Article 50 of the Tax Administration Law stipulates that the tax authorities may, under certain circumstances, exercise the subrogation right in accordance with the relevant provisions in the civil field for the recovery of taxes. Tax subrogation system is a private law concept in the field of tax law, its application in addition to follow the general provisions of civil law, but also need to consider the special circumstances of the field of tax law. This article starts with a case of tax assumption and tax payment of tax charter agreement to analyze the dispute and application of tax subrogation right in practice.

I. Conditions for the exercise of tax subrogation rights

For taxpayers who fail to pay the tax by the specified deadline, the Tax Administration Law stipulates that the tax authorities may take enforcement measures in accordance with the law to ensure that the full amount of national tax is deposited into the treasury, including written notification to the bank of account or other financial institutions to withhold the tax from their deposits; to seize, attach, auction or sell commodities, goods or other properties with a value equal to the amount of tax due, and offset the proceeds of the auction or sale against the tax. The proceeds from the auction or sale shall be used to offset the tax. In addition, Article 50 of the Tax Administration Law gives the tax authorities the right to exercise the subrogation right in accordance with the relevant provisions in the civil field under certain circumstances: "If a taxpayer who owes tax is negligent in exercising its due claims, or abandons its due claims, or transfers its property without compensation, or transfers its property at an obviously unreasonably low price and the transferee is aware of the situation, which causes damage to the state tax, the tax authorities may, in accordance with the provisions of the contract, impose a subrogation right on the taxpayer. If the damage is caused to the state tax, the tax authority may exercise the right of subrogation and right of avoidance in accordance with the provisions of Articles 73 and 74 of the Contract Law". According to this article, the tax authorities need to fulfill the following four conditions to exercise the subrogation right to recover the tax:

(I) Taxpayers should pay but have not paid tax

If a taxpayer fails to fulfill its tax obligations after the expiration of the legal tax payment period or the tax payment period approved by the tax authorities, the taxpayer is considered to be in arrears of tax payment.

(II) Taxpayer's negligence in exercising due claims

The taxpayer's claim for which the tax authority exercises the right of tax subrogation must have expired, and the taxpayer does not claim the matured claim with the content of pecuniary payment to the debtor by way of litigation or arbitration.

(III) State tax revenue is thereby jeopardized

The taxpayer's negligence in exercising its due claims affects the fulfillment of its tax obligations, resulting in damage to the state tax revenue.

(IV) The taxpayer's due claims do not have personal exclusivity.

The tax authorities cannot subrogate the rights belonging to the taxpayers, including the right to payment based on the relationship of fostering, supporting, alimony and inheritance, and the right to labor remuneration, pension, old-age pension, pension, resettlement fee, life insurance, personal injury compensation, and so on.

II. Common disputes over tax subrogation rights from one case to the next

(I) Basic facts of the case

On October 27, 2013, Chen and Company A entered into the Land Transfer Agreement, agreeing that Chen would transfer two pieces of land to Company A at a transfer price of RMB 14,620,000.On December 20, 2013, when applying for a land transfer from the Land Bureau, Chen and Company A agreed in the Application for Transfer of Land Use Right that the taxes and fees for the land transfer would be paid by Company A, and at the same time, confirmed that the application was a Supplementary Provisions to the Land Transfer Agreement.On March 15, 2016, Company A obtained the Certificate of State-owned Land Use Right.

In the process of transferring the above two land use rights, Chen incurred tax obligations but never paid the tax. After filing a case, investigation and other procedures, the local inspection bureau issued a Treatment Decision Letter to Chen on April 17, 2017, requiring Chen to make up for the underpayment of taxes and fees for the transfer of the two pieces of land totaling more than RMB6,350,000, plus late payment fees. Chen failed to settle the tax and late payment fee within the period specified in the Treatment Decision Letter.On May 28, 2017, the Inspection Bureau issued an Administrative Penalty Decision to Chen, imposing a fine of more than RMB1.31 million, which has not been paid by Chen. The abovementioned Treatment Decision and Administrative Penalty Decision have both become effective.

Due to the dispute over the transfer price of the land use right in question and the assumption of taxes and fees, Chen and Company A engaged in litigation, and in January 2018, the fifth item of the effective judgment of the Court of Final Appeal determined that "the taxes and fees arising from the registration of the transfer of the land use right shall be borne by Company A". Chen applied to the People's Court for compulsory execution on June 15, 2018, and in his application for compulsory execution, he only applied for compulsory execution of the remaining balance of the land transfer and interest and compensation, and did not apply for compulsory execution of the fifth item of the judgment relating to the assumption of taxes and fees.

On April 15, 2019, the Inspection Bureau issued a Reminder Notice to Chen to make a reminder, and Chen still failed to settle the tax.On October 10, 2019, the Inspection Bureau filed a subrogation claim against Company A. The Court of First Instance upheld the subrogation claim. The court of first instance upheld the Audit Bureau's claim, Company A appealed against it, and the court of second instance upheld the judgment.

(II) Common disputes on the exercise of tax subrogation rights

Company A: Chen was aware of the agreement to pay the tax by Company A when he signed the Application for Transfer of Land Use Right with Company A on December 20, 2011. In view of the legal status of the tax subject, Company A had no way to know the specific amount of tax payable and was unable to pay the tax in its own name.In 2017, the Inspection Bureau made the Processing Decision and Penalty Decision to Chen, and after receiving the aforesaid instruments, Chen had already known that he should pay the tax in accordance with the relevant provisions and also knew that the tax payable would be paid by Company A in accordance with the agreement, but Chen had never notified Company A to pay the corresponding tax to the tax authority on behalf of Chen, and was negligent in claiming for the payment of tax to the tax authority. However, Mr. Chen never notified Company A to pay the corresponding tax to the tax authority on his behalf, and was negligent in asserting his claim, which has apparently exceeded the two-year statute of limitations. Although the statutory limitation for the recovery of tax is three years, this is the limitation period for the inspection bureau to recover the tax from the statutory taxpayer Chen, Chen is based on the right of claim to Company A, and the two-year statute of limitations of the Civil Procedure Law should be applied. According to the supreme people's court "on the application of the contract law of the people's republic of china" a number of issues of interpretation (a)" (author's note: then effective), in the subrogation lawsuit, the sub-debtor to the debtor's defense, can be claimed to the creditor. Therefore, company A as a sub-debtor in this case can be more than the statute of limitations to defend the subrogation of the tax authorities.

Inspectorate of Taxation Bureau: The request of the Inspectorate in this case did not exceed the statute of limitations. Company A and Chen Mou since 2013 signed the "land use right transfer application", agreed by company A to bear the tax, but how to pay the tax of the two sides did not actually agree, Chen Mou that both have the above agreement, the land transaction involved in the tax should be paid by company A, and company A did not recognize, the two sides on the transfer of land use right and tax has been disputes, rights and obligations were in a state of uncertainty, and it was also uncertain whether Chen was truly entitled to the claim that Company A paid the tax on his behalf; therefore, in the process of the Inspection Bureau making a series of administrative acts of paying late fees and fines to Chen, Chen informed the Inspection Bureau that the tax and fees due to Chen were being confirmed through litigation, which was also the reason why Chen had failed to pay the tax in full to the tax authorities.The final judgment of January 5, 2018 confirmed that "The taxes and fees arising from the registration of the transfer of land use rights shall be borne by Company A". It was only at this point that the tax in question was finally determined to be borne by Company A. Therefore, the earliest point in time at which the Audit Bureau could confirm the fact that Chen had a valid and due claim on Jinjia was the final judgment of January 5, 2018, so that Chen could rely on this effective judgment to apply for enforcement against Company A in accordance with the law, requiring Company A to pay the tax and the resulting late payment fees and penalties. After the judgment came into effect, Chen applied to the court for compulsory execution, in its application for compulsory execution, only the land transfer residual transfer and interest, compensation for the application for compulsory execution, did not apply for compulsory execution of the tax content of the fifth judgment, its negligence to recover the above taxes and fees from Company A through legal means, will result in the fact that the state tax can not be paid in time and in full into the treasury of the factual side of the formation of the Audit Bureau is on October 2019 10, 2019, the Audit Bureau filed the subrogation claim in this case, and even if the calculation starts from January 5, 2018, it has not yet completed two years, so the prosecution of the Audit Bureau has not exceeded the statute of limitations.

Court of First Instance: since Chen and Company A had a dispute over the transfer of the land use right in question and filed a lawsuit to resolve it, the fact that the Audit Bureau was able to confirm the fact that Chen had a valid and matured claim against Company A was confirmed after the judgment issued by the court in the final hearing of January 5, 2018 according to the law. Therefore, the Audit Bureau's lawsuit in this case did not exceed the statute of limitations. After the Court rendered its judgment on January 5, 2018, the statute of limitations for Chen's claim for Company A's right to pay the tax on behalf of Company A should also start to run from then on, and it had not yet expired for two years by the time the Inspection Bureau filed the subrogation claim in this case on October 10, 2019, which was not yet two years old, and had not exceeded the statute of limitations either. The court of second instance upheld this.

First, is the period for exercising the right of tax subrogation the same as the limitation period for the debtor's claim?

As mentioned before, the tax subrogation right stipulated in the Tax Administration Law applies in accordance with the relevant provisions of the Civil Code, and the tax authority as a creditor subrogated to exercise the debtor's claim should be carried out within the period of limitation of the claim, i.e., the period of exercising the subrogation right of tax is the same as the period of limitation of the claim. In the legal relationship of this case, the taxpayer Chen Mou and Company A based on the tax package terms of the tax dispute for the tax authorities belongs to the "unresolved claims", after the court trial to determine the points to stop the dispute, determined that Company A should bear the tax of the transaction, Chen Mou claimed that the right of Company A for the payment of taxes and fees of the statute of limitations began to run, the exercise of the right of subrogation of the tax authorities as a creditor to exercise the debtor's claim within the limitation period. The statute of limitations for the exercise of subrogation rights by the tax authorities also began to run.

In addition, in practice, there is a dispute as to whether the exercise of subrogation rights requires both the primary and secondary claims to be in a state of certainty. The Supreme Court, in the case of Insurance Dispute between China Merchants Bank Co., Ltd, Shenzhen Tai Ran Sub-branch, and People's Republic of China Property and Casualty Insurance Co., Ltd, Nantong Branch and others ((2022) Supreme Court Civil Re-issue No. 16), held that the creditor's filing of a subrogation claim is not conditional on the debtor's debtor-subordinate debtor relationship being clear and undisputed, and that the court should conduct a trial of the debtor-subordinate debtor relationship. The court shall hear the debtor-subordinate debtor relationship. The main purpose of the subrogation system is to solve the problem of how to protect the rights of creditors when the debtor is negligent in exercising its secondary claims. The object of the creditor's subrogation right is the debtor's due claim, if the exercise of the subrogation right needs to be determined on the premise of sub-claims, in the case of the debtor's negligence in determining the sub-claims, the creditor will not be able to exercise the right of subrogation, the purpose of the subrogation right system will be completely defeated. Therefore, the creditor should provide evidence to prove that the debtor has a prima facie claim against the sub-debtor that is not exclusively its own and that it has been negligent in exercising it, and whether or not the sub-debtor's defenses are valid should be a matter to be resolved in the subrogation action.

Second, Does the dispute over the tax liability under the tax contract clause constitute a "due claim"?

Article 50 of the Tax Administration Law expresses the object of tax subrogation as "due claims". In addition to the common creditor-debt relationships in the civil and commercial fields, the "due taxes paid on behalf of the taxpayer" arising from tax underwriting clauses can also constitute a "due claim". "Claims due". Take the aforementioned case as an example, the Inspection Bureau is Chen's creditor, Company A is the third party who owes Chen a debt, the special point of this case is that, after the court's final judgment determines that Company A bears the tax of the transaction in question, Company A's debt to Chen is not an ordinary debt in the field of civil law, but a tax debt based on the transaction in question between the two parties. Therefore, under the premise of meeting the conditions for the exercise of the right of subrogation, the tax authorities may exercise the right of tax subrogation against the taxpayer in the tax charter agreement to safeguard the collection of taxes.

Third, Whether the failure to apply for enforcement after filing a lawsuit against a sub-claim is a negligent exercise of the due claim?

In the previous case, the Inspection Bureau considered that after the civil judgment came into effect, Chen applied to the court for compulsory execution, and in his application for compulsory execution, he only applied for compulsory execution for the transfer of the remaining balance of the land transfer and the interest and compensation, and did not apply for compulsory execution for the fifth item of the tax in the judgment, and that his negligence in pursuing the above taxes and fees from Company A by legal means would result in the state tax not being paid in full and on time. The Court upheld the Audit Bureau's finding that Chen was negligent in recovering the tax from Company A through legal means.

In another case ((2020) Qian 05 Civil Final No. 4349), the debtor who owed the tax filed a lawsuit on the civil debt dispute with the sub-debtor but did not apply for compulsory execution on the effective judgment, the tax authority filed a subrogation lawsuit, arguing that the debtor did not apply for compulsory execution, did not promote the litigation procedure to the next stage, the litigation procedure was not completed, and its inaction should be regarded as failure to claim the due claims by way of litigation to assert the due claim. The court considered that the creditor in the original legal relationship to the debtor for litigation that there is no negligence in exercising its due claims, although the enforcement procedure is the continuation and completion of the trial procedure, but is not a mandatory procedure of civil litigation, and can not be denied that the parties have filed a lawsuit to claim the rights of the objective fact because of the case did not enter into the enforcement procedure, the subrogation lawsuit filed by the tax authorities did not support.

On April 6, 2021, the Supreme People's Court issued the Minutes of the Working Conference of the National Courts on the Implementation of the Civil Code (Law [2021] No. 94), which stated in Article 8 that Article 535 of the Civil Code provides that "if a debtor is negligent in exercising his claim or subordinate right relating to such claim, which affects the realization of the creditor's due claim Article 535 of the Civil Code stipulates that "the debtor's negligence in exercising his claim or his subordinate rights in relation to that claim affects the realization of the creditor's due claim", which means that the debtor does not fulfil his due debt to the creditor and does not claim his claim or subordinate rights in relation to that claim from the counterparty by way of litigation or arbitration, thus causing the creditor's due claim to be unrealized. The first case is a special situation, Chen has filed a lawsuit on the dispute with Company A, the effective judgment contained in Company A to bear the disputed tax, Chen did not include this in the application for enforcement. Regardless of how the terms of the tax package agreement, the main body of the tax is legal, and does not change because of the agreement of the terms of the tax package. Company A should pay the tax on behalf of Chen in accordance with the contract, in the case of Chen did not take the initiative to urge its performance or apply for enforcement, the tax authorities through the exercise of subrogation to realize the tax benefits, in the exercise of subrogation procedures at the same time to realize the tax claims and civil claims.

III. How Do Subordinate Debtors Respond to Tax Subrogation

(I) Understanding the tax subrogation system

According to the provisions of the Civil Code and the Tax Administration Law, the exercise of subrogation rights by tax authorities needs to be initiated through the courts. If the tax authorities require the sub-debtor to pay the tax directly on behalf of the creditor by issuing all kinds of tax documents, the sub-debtor may apply for reconsideration or litigation, requesting that the administrative act be recognized as unlawful and safeguarding its own legal rights and interests.

(II) Enterprises should pay attention to the amount of debt forgiveness when carrying out debt restructuring

Debt restructuring is one of the common measures in business activities to ensure normal operation and stimulate the vitality of enterprises. In some reorganization schemes, creditors give up part of their claims against the debtor and only ask for partial settlement of their claims, i.e., reduction of the principal amount of the debt. If the creditor incurs tax arrears, the tax authorities may exercise their tax subrogation rights and demand the debtor to settle the tax. When carrying out debt restructuring, the debtor should fully consult with professionals and produce various documents that comply with the requirements of laws and regulations to formally ensure the authenticity of the debt restructuring business and reduce risks.