission to negotiate with the buyer on its behalf and require the buyer to bear the tax burden of the executed party arising from the auction. Therefore, the tax-related clauses in the Auction Confirmation do not represent the executing court's intention to transfer tax obligations on behalf of the executed party.

In summary, it is clear that the executed party is not a party to the auction transaction and has not authorized the executing court to transfer its tax obligations to the buyer. The tax-related clauses in the auction documents are merely set by the executing court to clarify its responsibilities with the buyer and to require the buyer not to hold it liable for tax-related matters.

04 How does the buyer assume the tax burden of the executant in judicial auctions?

As previously mentioned, the tax burden of the executant in real estate auctions can be transferred, but it requires the agreement of both the executant and the buyer. Otherwise, the relevant auction taxes will still be declared and paid by the executant. However, ultimately, the buyer is the bearer of the tax burden of the executant, which can be seen from the following two aspects:

Part One,from the perspective of tax principles and business common sense, the taxes of the executant originate from the buyer.

Firstly, value-added tax is generally included in the price of goods. This is determined by the principle of value-added tax: value-added tax is levied on each stage of the goods circulation based on the value-added amount and tax rate, and ultimately borne by the consumer. The value-added tax paid by the transferor must come from the payment made by the buyer in the next stage, and ultimately borne by the end consumer in the chain. Urban construction tax and surcharge are calculated based on the actual paid value-added tax, and are also included in the auction payment.

Secondly, land value-added tax is calculated based on the project's value-added amount and is also a part of the auction payment. Apart from verified levies, the calculation method of this tax is relatively complex. The value-added amount is formed by the difference between the price excluding value-added tax and the deductible items. The value-added rate is calculated by dividing the value-added amount by the deductible items, and the tax is calculated according to the excessive progressive tax rate. Compared to other taxes, the tax burden of this tax is relatively heavy, but it is still only a part of the auction payment. Additionally, stamp duty is a small portion of the auction payment, calculated based on the price excluding value-added tax multiplied by the tax rate of 0.05%.

From the perspective of business common sense, the logic of normal commodity transactions is that the price paid by the buyer equals the cost, expenses, taxes, and profits of the seller's goods. Taxes are certainly included in the price, and this logic also applies to judicial auctions. In the case mentioned, when the buyer paid 270 million yuan for the auction, the taxes related to the real estate transfer were already included.

Part two,From the perspective of the tax payment and transfer procedures in this case, it is evident that the tax obligations of the executant were funded by the auction proceeds.

In the given scenario, Company C communicated with the tax authorities in the location of the real estate, first entrusting them to calculate the total taxes and fees owed by the executant. Subsequently, the company also discussed with the court the scheme for tax payment and property transfer, agreeing to pay the auction price in two installments. It was communicated that the second installment of 30 million yuan would be specifically used for the executant to pay the associated taxes. After paying the full auction price, the court and tax authorities collaborated with Company C to complete the transfer formalities. Therefore, it can be seen that the executant's tax payment did not come from any other surplus funds of Company A, but rather from the auction proceeds paid by the buyer to the court. The buyer has already borne the corresponding taxes and fees.

From this perspective, regardless of tax law principles or the collection practices in this case, the taxes paid by the executant originated from the buyer. The executant's insistence on requiring the buyer to bear the taxes and fees again is both illegal and unreasonable, as it would constitute a duplicative burden on the buyer.

05 How to Resolve the Issue of Tax and Fee Responsibility in Judicial Auctions?

In this case, Buyer C successfully completed the tax payment and transfer procedures for the auctioned property through active communication. However, in reality, there are still many disputes involving taxes related to auctioned properties, primarily due to the unique nature of judicial auctions. The economic situation of the executant often deteriorates, and the proceeds from the auction of the property are partially or even entirely transferred to the applicant for enforcement. The executant lacks the financial inflow to bear the tax burden. To ensure the collection of taxes from judicial auctions, some local governments require the payment of taxes as a prerequisite for property transfer.

So, is there a solution to this dilemma? The answer is yes. According to Article 4 of the "Reply of the State Administration of Taxation on Tax Issues Related to the Compulsory Enforcement of the Property of the Executant by the People's Court" (Guo Shui Han [2005] No. 869), "The people's court shall assist the tax authorities in collecting taxes from the income in accordance with the law and on a priority basis." When the judicial authorities, tax authorities, and the buyer communicate and collaborate effectively during the auction payment, tax collection, and transfer procedures, the issues of tax collection and tax burden assumption in judicial auctions can be easily resolved.

However, since the issuance of the document, there have been varying degrees of implementation across different regions. Buyers still face numerous tax risks before and after participating in judicial auction activities. Therefore, it is recommended that they pay attention to the following matters before and after the auction:

Before the auction, buyers should pay attention to the tax-related clauses in the auction documents and request that the party publishing the announcement clarify any clauses stating that the buyer will bear all taxes and fees. If the buyer is required to bear the taxes of the executant, they can file an execution objection based on Fa Shi [2016] No. 18.

After the auction, the buyer should actively communicate with the executing court, contact the court and the tax authorities in charge of the executant regarding how the executant will bear the taxes and how the buyer will proceed with the transfer. They should consult on tax payment and transfer procedures and propose a comprehensive plan for reference.

In summary, judicial auctions involve various legal relationships for buyers, including real estate taxes, transfer procedures, and more. Buyers should be familiar with the local tax collection and administration and transfer policies for real estate. They should also clarify the auction procedures of the executing court and the tax payment procedures of the tax authorities. If necessary, buyers should seek assistance from professional tax lawyers to communicate and formulate plans to maximize the protection of their rights and interests.

Concluding Remarks

This article has analyzed the issue of tax and fee responsibility in judicial auctions. In cases where there is no agreement between the buyer and the executant regarding the transfer of tax liabilities, the executant shall be responsible for paying the taxes and fees associated with the transfer of real estate. However, the source of these taxes and fees is ultimately derived from the auction proceeds paid by the buyer.

In reality, disputes over tax and fee responsibilities in judicial auctions continue to arise, and resolving this issue urgently requires the close cooperation of the people's courts and tax authorities. It is noteworthy that the Jiangxi Provincial High Court and the Jiangxi Provincial Taxation Bureau jointly issued a notice in 2023 titled "Circular of the Jiangxi Provincial High Court and the State Administration of Taxation Jiangxi Provincial Taxation Bureau on Printing and Issuing the Opinions on the Collaboration in Tax Collection and Payment during the Disposal of Real Estate in Civil Enforcement" (Jiangxi High Court [2023] No. 64). This notice requires the establishment of a collaborative mechanism for tax collection and payment during judicial disposal of real estate, as well as a communication mechanism between the enforcement court and the tax authorities for targeted inquiries and estimation of taxable expenses. It also clarifies that the subject of tax responsibility stated in the auction announcement should be consistent with legal provisions, and designs a process for the transfer of ownership and tax collection for auctioned real estate. This undoubtedly reduces the uncertainty in tax collection and payment during judicial auctions and provides a clear path for the collection of taxes on auctioned real estate, which is worthy of reference for other provinces and cities. We also look forward to the decreasing number of disputes over tax and fee responsibilities in judicial auctions and the early resolution of the dilemma in tax collection and payment during judicial enforcement.

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Copyright@2019 Aequity.ALL rights reserved京CP备17073992号-1