Tax law, as a secondary evaluation, must be based on civil legal relations, so changes in civil legal relations will also lead to changes in tax legal relations. However, tax law as a separate field law, the formation of tax obligations and its changes have their own legal tax elements to regulate, and through the principle of substantive taxation can be penetrated into the appearance of the civil law, so the relationship between the tax law and the civil law is not "also follow the trend", but with considerable independence. Under the collision of the two legal norms, many disputes will arise, the most typical problem is whether the civil legal relationship is invalid or revoked, whether it can apply for tax refund. Recently, an equity transfer agreement suspected of contract fraud, withholding agents to apply for tax refund case, this paper combined with the current tax law, the issue of the preliminary discussion of feasible path for the reader's reference.

I. Case: Acquired Target Company Committed Contract Fraud, A Listed Company Applies for Refund of Withheld Taxes 

Beijing Jiuqi Software Corporation(hereinafter referred to as "Jiuqi Software") issued the Announcement on Matters Concerning the Administrative Litigation on February 2, 2023. Taking into account the announcements made by Jiuqi Software since April 16, 2020 regarding the arbitration matters in the case, the basic facts of the case are summarized as follows:

On January 20, 2017, Jiuqi Software and Beijing Jiuqi Science and Technology Investment Company Limited (hereinafter referred to as "Jiuqi Science and Technology Investment", the controlling parent company of Jiuqi Software) entered into an arbitration agreement with Etonenet (HongKong) Limited (hereinafter referred to as "HongKong Mobile") and two natural persons, namely, Etonenet (HongKong) Limited and HongKong Mobile. ("HKMTC") and two natural persons, Mr. Huang Jiaxuan and Mr. Zhang Dixin, signed the Acquisition Agreement. Pursuant to the Acquisition Agreement, Jiuqi Software and Jiuqi Science and Technology Investment jointly acquired 100% equity interest in Shanghai Mobile Network Limited ("Shanghai Mobile") at a transaction price of RMB1.44 billion. Jiuqi software in Shanghai move through 2016, 2017, 2018 annual performance commitment to achieve the premise, in three payments of 734.4 million yuan of equity transfer price. Obviously, the Acquisition Agreement is characterized as a betting agreement.

On March 20, 2017, Jiuqi Software paid the first equity transfer price of RMB 244.8 million and withheld and paid personal income tax of RMB 24,057,965.65; on May 3, 2018, Jiuqi Software paid the second equity transfer price of RMB 244.8 million and withheld and paid income tax of RMB 24,088,554.60, for a total of RMB 48,146,520.25 The total amount was RMB48,146,520.25. All of the above taxes were paid to the Beijing Haidian District Tax Bureau. The third equity transfer price was not paid.

At the beginning of 2019, Jiuqi Software discovered the existence of contract fraud and reported the case to the public security authorities. During the investigation, it was found that Shanghai Mobility existed contract fraud behaviors such as fictitious business, inflated performance and profit.

On February 24, 2020, Jiuqi Software filed an arbitration with the Shanghai Arbitration Commission, requesting the cancellation of the Acquisition Agreement and requiring Hong Kong Mobile Communication, Huang Jiaxuan and Zhang Dixin to return all the consideration. Subsequently, due to the case entering into criminal proceedings, Jiuqi Software withdrew the arbitration.

On May 12, 2021, the Beijing No. 1 Intermediate People's Court ruled that the employees of MobileTech, Mr. Ye, Mr. Yang, Mr. Lin and Mr. Zhang, had committed the crime of contract fraud, and each of the defendants did not appeal and the judgment had become effective.

During the period, CMHK filed an arbitration with the Shanghai Arbitration Commission, requesting Jiuqi Software to pay the remaining equity transfer price of RMB244.8 million, and the Shanghai Arbitration Commission made a ruling on December 30, 2021, which did not support CMHK's request. Jiuqi Software ceased to fulfill the obligation of the third equity transfer payment.

In May 2022, Jiuqi Software filed an arbitration with the Shanghai Arbitration Commission, requesting Hong Kong Mobile, Huang Jiaxu, and Zhang Dixin to return the consideration for the equity transfer, and the case was accepted but not decided.

On June 2, 2022, Jiuqi Software submitted an application for tax refund to the First Tax Office of Beijing Haidian District Tax Bureau, applying for a refund of the total tax paid of RMB48,146,520.25. On June 29, the Beijing Haidian District Tax Bureau issued a Notice of Tax Matters to the Company, stating that Jiuqi Software's application for tax refund did not comply with the requirements and would not be approved.

August 11, 2022, Jiuqi Software applied for administrative reconsideration to Beijing Municipal Bureau of Taxation. on November 9, 2022, Beijing Municipal Bureau of Taxation made a Decision on Administrative Reconsideration and upheld the Notice on Tax Matters.

On February 1, 2023, Jiuqi Software filed an administrative lawsuit with the Beijing Haidian District People's Court because it was not satisfied with the Notice and Decision made by Beijing Haidian District Taxation Bureau and Beijing Municipal Taxation Bureau, and the case was accepted.

II. Legal dilemmas and difficulties in this case of tax refund application: contract validity and subject matter eligibility

Due to the complexity of this case, several key issues are summarized in this article:

(I) The validity of the Acquisition Agreement will determine the basis of the tax refund.

According to the announcement, the Acquisition Agreement has not been revoked or declared invalid so far. The decision of the Shanghai Arbitration Commission only confirmed that Jiuqi Software did not need to fulfill the obligation of the third equity transfer, not to revoke the Acquisition Agreement. The Criminal Judgment found that the employees of Shanghai Mobile were guilty of contract fraud, but whether the validity of the contract was invalid as a result was not ipso facto confirmed. Although according to the Civil Code, the invalidity of a contract is ipso facto invalid and does not need to be confirmed by a court or an arbitration tribunal. However, if there is a dispute between the contracting parties as to whether the contract is valid or not, it still needs to be examined and confirmed by the court or arbitration tribunal. At the same time, the court or arbitration tribunal to confirm the invalidity or revocation, but also more persuasive to the tax authorities.

Does the Acquisition Agreement meet the elements of invalidity?

It should be pointed out that the offense of contract fraud does not necessarily lead to the invalidity of the contract. According to the provisions of article 224 of the criminal law: contract fraud is "for the purpose of illegal possession, in the process of signing and performance of the contract, fraudulent acquisition of the other party's property" behavior. And the provisions of the Civil Code, invalid circumstances include:

(1) The civil legal act of a person who is incapable of civil behavior;

(2) Civil legal acts that violate the mandatory provisions of laws and administrative regulations;

(3) Civil legal acts that violate public order and morals;

(4) Civil legal acts in which the perpetrator colludes with the opposite party in bad faith to the detriment of the legitimate rights and interests of others.

Obviously, the Acquisition Agreement involves contractual fraud, mainly the counterparty of the contract (mainly Shanghai Mobile's real controller, the original shareholder, Huang Jiaxu) as well as the subject company is suspected of fraudulent and false behavior. The Acquisition Agreement itself does not violate the mandatory provisions of the law or public order and morals. The Acquisition Agreement itself does not contain any malicious collusion between the two parties to the detriment of the interests of third parties, and therefore cannot be directly ruled invalid of course.

Does the Acquisition Agreement have the circumstances to be revoked?

According to the Civil Code, the circumstances under which it can be revoked include:

(1) Material misunderstanding;

(2) Fraud or duress by one party or a third party;

(3) The contract was entered into in a manifestly unfair manner.

To claim rescission of the contract, the software needs to prove that there was a material misinterpretation of the contract, or fraud, duress, or unfairness due to a state of distress or lack of judgment. According to the provisions of the Civil Code, if the perpetrator of a civil act, by the other party or a third party fraud, then you can claim to cancel the contract. In this case, the target enterprise and its staff fraud, fraud, is a third-party fraud. Jiuqi software should first through arbitration to revoke the Acquisition Agreement, so that the tax collection lacks the basis of civil legal relationship.

If the Letter of Acquisition Agreement is revoked, it is not subject to the 3-year period limitation

At present, the legal basis for tax rebates are mainly two, the first category is based on the "Tax Collection and Management Law," Article 51 of the "more than the taxable amount of tax payments" should be refunded, the taxpayer to apply for a refund of the period of three years. The second category is "Liu Yuxiu, Shen Heng tax refund case", the judicial authorities that the civil legal relationship after the annihilation of the tax subject and the object of taxation no longer exists, the elements of taxation is no longer satisfied, and therefore does not comply with the fundamental attributes of the tax, the tax should be refunded and is not subject to the provisions of Article 51 of the three-year time limit. In this way, it can be deduced that the provisions of Article 51 mainly refer to the situation that the taxpayer is obliged to pay tax, but due to miscalculation, application of tax rate error or other errors, resulting in overpayment of tax.

This case does not have the situation of overpayment of tax due to miscalculation and other problems, and its nature is similar to the "Liu Yuxiu, Shen Heng Tax Refund Case", which belongs to the situation of invalid or revoked civil legal relationship.

(II) Does the withholding agent have the right to claim tax refund?

The current tax collection and management law does not stipulate the right of tax refund for withholding agents.

According to Article 8 of the Tax Collection and Administration Law, "taxpayers shall enjoy the right to apply for tax reduction, exemption and refund in accordance with the law", which does not include withholding agents. In the provisions of Article 51, the subject of tax refund also has and only has taxpayers. Withholding agents apply for tax refund, tax authorities are concerned about the legal risk and not refund, but also justifiable.

According to the legal theory, the withholding agent to pay, belonging to the withholding agent of the non-tax property should be refunded to the withholding agent

However, as "Liu Yuxiu, Shen Heng tax refund case" in the judicial organs to confirm that, Article 51 of the right to tax refund, refers to the premise of the tax obligation occurs in the tax refund. If the most basic tax obligations are not available, the tax elements are not satisfied, then the property paid to the tax authorities is not tax, the tax authorities to hold the property in the law is an unjust enrichment, should be refunded. As an example, when the withholding agent solves the taxpayer's tax, because of the operation error, part of the payment will be paid to the tax authority together with the taxpayer's tax, because the nature of this part of the excess payment is not tax, the tax authority should naturally be returned to the withholding agent.

In this case, if the Acquisition Agreement, i.e., the underlying civil legal relationship, is declared null and void or revoked, then since the portion of the personal income tax does not meet the legal requirements for taxation, and thus does not constitute a tax by nature, the State's holding of that portion of the property is an unjustified gain and should be refunded. However, at this stage, the portion of the personal income tax should also be refunded to the taxpayer and not to the withholding agent.

However, Article 157 of the Civil Code states: "After a civil legal act is invalid, revoked or determined to be ineffective, the property acquired by the perpetrator as a result of the act shall be returned; if it cannot be returned or if there is no need for it to be returned, it shall be compensated at a discounted price. The party at fault shall compensate the other party for the loss thereby sustained; if all parties are at fault, each shall bear the corresponding responsibility." That is, each party should restore the property to its original state, and if it cannot do so, it should compensate for it. In the field of personal tax withholding obligation of equity transfer, the tax is deducted from the payment of equity transfer by the withholding agent, therefore, the taxpayer should also return to the withholding agent according to the law after obtaining the personal tax. From this point of view, based on the principle of efficiency, it is not improper to return the tax directly to the withholding agent.

Exploring feasible paths from the theoretical perspective of tax debt

The Tax Collection and Management Law partially recognizes the theory of tax debt, based on Article 50, which stipulates the right of subrogation and avoidance of tax debt. According to the theory of subrogation and avoidance, if the debtor is negligent in fulfilling its rights to the sub-debtor, the creditor can go beyond the debtor and claim rights directly from the sub-debtor. Accordingly, in the case of invalid civil legal relationship, the tax authorities have formed a situation similar to "unjust enrichment", and they have the obligation to return the tax to the taxpayer. 

III. Consideration of the circumstances under which application for tax refund can be made when the underlying civil legal relationship is extinguished.

Combined with Article 51 of the Tax Collection and Administration Law and the reasoning of Liu Yuxiu and Shen Heng Tax Refund Case, this article makes the following distinctions between the circumstances of the application for tax refund:

(I) Observe the nature of the applied tax refund from the perspective of the composition of the tax law.

According to the "tax collection management law" article 51 and "LiuYuXiu, ShenHeng tax refund case" distinction, can apply for tax refund of the nature of the money include three kinds of, namely:

"Overpayment of tax" as stipulated in Article 51, i.e., tax payment with tax obligation at the time of payment, but overpayment of tax due to the error of calculation or application of law;

That is, "Liu Yuxiu, Shen Heng Tax Refund Case" to determine the refund, that is, the payment of tax elements, but in the collection of tax elements after the elimination of the tax, resulting in the evolution of the tax into the tax does not have the fundamental attributes of the "unjustified enrichment".

The third category refers to the situation that the tax obligation is not available at the beginning of the payment.

However, Article 51 of the Tax Collection and Administration Law only provides for the first situation, which makes it difficult to deal with tax-related disputes arising from the latter two situations in practice. In this paper, no matter what kind of situation belongs to the above three types of situations, the tax authorities should be refunded ex officio.

(II) Observe whether the taxpayer is benefited from the perspective of economic substance

Tax law has the principle of substantive taxation, i.e., not only to observe the legal appearance, but also to observe the actual economic effect. For example:

For invalid civil legal acts, and the parties did not fulfill, did not produce substantial economic effects, the contract of the parties did not benefit, then due to the lack of fulfillment, generally does not give rise to tax issues. However, since the scope of stamp duty is the contract itself, it is not possible to apply for a refund of the stamp duty paid as a result of the written contract.

A more complex issue is what happens when a civil legal act that has already been performed is declared null and void ab initio or is revoked. If, after the civil legal act is declared invalid, both parties to the contract are able to restore the status quo ante, such as the movable or immovable property that has been delivered and the consideration that has been paid is returned to the other party, so that the economic status of the two parties is restored to that before the civil legal relationship in substance, the tax paid for this reason, such as income tax and value-added tax, should be returned due to the lack of taxable basis and foundation.

If the nature of the subject matter of the contract cannot be restored to its original state after the civil legal act is declared null and void, such as labor service, the economic status of the two parties has been changed from the perspective of economic substance, and the economic effect of the civil legal act still exists, then, according to the principle of substantive taxation, the tax elements are still satisfied, and it is not appropriate to refund the tax.

IV. Summary: The Necessity of Tax Compliance and the Dilemma of Tax Refund

Tax is the property acquired by the state from the taxpayer without compensation, and the tax authority, as a collection authority, is obliged to maintain the state treasury interests of the state from being infringed upon, so the tax authority is extraordinarily cautious about the circumstances of the tax refund, which also leads to the application for the tax refund in practice to either face the problem of non-compliance with the conditions of the tax refund, or face the problem of the three-year period. Meanwhile, compared with taxpayers, withholding agents have even narrower channels to remedy their rights. Therefore, enterprises should do a good job of tax compliance and pay attention to tax accruals to avoid being caught up in subsequent disputes with tax refunds.