Editor's Note: In December 2018, the Ministry of Natural Resources issued the Letter on Policies Concerning the Compensated Recovery of Idle Land Due to Government Reasons through Agreement (Ziranzi Banhan [2018] No. 1903), which clarifies that when grassroots governments, in accordance with the Measures for the Disposal of Idle Land, investigate and confirm that land is idle due to government reasons and decide to recover it with compensation, they shall follow the principles of consensus through consultation and reasonable compensation, and require that the compensation amount be determined by both parties through joint consultation with reference to market prices. Since then, the compensation standards for the recovery of idle land due to government reasons nationwide have no longer been limited to the land bidding costs but generally follow market premium compensation. This raises a tax administration issue: whether the land compensation received when land, idle due to government reasons, is recovered by the land reserve center at market prices can be exempt from Land Value Increment Tax. This article analyzes this issue.

01 Origin of Disputes Over Tax Exemption for Land Idle Due to Government Reasons

According to the Interim Regulations on Land Value Increment Tax and its Implementation Rules, the right to use land recovered by government approval due to urban implementation of planning or national construction needs may be exempt from Land Value Increment Tax. However, China's tax laws do not clearly define the specific circumstances of "urban implementation of planning or national construction needs." Due to such regulatory gaps, taxpayers' rights to tax exemption are difficult to effectively protect, and tax authorities also face certain law enforcement risks. Particularly in transactions where land is recovered because it is idle due to government reasons, tax authorities and taxpayers often hold opposing views on whether the government-induced idleness qualifies as "urban implementation of planning or national construction needs," leading to frequent disputes.

Regulations on disposing of idle land first appeared in the 1998 revised Land Administration Law, and in 1999, the former Ministry of Land and Resources issued supporting Measures for the Disposal of Idle Land. At that time, the regulations only focused on idleness caused by the land user, without involving cases of government-induced idleness. It was not until 2012 that the Measures for the Disposal of Idle Land underwent a substantial revision, adding circumstances of government-induced idleness and specific disposal rules. These government reasons include government's breach of contract in land delivery, planning revision, policy changes, protection of public interests, military control, cultural relics protection, and other government actions. Disposal methods include extending the construction start deadline, adjusting land use, land replacement, and compensated recovery through agreement.

It is noteworthy that the Interim Regulations on Land Value Increment Tax were formulated in 1993, and its Implementation Rules in 1995, while the Measures for the Disposal of Idle Land added rules on government-induced idleness in 2012. This means that when formulating Land Value Increment Tax exemption rules, the state could not consider the connection between exemption scenarios and the recovery of land idle due to government reasons. In essence, the lack of coordination between rules of different departmental laws is the root cause of such disputes.

02 Two Common Misconceptions in Tax Administration Practice

In practice, for cases where land, idle due to government reasons, is recovered with compensation upon government approval, the core dispute between tax authorities and taxpayers is whether the "idleness" as the reason for recovery qualifies as a tax exemption ground under "urban implementation of planning or national construction needs." Based on practical experience, some tax authorities argue against exemption mainly for two reasons.

Misconception 1: Treating "idleness" as the sole reason for land recovery

Some tax authorities believe that the reason for land recovery is idleness, regardless of whether the idleness is caused by the government or the land user, or (if government-induced) the connection between specific government reasons and "urban implementation of planning or national construction needs." However, according to the Measures for the Disposal of Idle Land, certain specific circumstances of land recovery due to government-induced idleness can meet the Land Value Increment Tax exemption criteria of "urban implementation of planning or national construction needs," and the two are not fundamentally contradictory.

Under the Measures, land idleness is categorized into two types: idleness caused by the land user and that by the government. Article 8 of the Measures lists six government reasons: government's breach of contract in land delivery, planning revision, policy changes, protection of public interests, military control, cultural relics protection, and other government actions. Among these, "planning revision" can be linked to "urban implementation of planning" specified in Paragraph 3 of Article 11 of the Implementation Rules of the Interim Regulations on Land Value Increment Tax, as they are inherently consistent. This means that idleness reasons under land administration laws and urban planning reasons under Land Value Increment Tax administration can coexist and are not mutually exclusive.

The author believes that when dealing with land recovery due to government-induced idleness, tax authorities should not categorically deny the possibility of exemption solely based on idleness. Instead, they should further examine whether specific government reasons align with "urban implementation of planning or national construction needs." Otherwise, the government could bypass taxpayers' right to exemption by first identifying land as idle and then recovering it for any urban planning that delays construction, improperly undermining taxpayers' legitimate rights.

Misconception 2: Using Article 4 of Caishui [2006] No. 21 to deny exemption

Paragraph 3 of Article 11 of the Implementation Rules of the Interim Regulations on Land Value Increment Tax stipulates: "The term 'real estate expropriated or recovered in accordance with the law due to national construction needs' in Article 8(2) of the Regulations refers to houses or land use rights expropriated or recovered by government approval due to urban implementation of planning or national construction needs." Paragraph 4 of Article 11 states: "Where taxpayers relocate and transfer their original real estate on their own initiative due to urban implementation of planning or national construction needs, such transfer shall be exempt from Land Value Increment Tax by analogy with these provisions." As mentioned earlier, China's tax laws do not clearly define "urban implementation of planning or national construction needs." Strictly speaking, they do not specify such circumstances for Paragraph 3 of Article 11 but only enumerate them for Paragraph 4.

Article 4 of the Notice of the Ministry of Finance and State Taxation Administration on Several Issues Concerning Land Value Increment Tax (Caishui [2006] No. 21) issued in March 2006 stipulates: "On the issue of Land Value Increment Tax exemption for taxpayers who transfer real estate on their own initiative due to relocation caused by urban implementation of planning or national construction needs: The term 'relocation due to urban implementation of planning' in Paragraph 4 of Article 11 of the Implementation Rules of the Interim Regulations on Land Value Increment Tax refers to relocation determined by the government or its competent departments in accordance with approved urban plans due to old city renovation or enterprise-caused pollution, nuisance (i.e., excessive waste gas, wastewater, residues, or noise harming residents). 'Relocation due to national construction needs' refers to relocation for construction projects approved by the State Council, provincial governments, or relevant central ministries."

In practice, some tax authorities apply the scenarios listed in Article 4 of Caishui [2006] No. 21 to determine Land Value Increment Tax exemption for government land recovery. If specific government reasons for idleness do not fall under these scenarios, they deny exemption. This is clearly a misapplication. The specific circumstances of "urban implementation of planning" and "national construction needs" in Article 4 of Caishui [2006] No. 21 only apply to Paragraph 4 of Article 11 of the Implementation Rules, not directly to Paragraph 3.

Although both paragraphs use the phrase "urban implementation of planning or national construction needs," they are essentially different and should be treated separately for two reasons:

First, Paragraph 3 of Article 11 derives from Article 8(2) of the Interim Regulations, established by the State Council. Paragraph 4 originates from the Implementation Rules itself, established by the Ministry of Finance and the State Taxation Administration.

Second, Paragraph 3 involves government land recovery, which is an unequal right transfer with obvious compulsoriness, administrative dominance, and deprivation of rights. The recovered party has almost no autonomy in deciding the transaction, counterparty, or price. In contrast, Paragraph 4 involves voluntary transfer by taxpayers during relocation, an equal right transfer where the transferor has sufficient autonomy in choosing the counterparty and price—transactions that are otherwise subject to Land Value Increment Tax.

Due to these differences, "urban implementation of planning or national construction needs" should be interpreted differently in the two paragraphs. For Paragraph 3, the implementers are mainly grassroots local governments, which have full autonomy in administrative management to safeguard local public interests. Thus, any urban planning adjustment and corresponding land recovery led by local governments should entitle the recovered party to exemption. This balances the protection of relatively vulnerable taxpayers with the administrative functions of relatively powerful local governments, reflecting the State Council's effort to balance power and rights between them.

In contrast, Paragraph 4 involves voluntary transfers during relocation (not government recovery), creating risks of collusion between local governments and taxpayers to disguise ordinary real estate transactions as "relocation" for exemption. Therefore, "urban implementation of planning or national construction needs" here must be restricted: exemption is only granted for relocation due to significant public interest reasons (e.g., old city renovation, pollution control) or projects led by the State Council or provincial governments.

Thus, the author speculates that after establishing the exemption type in Paragraph 4 of Article 11, the Ministry of Finance and the State Taxation Administration issued Caishui [2006] No. 21 to restrict "urban implementation of planning or national construction needs" for voluntary relocation transfers. This limits local government influence, preventing tax revenue loss due to local fraud or manipulation.

03 Supreme People's Court View: Introducing Public Interest as the Criterion for Exemption

On January 24, 2025, the Supreme People's Court held the 11th "Administrative Trial Lecture Hall." During the Q&A session, a senior judge from the Administrative Tribunal of the Supreme People's Court specifically addressed how to determine whether government land recovery qualifies for Land Value Increment Tax exemption.

In this lecture hall, the Supreme People's Court clarified: "Pursuant to Article 8(2) of the Interim Regulations on Land Value Increment Tax and Paragraph 3 of Article 11 of its Implementation Rules, real estate expropriated or land use rights recovered by government approval due to urban implementation of planning or national construction needs are exempt from Land Value Increment Tax. The phrase 'due to urban implementation of planning or national construction needs' can be interpreted as 'based on public interests such as national construction.'"

According to this view, the key criterion for "urban implementation of planning or national construction needs" is public interest, which includes land recovery due to government-induced idleness. Tax authorities must therefore examine whether government reasons for idleness are related to public interests to determine exemption eligibility, rather than categorically denying it based on idleness alone. The Supreme People's Court's introduction of "public interest needs" as the criterion resolves disputes over whether "urban implementation of planning or national construction needs" and government-induced idleness are contradictory or compatible. It provides a clear legal solution for such disputes, effectively protecting taxpayers' rights, regulating tax authorities' enforcement, and reducing law enforcement risks. This view should serve as a legal basis for grassroots tax authorities in Land Value Increment Tax administration.

04 Conclusion

In the first half of this year, a dispute over Land Value Increment Tax exemption for compensation for land recovered due to government-induced idleness, represented by Hwuason Law Firm, won a retrial judgment in the provincial higher people's court. After over three years of legal efforts by a joint lawyer team from the enterprise and three law firms, the enterprise's right to tax exemption finally received precious judicial protection. This successful case vividly demonstrates the court's adherence to the Supreme People's Court's above views, setting a highly typical and representative precedent for resolving similar disputes. Hwuason Law Firm will adhere to the concept of professional excellence and work with tax authorities and enterprises involved in such disputes to contribute professional expertise to resolving tax conflicts and building a sound tax collection relationship.