In order to cope with the shortage of cash flow to postpone the fulfillment of debts, or to successfully raise funds, real estate development enterprises may choose to use the commercial properties they have developed to enter into a sale and purchase contract with creditors, and adopt the method of granting guarantees to guarantee the fulfillment of debts. Although the transfer guarantee is not intended to be a transfer of real estate, if a change in property ownership occurs during the transfer guarantee process, there is a risk that the tax authorities will recognize it as a transfer of real estate and levy a land value-added tax (LVAT) on it.

I. Case introduction

(I) Basic facts

Mingrui Company is a real estate development enterprise, in order to develop and construct the project in question, it had borrowed 100 million yuan from the natural persons Luo Moumou and Wang Moumou.

On January 3, 2015, Mingrui Company and Luo Moumou, Wang Moumou signed a "letter of agreement", in order to guarantee the realization of the creditor's principal and interest, Mingrui Company to its development but not yet sold 352 sets of residential for the price of the top money, and at the same time agreed that all the top of the property's ownership in the agreement before the effective date of the full return to Mingrui Company. At the request of the creditor, Mingrui signed the "Contract for the Sale and Purchase of Commodity Properties (Pre-sale)" for the 352 houses with a third party, Jinxinyuan Company, the "Agreement on Pre-registration of Pre-purchased Commodity Properties", and filled in the "Application for Approval of Pre-registration Form". After Mingrui Company sold some of the commercial properties to the actual purchasers, the sales proceeds were paid by Mingrui Company to the creditors for the return of principal and interest. JINXINYUAN then returned the pre-registration contract and the relevant pre-registration approval form and other information to MINGRUI, and MINGRUI then went through the procedures for the sale and purchase of commercial properties with the actual purchasers. Mingrui Company returned more than 70 million yuan in arrears in this manner.

Due to factors outside the case, on March 27, 2019, the Tax Inspection Bureau commenced a tax inspection of Mingrui Company. on October 30, 2019, the Inspection Bureau issued a Decision on Tax Treatment and a Decision on Tax Administrative Penalty, which determined that Mingrui Company's act of offsetting the debt through 352 houses constituted a real estate transfer, and decided to recover the unpaid land value-added tax and other taxes and fees payable in the amount of more than RMB 41 million, and imposed a penalty on the Mingrui was fined double the amount of tax underpaid. Mingrui refused to accept the decision of tax administrative penalty and filed an administrative litigation with a district people's court.

(II) Focus of Dispute

Whether the nature of the offsetting agreement signed between Mingrui and the creditor constituted a transfer of real estate, and whether it gave rise to land value-added tax obligations?

(III) Opinions of the Parties

The Audit Bureau held that: Mingrui Company had eliminated its own debts by entering into the Offset Agreement and the Contract for Sale of Commodity Housing with its creditors and registering the advance notice in the real estate registration department, which constituted a transfer of real estate and should be regarded as a sale for the purpose of calculating tax in the tax determination. After signing the Contract of Sale of Commodity Housing and registering the advance notice, Mingrui Company and the creditor gave the house payment to the creditor and the creditor returned the house, which only constituted a partial change of the content of the previous offsetting agreement and did not affect the nature of the entire offsetting agreement.

Mingrui argued that the unsold commercial properties were still in Mingrui's name, and the agreement stipulated that the ownership of all the offset properties belonged to Mingrui before the agreement came into effect. Mingrui company with the development of commercial property and the creditor to enter into a sales agreement, only to guarantee the realization of the creditor's claim, belong to the transfer of security, not against the sale of behavior.

The court held that: if an administrative act has a stake in the personal and property rights of the administrative relative, in the case of Mingrui Company's statement and defense and the provision of corresponding evidence, the Inspection Bureau should make an accurate judgment on the legal relationship corresponding to the administrative act when making the administrative act, in order to determine the plaintiff's income and the tax node. However, the Inspection Bureau found that it was unclear whether the offsetting behavior between Mingrui and the creditor resulted in the extinction of Mingrui's debt and the change of the right status of the house. Since the Inspection Bureau's unclear determination of the nature of the offsetting behavior led to its unclear determination of the facts in the above taxes, the Inspection Bureau determined that the underpayment of tax and the tax payable by Mingrui Company (involving the portion of the house offsetting) also belonged to the insufficiency of evidence, and it should find out the nature and effectiveness of the agreement to offset the debt with the house involved in the case.

(IV) Judgment results

The court ruled to revoke the Decision on Tax Administrative Penalty made by the Tax Inspection Bureau and ordered it to re-examine the facts of the case and make a corresponding decision.

II. Three Typical Forms of Offsetting Debt by Houses and Their Tax Consequences

The operation between real estate enterprises and creditors through housing against debt is mainly manifested in the following three forms:

First, the real estate enterprise will use the developed commodity houses as the guarantee for the debt, and the purchase money obtained from the external sale of the designated commodity houses will be used to repay the debt, i.e., the cession guarantee;

The second is that the housing development enterprise and the creditor enter into a contract for the purchase and sale of commodity houses, and the developed commodity houses are sold to the creditor at a price, forming a claim against the creditor, and then the original debt relationship is eliminated by way of offset, i.e., the house is used to offset the debt;

Thirdly, the real estate development enterprise invests the developed commercial properties to its subsidiaries at a price, and then sells the equity of the subsidiaries to the creditors at a price to achieve the purpose of offsetting the original credit and debt relationship.

In the above three ways, real estate development enterprises as debtors and creditors construct different legal relationship appearance, which will produce different tax consequences.

In the first form, the real estate development enterprise pays tax according to the normal sale of real estate, and does not generate other tax burdens in the repayment of debt with real estate.

In the second form, the real estate development enterprise will develop the commercial property for debt repayment, when the property ownership changes, it should be treated as the sale of real estate to determine the income and pay taxes.

In the third case, not only the real estate development enterprise will be developed by the commercial real estate to subsidiaries for investment need to be treated as a sale of tax, and then its subsidiary's equity to offset the debt, should also be treated as the sale of equity to pay the tax, the tax burden is heavier.

Therefore, as long as the change of property ownership, the tax authorities are very easy to determine that the act of offsetting constitutes the transfer of real estate, and levy taxes on the act. In addition to considering the cash flow of the enterprise, taxpayers should also consider the issue of tax burden.

III. Potential Tax-Related Risks of Home Letting Guarantees

As mentioned above, if a housing enterprise offsets a debt through a house and the ownership of the relevant property has not been transferred, it does not need to bear tax obligations. However, housing enterprises and creditors to enter into an agreement to offset, to commodity house sale contract to guarantee the fulfillment of the debt, is still facing greater tax-related risks.

(I) The agreement is recognized as a house against the debt will produce a number of tax obligations

The specific content of the roofing agreement is to "house" against the debt or "house" against the debt, will have a significant impact on the nature of the agreement. The fact that the "house" against the debt still only involves cash flow issues, and the repayment of the debt in cash does not give rise to a tax burden. However, real estate enterprises and creditors to guarantee the realization of the claim, enter into a separate contract for the purchase and sale of commercial property, and even with a preview of the registration and other publicity, it is very easy to be recognized as a house against the debt. Although according to "the supreme people's court on the revision of < on the trial of private lending cases on the application of law on a number of issues of the provisions of the decision" (law release [2020] no. 6) article 18, the parties to enter into a contract for the sale of private lending contract as a guarantee, after the expiration of the loan borrower can not repay, the lender request to fulfill the contract for the sale of the civil law is recognized as a legal relationship between the borrowing and lending, but the signing of the contract and the record However, if the property is "sold" in the form of signing and filing a contract, according to the current tax law, it may be regarded as an actual sale, and should pay value-added tax, enterprise income tax (or personal income tax), land value-added tax, stamp duty and other taxes. The creditor, as the party that assumes ownership of the house, is also required to pay deed tax and stamp duty.

China's tax law gives certain tax benefits to bankrupt enterprises, especially those that are expected to be reorganized, such as taxpayers who, in the process of asset reorganization, transfer all or part of their physical assets, as well as their associated claims, liabilities and labor force to other units and individuals through merger, separation, sale or replacement, in which the transfer of property is involved, no value-added tax will be levied. Creditors are exempted from the levy of deed tax if they bear the property of an insolvent enterprise in satisfaction of its debts.

However, for the normal operation of the enterprise, the house against the debt should be recognized as income and pay the tax according to the law when the ownership of the real estate has been changed or when the relevant subject actually obtains the right to benefit from it. Moreover, if the ownership of real estate has been changed, even if the civil law that the contract for the purchase and sale of commercial real estate is invalid, or the parties to terminate the contract, does not ipso facto prevent the occurrence of the aforementioned tax obligations.

(II) All unsold properties as security for alienation may give rise to the settlement of land tax

In the process of project development and construction, a real estate enterprise may be recognized as "transferring the whole uncompleted real estate development project" and meet the mandatory liquidation conditions as stipulated in Article 9 of the "Land Value-added Tax Liquidation and Management Procedures" by using the unsold commercial properties developed by the real estate enterprise as collateral, especially if the relevant properties have been changed in the form of ownership. The conditions for liquidation as stipulated in Article 9 of the "Regulations on the Administration of Land Value-added Tax Settlement" may be met, thus giving rise to the risk of land value-added tax settlement.

(III) Enterprises failing to pay or underpaying taxes may be subject to tax recovery, late payment fees and penalties

As mentioned above, there is a difference in understanding between taxpayers and enterprises as to whether an offsetting agreement constitutes a debt in lieu of a house. Taxpayers who believe that their offsetting behavior constitutes a transfer and guarantee, rather than a debt for housing, and should not be subject to the corresponding tax obligations, and thus fail to pay or underpay the corresponding taxes, may be recognized as tax evasion. Then, the tax authorities will not only recover the taxes and late payment fees arising from the offsetting behavior indefinitely, but also impose a fine of more than 50% of the unpaid or underpaid taxes and less than five times the amount, and if it constitutes a crime, it will be held criminally liable.

IV.Summary

When solving cash flow problems, real estate enterprises should consider the tax burden and reasonably choose security methods. In particular, they should avoid formally transferring the property to the creditor before the expiration of the debt fulfillment period, or else they may be recognized as using the property to offset the debt and be subject to land value-added tax and other tax obligations. If the tax authorities intend to recognize the property as a loan against debt for the purpose of recovering taxes and late payment fees, the taxpayer should actively seize the opportunity to communicate with the tax authorities and fully explain the reasons why the relevant agreement does not constitute a loan against debt according to the principle of substantive taxation. If the tax authorities fail to prove whether the offsetting behavior between the parties leads to the extinction of the debt of the enterprise and the change of the right status of the house, the taxpayer shall safeguard his legal rights and interests through administrative reconsideration and administrative litigation.