In March 2024, the plaintiff, a certain equipment manufacturing company, entered into an Industrial Equipment Sales Contract with the defendant, a certain engineering construction company, pursuant to which the plaintiff agreed to sell a customized production system to the defendant. The total contract price was RMB 1.8 million, excluding tax. The contract’s “Tax and Fee Allocation” clause expressly stipulates: “All taxes and fees arising from this transaction, including but not limited to value-added tax, stamp duty, and other applicable levies, shall be borne by the defendant, the engineering construction company; the plaintiff, the equipment manufacturing company, shall solely be responsible for issuing a special value-added tax invoice in accordance with the law and cooperating with tax filing, and shall bear no tax or fee expenses whatsoever.”

Following the execution of the contract, the defendant, a certain engineering construction company, paid RMB 1.8 million as agreed for the equipment but failed to remit the applicable taxes and fees to the tax authorities as stipulated. In October 2024, during a routine audit, the tax authorities discovered that the plaintiff, a certain equipment manufacturing company, had not filed or paid the value-added tax and associated surcharges corresponding to the sale of the equipment. Accordingly, the tax authorities issued a “Tax Collection Notice” to the plaintiff, demanding payment of RMB 234,000 in value-added tax, RMB 16,380 in urban maintenance and construction tax, RMB 7,020 in education surcharge, and RMB 4,680 in local education surcharge, totaling RMB 262,080, together with a late-payment penalty of RMB 8,900.

After the plaintiff, a certain equipment manufacturing company, paid in full the aforementioned taxes and late payment penalties as required by the tax authorities, it sought reimbursement from the defendant, a certain engineering construction company, pursuant to the contractual agreement for the sum of RMB 270,980. However, the defendant, citing that it is not a legally designated taxpayer, refused to make the payment, thereby giving rise to a dispute and prompting the plaintiff to bring the matter before the court.

After trial, the court held that Article 3 of the Value-Added Tax Law of the People’s Republic of China stipulates that the taxpayers of value-added tax are entities and individuals that sell goods, services, intangible assets, or real estate within the territory of the People’s Republic of China. Furthermore, Article 4 of the Law of the People’s Republic of China on the Administration of Tax Collection explicitly provides that any entity or individual obligated to pay taxes under laws or administrative regulations shall be deemed a taxpayer, and such taxpayers must remit taxes in accordance with the provisions of the relevant laws and administrative regulations. In the present case, the plaintiff, a certain equipment manufacturing company, as the seller of the goods, is, pursuant to the law, the statutory value-added tax payer for this particular equipment sale.

The central issue in this case is whether the “tax and fee allocation” clause in the Industrial Equipment Sales Contract entered into by the parties is valid.

The court held that Article 16 of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the General Provisions of the Contract Section of the Civil Code of the People’s Republic of China” provides that, where a mandatory provision is intended to safeguard state interests—such as government tax revenues or land‑transfer fees—or the legitimate interests of other civil subjects, rather than the civil rights and interests of the contracting parties, and where recognizing the contract’s validity would not undermine the achievement of the norm’s purpose, such a situation falls within the exception set forth in Article 153, Paragraph 1 of the Civil Code, which states: “except where the mandatory provision does not render the civil legal act invalid.” In this case, the plaintiff, a certain equipment‑manufacturing company, and the defendant, a certain engineering‑construction company, agreed that the tax obligations that should have been borne by the plaintiff would instead be assumed by the defendant. This constitutes a contract performed by a third party, as provided for in Article 523 of the Civil Code. The agreement was reached after both parties carefully weighed transaction costs and does not give rise to any suspicion of tax avoidance; it reflects the principle of autonomy of the parties’ will. Moreover, it has no substantial impact on the protection of state tax revenues. Accordingly, the agreement between the plaintiff and the defendant should not be deemed invalid.

As previously stated, the defendant failed to fulfill its tax‑payment obligations as stipulated in the contract. Since the plaintiff has a legitimate interest in the performance of that obligation, upon the tax authorities’ demand for payment, the plaintiff duly paid the outstanding taxes and late‑payment penalties and is therefore entitled, pursuant to the contractual provisions, to seek reimbursement from the defendant for the taxes and penalties it has advanced.

The court ultimately ruled in favor of the plaintiff’s claims. Following the first-instance judgment, neither the plaintiff nor the defendant filed an appeal, and the judgment has thus become legally effective.

Units and individuals that sell goods, labor services, services, intangible assets, or real estate within the territory of the People’s Republic of China (hereinafter referred to as “within the territory”) are value-added tax payers. In judicial practice, whether an agreement reached through negotiation—under which a non‑statutory taxpayer assumes responsibility for paying the tax—is valid should be assessed from the following aspects:

First, from the perspective of purpose, the provision in question is intended to allow the actual taxpayer to fulfill the state’s tax‑collection obligation in place of the legally designated taxpayer. At the same time, under substantive law, there is no such thing as a tax‑related debt… Statutory obligation There is an explicit provision prohibiting performance by a third party, and since the purpose of collecting tax liabilities is to ensure adequate state revenue, such tax liabilities are not highly personal in nature. Accordingly, the “performance by a third party” stipulated in this tax provision complies with Article 524 of the Civil Code.

Second, from the perspective of the taxpayer’s status: the tax‑related provisions in the contract do not contravene the principle of tax legality. When one party to the transaction performs the tax‑imposition obligation on behalf of the other as agreed, the taxpayer’s and the tax debtor’s legal status remains unchanged. The statutory tax liability is not discharged by the involvement of the actual tax bearer; should the latter fail to fulfill its tax obligations or perform them in a manner inconsistent with tax law, the taxpayer must nonetheless continue to discharge its statutory duties.

Thirdly, from Tax claim On the feasibility of such an arrangement: The fact that the actual tax bearer fulfills the statutory tax obligation on behalf of the legally designated taxpayer is an agreement between the parties to the transaction. This does not undermine the capacity to perform the tax debt; rather, it enhances the likelihood of realizing the tax claim. Tax law should respect contractual provisions regarding tax‑price arrangements—namely, that a non‑statutory taxpayer who has agreed or is deemed to bear the tax burden in practice does not violate mandatory legal provisions, nor may such an arrangement be invalidated on that ground.

However, it should be noted that if the tax terms deliberately understate the tax‑exclusive or tax‑inclusive price, or expressly stipulate that no VAT invoices will be issued or that false VAT invoices will be provided, such conduct constitutes a violation of the mandatory tax provisions under tax law, for example, in breach of… Value-Added Tax Law Article 3, which stipulates the statutory VAT liability, or any provision that contravenes Article 21 of the Law on the Administration of Tax Collection regarding the issuance of invoices, constitutes an act of tax evasion that harms national tax revenues and shall be deemed invalid.