Editor's Note: In civil enforcement cases, tax authorities often issue letters to enforcement courts requesting assistance in withholding taxes for the transfer registration of auctioned real estate. Once the enforcement court approves the tax authority's request, using the auction proceeds to pay the tax authority will directly affect the creditor's interest in obtaining repayment. This phenomenon also widely exists in enforcement cases where the creditor is a mortgagee. Many mortgagees are deeply confused by the huge discrepancy between the priority of mortgage rights recognized by the Tax Collection and Administration Law and the actual situation, and they often have no way to seek redress or obtain relief. Taking a case as the starting point, this article focuses on analyzing that the tax authority's act of sending a letter requesting assistance in withholding taxes and the court's act of cooperating in withholding taxes lack legal basis, and sorts out and analyzes different legal remedies for creditors, aiming to provide practical references for resolving such disputes and safeguarding creditors' rights and interests.

 

01 Case Introduction

In the creditor-debt dispute between Company A and Company B, Company B provided mortgage guarantee for the subject loan with a parcel of land under its name. Later, due to its failure to repay the debt on schedule, Company A filed a lawsuit. After trial, the court legally confirmed the existence of the creditor-debt relationship between the two parties and rendered a judgment ordering Company B to repay RMB 700 million to Company A. As Company B failed to perform the obligations specified in the effective judgment, Company A applied to the court for enforcement, and the court subsequently initiated the auction procedure for the mortgaged property. Finally, a real estate company won the bid for the subject property at the highest price of RMB 800 million, and paid the full auction proceeds into the account designated by the court in accordance with the auction requirements, thus concluding the auction procedure legally.

The auction announcement had clearly specified the rules for bearing transaction taxes and fees: the buyer shall handle the transfer registration procedures of the subject matter on its own; taxes and fees incurred during the transaction shall be borne by the corresponding entities in accordance with the provisions of national laws and administrative regulations; if there are no provisions or the provisions are unclear, the buyer shall bear such taxes and fees.

After the conclusion of the auction procedure, the local competent tax authority sent a Letter Requesting Assistance in Withholding Taxes to the enforcement court regarding the transaction taxes and fees of the subject land, requiring the court to assist in withholding the relevant taxes that Company B, as the statutory taxpayer, should pay from the auction proceeds. The enforcement court served this letter to Company A to inform it of the matter. Company A did not recognize the tax authority's request for prior withholding of taxes and submitted a written objection to the enforcement court, arguing that the auction announcement clearly stipulated that the taxes and fees for the land transfer should be borne by Company B in accordance with the law, and that Company A's mortgage right had priority over the transfer taxes and fees. However, the enforcement court did not accept Company A's opinion and issued an Enforcement Ruling, deciding that from the RMB 800 million proceeds from the auction of the land use right in this case, over RMB 300 million should first be used to pay taxes and fees in cooperation with the tax authority, and RMB 1 million should be deducted as relevant enforcement fees; the remaining RMB 500 million should be paid to Company A as repayment.

With regard to the tax authority's issuance of the Letter Requesting Assistance in Withholding Taxes and the court's act of giving priority to withholding over RMB 300 million in taxes and fees in the distribution plan, Company A believed that this damaged the legitimate interest of its creditor's right to obtain repayment. Then, do the tax authority's act of issuing the letter requesting assistance in withholding taxes and the enforcement court's act of cooperating in withholding taxes comply with legal provisions and enforcement distribution rules? The following will analyze around this controversial focus.

02 The Tax Authority's Issuance of the "Letter Requesting Assistance in Withholding Taxes" to the Court Lacks Legality and Reasonableness

In civil enforcement cases, tax authorities often send letters to enforcement courts requesting assistance in withholding taxes for the transfer registration of auctioned real estate. The reason for this can be traced back to the Reply of the State Taxation Administration on Tax Issues Concerning the People's Court's Enforcement of the Property of the Person Subject to Enforcement (Guoshuihan 〔2005〕 No. 869). At that time, the background for the issuance of this reply was that the Supreme People's Court raised the question of "whether the tax department can directly collect business tax from the people's court after the people's court legally enforces the auction or sale of the property of the person subject to enforcement". The State Taxation Administration made a correct reply that "the enforcement activities of the people's court are judicial activities, which are not of an operational nature and do not belong to taxable acts, so the tax department cannot levy taxes on the enforcement activities of the people's court". However, an additional Article 4 was added at the end of the reply, which states: "In view of the fact that the people's court actually controls the income obtained by the taxpayer from the auction or sale of property due to enforcement activities, the people's court shall assist the tax authority in collecting taxes with priority from such income in accordance with the provisions of Article 5 of the Tax Collection and Administration Law of the People's Republic of China." This provision has since become the fundamental basis for tax authorities to send letters requesting assistance in withholding taxes.

However, although this provision provides a formal basis for tax authorities, its legality and validity have significant flaws from a legal perspective. In terms of the content of the provision, it attempts to directly define the rights and responsibilities between tax authorities and courts, clarifying that tax authorities have the right to request assistance and courts have the obligation to cooperate in tax collection. But this setting obviously exceeds the boundary of legal authority.

First, from the perspective of legal hierarchy, Document Guoshuihan 〔2005〕 No. 869 is a tax regulatory document formulated by the State Taxation Administration. The judicial powers and legal obligations of the people's courts are clearly granted and restricted by the legal system such as the Constitution, Organic Law of the People's Courts and Civil Procedure Law. As an administrative document with a low level of effectiveness, tax regulatory documents have no right to break through the legal framework and impose a mandatory obligation of assisting in withholding taxes on the national court system. This provision essentially expands administrative powers and adds judicial obligations in a disguised form through administrative regulatory documents, which obviously exceeds the statutory authority scope of tax regulatory documents and is a typical ultra vires provision.

In addition to the legality issue, from the perspective of the rationality of tax collection logic, the argumentation logic used by tax authorities to claim withholding based on this provision also has obvious errors. Tax authorities directly equate "such income" in the provision with the auction or sale income generated from the enforcement of the people's court, and thus deduce that since the income is dominated and controlled by the court, the court needs to assist in withholding. However, this premise completely violates the core logic of tax collection. The essence of tax collection is that taxpayers bear liability for tax obligations with all their property, rather than limiting the source of taxable income to a single economic activity or a specific sum of income. For example, if an enterprise has three transactions in the same period, resulting in a loss, a profit and a balance of income and expenditure respectively, the tax authority will not levy taxes only on the income corresponding to the profitable transaction, but will calculate the current taxable amount based on the enterprise's overall operating status. This exactly shows that taxpayers do not need to bind their performance of tax obligations to specific income that generates taxes; the basis for their liability lies in their overall property and all business activities.

Furthermore, although the court actually controls the subject auction proceeds, it does not control other properties and income of the person subject to enforcement. According to the Tax Collection and Administration Law, tax authorities themselves have statutory compulsory tax collection powers. They can realize tax collection by seizing or detaining the non-enforcement subject property of the person subject to enforcement, ordering it to declare taxes within a time limit, and taking tax preservation or enforcement measures. They do not have to rely on the subject enforcement auction proceeds. It can be seen that the tax authority's forced restriction of the collection source of transaction taxes and fees for enforcement property to the enforcement auction proceeds is essentially an improper narrowing and artificial limitation of the scope of taxable income, which not only violates the tax collection logic but also lacks the support of clear legal basis. In conclusion, the tax authority's act of sending the Letter Requesting Assistance in Withholding Taxes not only has a legal flaw in the provision on which it is based, but also its argumentation logic and the act itself do not conform to the basic rules of tax collection and lack legitimacy.

03 The Court's Act of Cooperating with the Tax Authority in Withholding Taxes from Enforcement Proceeds is Obviously Improper

Next, we will further analyze the court's act of cooperating with the tax authority in withholding taxes from enforcement proceeds.

First of all, it should be clear that the court has no legal obligation to cooperate in such tax withholding, let alone the statutory right to withhold taxes on its own initiative. As discussed earlier, the judicial obligations of the court are statutory. Tax regulatory documents have no right to add judicial obligations to the court, so they cannot be the basis for the court to cooperate in withholding. The Letter Requesting Assistance in Withholding Taxes sent by the tax authority is essentially a work assistance request put forward by the administrative organ to promote tax collection, not a judicial document or administrative decision with binding force. The court has the discretion to such requests and no obligation to obey them.

From the perspective of the statutory rules for the distribution of enforcement proceeds, the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China and the Provisions of the Supreme People's Court on Several Issues Concerning the Execution Work of the People's Court clearly stipulate the order and scope of the distribution of enforcement proceeds, among which there is no clear provision on giving priority to withholding auction transaction taxes and fees. If the court withholds taxes on its own initiative, it is actually creating distribution rules beyond its statutory authority and lacks a legal basis for the right.

From the perspective of practical logic, the court's act of cooperating in withholding is neither necessary nor will it damage the creditor's rights and interests. According to the Tax Collection and Administration Law, tax authorities themselves have complete compulsory tax collection powers and do not need to rely on the auction proceeds controlled by the enforcement court to collect taxes. If the court forcibly withholds taxes and fees from the enforcement proceeds, it will not only disrupt the enforcement distribution order (for example, in this case, it directly reduces the amount of repayment received by Company A, the mortgage creditor, from RMB 700 million to RMB 500 million), but also weaken the guarantee function of civil enforcement for creditor's rights and reduce the enthusiasm of creditors to realize their rights and interests through judicial procedures.

The ruling rules of similar cases also clearly stipulate that the court should not be involved in tax withholding. In the case (2024) Liao Zhixingfu No. 352, regarding the claim of the person subject to enforcement that "the payable taxes and fees should be deducted from the enforcement proceeds obtained from the auction of the subject real estate", the Liaoning Higher People's Court clearly refused to review it, stating that: "The auction confirmation ruling made by the people's court in the execution process has the effect of real right confirmation. The buyer obtains the ownership of the auctioned house from the date when the auction confirmation enforcement ruling is served on all parties. The auction proceeds shall be distributed to the applicant for execution as the enforcement proceeds of the person subject to enforcement. The auction announcement clearly states that the taxes and fees incurred after the auction is concluded shall be borne in accordance with legal provisions. The applicant for reconsideration's claim that the payable taxes and fees should be deducted from the enforcement proceeds obtained from the auction of the subject real estate lacks legal basis. Moreover, tax collection is the administrative function of the tax authority. The tax authority's decision on which tax payment link, which sum of money and which taxpayer to issue a tax notice belongs to the scope of the administrative authority's functions. The objection raised by the applicant for reconsideration is an objection to the tax authority's administrative tax collection act, and it is not improper for the Shenyang Intermediate People's Court to refuse to review it in the objection ruling."

Finally, returning to this case, the court's act of cooperating with the tax authority in giving priority to withholding taxes and fees, on the one hand, fails to correctly distinguish the boundary between judicial enforcement and administrative tax collection powers, and on the other hand, fails to follow the distribution rules of civil enforcement. In essence, it is an improper exercise of judicial power. Its act not only lacks legal basis but also damages the legitimate rights and interests of creditors, which is obviously improper.

04 What Should Creditors Do When the Court Gives Priority to Withholding Taxes and Fees?

In cases where the tax authority sends a letter requesting assistance in withholding taxes and the court cooperates in withholding taxes, which damages the creditor's interest in obtaining repayment, we have observed in practice that most creditors will attempt various legal remedies to prevent the court from withholding and recover the interest in obtaining repayment. However, from the actual effect, most of these remedies have limited effects; some cannot be initiated at all due to procedural obstacles, and some are difficult to achieve the expected goals even if initiated. The following is an analysis of common remedies in practice:

1. Filing an Administrative Reconsideration or Administrative Lawsuit Against the Tax Authority's Assistance Letter

In practice, it is almost impossible to succeed in filing an administrative reconsideration or administrative lawsuit against the tax authority's Letter Requesting Assistance in Withholding Taxes. The core obstacle lies in the legal nature of the letter. In essence, this letter is not a "reviewable specific administrative act" that directly affects the rights and obligations of creditors or the person subject to enforcement, but a communication letter for requesting assistance sent by the tax authority to the enforcement court to promote tax collection. Based on this, the reconsideration organ or the court usually rejects the creditor's reconsideration application or lawsuit on the grounds that "it does not fall within the scope of administrative reconsideration cases" or "it does not meet the conditions for accepting an administrative lawsuit". This remedy is time-consuming and labor-intensive, has no practical effect, and lacks practical operability.

2. Action Against Execution Objection

According to the relevant provisions of the Civil Procedure Law and related judicial interpretations, in the execution procedure, if a third party raises a written objection to the subject matter of execution and the enforcement court determines that the grounds for the objection are valid after review, it shall issue a ruling to suspend the execution. Only in this case can the applicant for execution file an action against execution objection with the enforcement court and take the third party as the defendant.

Since the tax authority's way of putting forward the claim of priority repayment of taxes to the enforcement court is not by filing a written objection as a third party, but by means of an inter-agency communication letter for assistance, it naturally cannot meet the conditions for the applicant for execution to file an action against execution objection with the tax authority as the defendant. Therefore, if the creditor files an action against execution objection with the enforcement court with the tax authority as the defendant, the enforcement court will not support the filing of the case. This method is not feasible.

3. Action Against the Enforcement Distribution Plan

According to the relevant provisions of the Civil Procedure Law and related judicial interpretations, if multiple creditors participate in the distribution of the enforcement property together, the enforcement court shall formulate an enforcement property distribution plan and serve it on each creditor. At this time, the creditor may raise a written objection to the distribution plan, and the enforcement court shall then notify other creditors. If other creditors raise objections, the creditor who raised the objection may file an action against the enforcement distribution plan with the enforcement court, and the defendant in this lawsuit shall be the creditor who raised the objection.

Similar to the action against execution objection, even if the creditor attempts to file an action against the enforcement distribution plan, it will fall into a procedural dilemma due to the tax authority's disqualification as a proper subject. The tax authority is not a "civil creditor" who raised an objection, so it cannot become a proper defendant in such a lawsuit. Therefore, this method is also not feasible.

The core contradiction in the fact that neither of the two types of objection lawsuits is feasible is that the tax authority obtains interests directly related to the creditor's repayment by withholding the enforcement proceeds through the court, but does not need to accept the review and supervision of such lawsuits like civil creditors. In the end, the creditor finds it difficult to claim rights due to the tax authority's disqualification as a proper defendant, resulting in the lack of practical feasibility of this remedy.

4. Enforcement Supervision and Procuratorial Supervision

In contrast, the hierarchical procedure of "objection to execution act—execution reconsideration—execution supervision—procuratorial supervision" is the most feasible remedy for creditors in current practice, which requires strictly following the statutory procedures and time limits. Specifically, in accordance with the provisions of Article 236 of the Civil Procedure Law, after learning that the court has formulated an enforcement property distribution plan and decided to give priority to withholding taxes and fees, the creditor may promptly file a written objection to the execution act with the court responsible for enforcement and specify the grounds for the objection. The enforcement court shall review the objection within 15 days from the date of receiving it; if the grounds are valid, it shall issue a ruling to revoke or correct the act; if the grounds are invalid, it shall issue a ruling to reject the objection. If the creditor is dissatisfied with the objection ruling, it shall apply to the people's court at the next higher level for reconsideration within 10 days from the date of service of the ruling. According to the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Execution Procedure of the Civil Procedure Law of the People's Republic of China, the people's court at the next higher level shall complete the review and issue a ruling within 30 days from the date of receiving the reconsideration application. If an extension is needed due to special circumstances, it may be extended with the approval of the president of the court, and the extended period shall not exceed 30 days.

If the creditor is still dissatisfied with the reconsideration ruling, it may apply to the people's court at the next higher level for execution supervision within six months after the execution reconsideration ruling becomes legally effective. According to the relevant provisions of the Opinions of the Supreme People's Court on Several Issues Concerning the Handling of Applications for Execution Supervision Cases, the people's court shall generally issue an execution ruling when reviewing an execution supervision case; however, if it does not support the claim in the petition, it may issue a notice of rejection according to the specific circumstances of the case. If the creditor is still dissatisfied with the result of the execution supervision, it may also apply to the people's procuratorate at the same level as the enforcement court for procuratorial supervision. According to the Rules of the People's Procuratorates on Civil Litigation Supervision and the Provisions on Several Issues Concerning the Legal Supervision of Civil Execution Activities, the creditor shall first submit a supervision application, identity certificate, relevant legal documents and evidence materials to the complaint and petition department of the procuratorate. After the complaint and petition department reviews and files the case, it shall transfer the case to the civil procuratorial department for handling within three days. If the creditor believes that the execution act is illegal and applies to the procuratorate for supervision, it shall submit the application within two years from the date of knowing or should have known that the execution act is illegal.

In addition, when promoting the remedy procedure, the creditor may simultaneously put forward a request for reviewing the legality of regulatory documents. Since Article 4 of Document Guoshuihan 〔2005〕 No. 869, which is the core basis for the tax authority's withholding, is an ultra vires provision and has significant flaws in legality and validity, the creditor may, in accordance with Article 42 of the Measures for the Formulation and Administration of Tax Regulatory Documents (which stipulates that "if a tax administrative counterpart believes that a tax regulatory document violates laws, regulations, rules or the provisions of higher-level tax regulatory documents, it may submit a written request for review to the formulating organ or its superior tax authority, and the formulating organ or its superior tax authority shall study and handle it in accordance with the law in a timely manner"), submit a written request for review to the formulating organ of this document or its superior organ, requesting a review of the legality of this provision.

At the same time, the creditor shall actively communicate with the enforcement court and strive to suspend the payment of the auction proceeds to the tax authority. Once the payment is made, it will be difficult for the mortgage creditor to recover the interest in obtaining repayment; this measure can gain crucial time and space for the current round of remedies. It is recommended to engage professional legal forces when necessary to safeguard the interest of the creditor in obtaining repayment through legal argumentation and promote the standardized resolution of such disputes.