[Introduction]

In previous years, in the context of business and investment attraction nationwide, for the administrative purposes of introducing investment to promote economic development and increase fiscal and tax revenue, local governments or administrative organs often enter into business and investment attraction agreements with investing enterprises, agreeing to grant them various preferential policies, tax incentives, coordination and assistance in order to win the investor’s project. However, in recent years, the state has emphasized that local governments must not use tax cuts, exemptions, tax rebates, etc. to attract investment in violation of legal regulations. For avoidance of administrative risks or due to changes in administrative supervisors, the local governments or administrative organs often refuse to honor the tax incentive clauses in the previous investment attraction agreements. As a result, the investing enterprises cannot realize the expected benefits based on the administrative agreement, which causes disputes between the investing enterprises and the local governments or administrative organs.

In handling such disputes, the common legal issues include whether such investment attraction agreements are civil or administrative agreements, whether the tax incentive clauses are legal and effective, whether the reduction in local taxes due to tax incentives is detrimental to the public interest, and the definition of the standards for tax incentives, etc. The author has also noticed that the judgment standards adopted in the judgments varied among different courts.

 Guan Ke of my law firm and I acted for the plaintiff in a real estate development Co., Ltd. in Rugao (hereinafter referred to as the “development company”) v. the People's Government of a town in Rugao involving the performance of the administrative agreement. Our opinions were adopted in the first and second instances, where it was ruled that the town government should pay tax incentives in accordance with the administrative agreement (The case was reported by Toutiao as a judicial case in Jiangsu).
 

[About the case]

On August 20, 2004, the development company obtained the right to use a plot of 7,005.04 square meters in a town through public bidding. On the day of signing the agreement on transfer of state-owned land use right with the Land and Resources Department, a subsidiary agreement was also signed with the town government (Party A). The fourth article of the subsidiary agreement stipulates that “the tax paid by Party B (the development company) to Party A in the development of the plot shall be rewarded to Party B at 50% of the tax paid by Party B after Party A’s confirmation.”

On August 31, 2004, the development company paid 100,400 yuan in land transfer tax. On March 8, 2005, the development company obtained the right to use the underlying land. Later, after obtaining the construction land planning permit and construction project construction permit of the underlying land, the development company carried out construction and development, commercial housing sales, and paid business tax, land value-added tax, urban construction tax and other related taxes.

After the sale of commercial housing was basically completed, the development company submitted a report to the town government on August 20, 2017 and requested an award in accordance with the agreement, believing that it has paid 1,236,760.48 yuan in taxes for the development of the underlying project from July 2004 to July 30, 2017 and that the town government should pay a reward of 618,380 yuan in accordance with article 4 of the subsidiary agreement.

 On February 26, 2018, the town government commissioned a lawyer from a law firm in Jiangsu to issue a lawyer’s letter to the development company, arguing that there was no factual basis for the town government to give tax incentives to the development company since the latter did not directly pay taxes to the town government during the development of the land. The development company believed that the town government failed to fulfill the tax incentive clause of the subsidiary agreement. After many unsuccessful negotiations, it filed the lawsuit.

[Agency ideas]

At the beginning of this case, the development company filed a civil lawsuit in the court over a contract dispute. However, after the Guan Ke and I were commissioned by the development company, we believe that the subsidiary agreement signed between the development company and the town government on the land transfer was not a civil contract. The town government signed the agreement in order to achieve its administrative goals, which satisfied the substantive criteria for identifying it as an administrative agreement. Therefore, the subsidiary agreement should be an administrative agreement, and an administrative agreement should be filed over the performance of the administrative agreement.

As whether rewards based on the tax amount under the subsidiary agreement was invalid, we believe that there may be certain risks in judicial determination. If this is a civil case, it may be invalidated because the tax incentive agreement violates relevant tax management laws and regulations, and there was no shortage of such jurisprudence in local courts. However, if this is an administrative litigation, the administrative agreement will be subject to the relevant regulations regarding protection of the reliance interest. The Opinions of the Central Committee of the Communist Party of China and the State Council on Improving the Property Rights Protection System to Protect Property rights in accordance with the Law, the Notice of the State Council on Matters Related to Preferential Policies Such as Taxation (GF [2015] No.25) and other documents have stipulated that the governments’ trustworthiness and commitment mechanism should be improved and that the established preferential policies should remain valid, which is an important demonstration of the protection of reliance interest under administrative law. Therefore, the plaintiff had more chances to win in the case if an administrative litigation other a civil litigation is filed regarding the underlying contract.

The development company adopted our opinions and did not pay the case acceptance fee for the civil litigation, but filed a separate administrative litigation.
 

[The hearing]

On June 21, 2018, the development company filed an administrative lawsuit with the Haian Municipal People’s Court against the town government, requiring the court to order the town government to fulfill the administrative agreement and pay the development company an incentive payment of 618,380 yuan and interest on delayed payment.

After hearing, the Haian Municipal People’s Court made an administrative judgment in the first instance. After excluding the paid tax which cannot be proved to be payment relating to the project, the court ordered: 1. The town government shall pay the development company an incentive fee of 419,899.42 yuan within 10 days after the judgment takes effect; 2. The other litigation claims of the development company shall be rejected.

The town government was not satisfied with the judgment of the first instance and appealed to the Nantong Intermediate People’s Court. After hearing, the Nantong Intermediate People’s Court issued a final administrative judgment, and ordered the appeal to be rejected and the original judgment be maintained.

Our opinions and viewpoints were adopted by both the courts of first and second instance.
 

[Focuses of the dispute and our views]

The main focuses of dispute between the two parties in this case are: 1. Whether the underlying subsidiary agreement is an administrative agreement; 2. Whether Article 4 of the underlying subsidiary agreement violates legal provisions; 3. Whether the town government should continue to fulfill Article 4 of the underlying subsidiary agreement; 4. How should the town government fulfill the Article 4 of the underlying subsidiary agreement.

 

I. Whether the underlying subsidiary agreement is an administrative agreement

The town government believed that it was not the management department of the land transfer, and its signing of the underlying subsidiary agreement with the development company on the land transfer was obviously different from the daily functions of the town government. Therefore, it should be a civil agreement rather than an administrative agreement.

We believed that although the town government was not the subject of the land transfer agreement, the town government has the public function of managing the underlying land. Since its signing of the subsidiary agreement to the land transfer contract with the development company is for the administrative purposes of attracting investment, promoting economic development, and improving the living environment, it should be an administrative agreement.

Paragraph 11 of Article 12 (1) of the Administrative Litigation Law of the People's Republic of China stipulates that, if a citizen, legal person or other organization believes that the administrative organ fails to perform the government franchise agreement, land and housing expropriation compensation agreement and other agreements, or illegally changes or cancels these agreements, the people’s court shall accept the administrative litigation filed.

Chapter V of the Regulations on Administrative Procedures of Jiangsu Province specifically stipulates the definition, conclusion, effectiveness, modification and cancellation of administrative contracts. Paragraph 1 of Article 77 stipulates that the term “administrative contract” as used in these Regulations refers to an agreement signed by an administrative organ with a citizen, a legal person or other organization in order to safeguard the public interest and achieve administrative purposes after mutual agreement.

According to the above provisions, an administrative agreement is an agreement signed by an administrative organ with the other party in order to achieve the public interest or administrative goal, under which there are rights and obligations under administrative law. As far as the common investment attraction agreements in the administrative management are concerned, the administrative organs exercised their administrative functions or used the convenience and resources of their administrative powers when entering into the agreement for the purpose of introducing funds, promoting local economic development, and increasing local fiscal and tax revenue, such as granting various preferential policies, tax incentives, and providing coordination or assistance to the other party. Such agreements carry obvious attribute of public interest and administrative authority, and should be administrative agreements that are obviously different from civil contracts in terms of the subject, purpose, and content.

In this case, first of all, from the perspective of the subjects of the agreement, one subject of the agreement was a first-level people’s government, which conforms to the characteristics of the main elements of an administrative agreement. Secondly, judging from the content of the agreement, the town government mainly disposes of administrative powers in the underlying agreement. Article 1 of the subsidiary agreement stipulated that Party A guarantees that the land provided is mature land without houses to be demolished. Party A shall appoint a special person to assist the handling of all kinds of licenses (construction land planning permits, land use permits, and construction planning permits) required for Party B’s development, without affecting Party B’s normal development needs. Article 2 stipulated that the price of the plot was RMB 1.82 million. Article 3 stipulated that Party A shall be exempted from supporting facility fees and that all other expenses shall be borne by Party B. Party A guarantees the availability of water and electricity, the accessibility of roads and the flatness of the site for Party B’s infrastructure construction, and Party B shall be responsible for the supporting facilities of the relevant plots and coordinate with the government. Article 5 stipulated that Party A guarantees that a relaxed soft investment and development environment for Party B. It can be seen that the rights and obligations of the town government agreed in the underlying subsidiary agreement such as the determination of the price of the land transfer, the reservation of land for project development, supporting leveling of land, grant of policy subsidies, reduction of corresponding taxes and fees, and provision of a relaxed investment environment fell within the town government’s administrative authority as a first-level government, but were not the rights enjoyed as a civil subject. Third, from the perspective of the purpose of the agreement, for the development company, it is signed for the profit. For the town government, however, the ultimate goal is to develop the local economy, adjust land functions, and improve the administrative goals of urban construction. In summary, it can be seen that the underlying subsidiary agreement is an investment attraction agreement for the town government to exercise its administrative powers and authority based on administrative needs to provide various policy concessions and convenience for the development company to develop real estate projects, and it should be recognized as an administrative agreement. Therefore, the disputes arising therefrom shall fall into the administrative litigation in accordance with the law.

II. Whether Article 4 of the underlying subsidiary agreement violates the legal provisions

The town government believed that the agreement on tax refund incentives in Article 4 of the underlying subsidiary agreement violates the mandatory provisions of the Tax Collection Administration Law and other laws, and should be an invalid clause.

We believed that the payment of incentives stipulated in the Article 4 of the underlying agreement was not equivalent to the refund of taxes after collection, and was not prohibited by law; as to the various preferential tax policies offered by local governments for investment attraction to promote local economic development in 2004 when the agreement was signed, the effectiveness of the then contract cannot be denied in accordance with current laws and regulations; in 2015, the State Council expressly stipulated that the preferential policies in contracts signed by local governments and enterprises shall remain effective. Therefore, Article 4 of the underlying subsidiary agreement did not violate legal provisions.

Since an administrative management is a way for an administrative organ to conduct administration, its content should of course fall within the authority of the administrative organ, and it cannot be an agreement that is unprincipled, unbounded or even harm the interests of others or the public interest. Administrative agreements concluded by administrative organs without or beyond their authority, and those concluded in serious violation of legal procedures, and administrative agreements in which administrative acts are significant and obviously illegal shall be invalid agreements. Since administrative agreements not only have administrative nature, but also reflect contractual characteristics, the validity of administrative agreements can be judged by applying administrative legal norms. At the same time, while the provisions of administrative law and administrative litigation law can also be applied, civil legal norms also apply provided that they do not violate the mandatory provisions of administrative law and administrative litigation law.

First of all, the signing of the underlying subsidiary agreement did not exceed the authority of the town government. Article 75 of the Administrative Litigation Law of the People’s Republic of China stipulates that where a people’s court enters a judgment to confirm the illegality or void of the alleged administrative action, it may concurrently order the defendant to take remedial measures; and, if the plaintiff has sustained losses from the alleged administrative action, order the defendant to assume compensatory liability according to the law. Article 61 of the Organic Law of the People’s Republic of China on Local People’s Congresses and People’s Government at Various Levels stipulates that the people’s governments of townships, nationality townships, and towns shall exercise the following powers and authority: (2) Implement economic and social development plans and budgets in respective administrative areas, and manage economic, educational, scientific, cultural, health, sports undertakings and financial, civil affairs, public security, judicial administration, family planning and other administrative work within the administrative area. As mentioned earlier, the underlying agreement is an investment attraction agreement between the town government and the development company under which various policy concessions were provided for the development of real estate projects within the scope of its authority. The contents of the agreement were the administrative functions enjoyed by the town government as a first-level government or matters that can be coordinated and completed. Therefore, the signing of the agreement did not exceed the authority of the town government or significantly and obviously violate the laws.

Secondly, the underlying subsidiary agreement was an expression of the true meaning of both parties. According to Article 133, Paragraph 1 of Article 134, paragraph 2 of Article 143 of the General Code of the People’s Republic of China, a civil juristic act is an act through which a person of the civil law, by expression of intent, creates, alters, or terminates a civil juristic relationship, and a civil juristic act may be accomplished through unanimous consent of two or more parties, or through one party’s unilateral expression of intent. Whatsoever, the truthfulness of meaning is a prerequisite for the validity of a civil legal act. Article 119 of the General code of the Civil Law of the People’s Republic of China and Article 8 of the Contract Law of the People’s Republic of China stipulate that, a contract formed in accordance with law is legally binding on the parties to the contract. The underlying subsidiary agreement was concluded on the basis of full consultation and agreement between the development company and the town government. It was the true meaning of both parties, and was sealed and signed by both parties. Therefore, the agreement was established in accordance with the law.

Thirdly, Article 4 of the underlying subsidiary agreement did not fall in any circumstances of invalidity of a civil contract. Article 52(5) stipulates that a contract is invalid if it violates the mandatory provisions of laws and administrative regulations. Article 3(2) of the Tax Collection Administration Law of the People’s Republic of China stipulates that no organ, unit or individual may violate the laws or administrative regulations and make unauthorized decision on tax collection, suspension, tax reduction, tax exemption, tax refund, tax supplement that conflict with tax laws and administrative regulations. Article 2 of the Notice of the State Council on Matters Related to Preferential Policies Such as Taxation (GF [2015] No.25) stipulates that preferential policies that have been introduced by various regions and departments shall be implemented within the prescribed time limit; if there is no prescribed time limit and adjustments are indeed required, the local government and relevant departments shall set up a transition period in accordance with the principle of ensuring the steadiness, and the policies shall be continued during the transition period. Article 3 stipulates that the preferential policies in contracts signed between various regions and enterprises shall continue to be valid; the parts that have been fulfilled shall not be retroactive to the past.

In this case, although the town government was not allowed to make unauthorized decisions or agreements on tax relief according to law, the reliance interest of the development company under the contract should be protected. Since the underlying subsidiary agreement was signed in 2004. According to the provisions of the Document ([2015] No. 25) issued by the State Council, matters related to tax incentives in the agreement shall continue to be valid. Moreover, the payment under Article 4 of the underlying agreement was paid in the form of rewards, which was not equivalent to the refund of taxes after collection. The law does not prohibit administrative organs from achieving administrative purposes through preferential policies such as rewards for enterprises based on specific standards.

III. Whether the town government should continue to fulfill Article 4 of the underlying subsidiary agreement

The town government believed that even if the subsidiary agreement was valid, if the reward was given based on the amount of tax paid by the development company, the town government would not only have no actual income from the development project, but subsidize part of the costs. Therefore, it should not continue to fulfill the reward obligation since the public interest would be harmed.

We believed that although the payment of incentives by the town government would cause certain loss of tax benefits, the government’s interests were not only manifested as tax benefits. The performance of the subsidiary agreement would not harm the public interest, and it had no right to change or terminate the agreement.

Article 82 of the Regulations on Administrative Procedures of Jiangsu Province stipulates that administrative contracts are protected by law, and the parties to the contract may not change, suspend or terminate it unilaterally. If the national or the public interest is seriously harmed during the performance of an administrative contract, the administrative organ shall be entitled to change or terminate the contract. If there is a circumstance where the material interests of the parties to the contract are affected as a result of which the contract cannot be performed or is difficult to be performed during the performance of an administrative contract, the parties to the contract may negotiate to change or terminate the contract. Articles 109 and 110 of the Contract Law of the People’s Republic of China make corresponding provisions on the performability and performance methods of monetary and non-monetary debts. Generally speaking, there is a possibility of performance of monetary debts. However, since the administrative agreement involves the public interest, the administrative organ shall have the right of preference. When the performance of an agreement will seriously harm the national or public interest, the administrative organ shall be entitled to change or terminate the agreement. Conversely, if the above-mentioned circumstances do not exist in the administrative agreement, either party shall perform it in accordance with the agreement, and the unilateral termination of the agreement by the administrative organ must be strictly limited to the extent that the harm to the public interest is serious.

In this case, the agreement on payment of the reward under Article 4 of the underlying subsidiary agreement is a monetary debt, so the town government shall fulfill it in accordance with the agreement. The purposes of signing the investment attraction agreement between the government and enterprises are not exactly the same. For enterprises, the main purpose is for profit. For the governments, in addition to increasing taxes, other purposes include promoting economic development, increasing employment, and improving urban functions, etc. The many benefits brought about by the agreement are difficult to measure with money or are difficult to be shown in the short term. Therefore, as to whether the public interest is harmed by performance of this administrative agreement, it cannot simply be based on whether the government achieves profit or whether it directly increases fiscal revenue. Even if the incentive fee is indeed too high as claimed by the town government, it is not necessarily considered that the underlying subsidiary agreement harms the national or public interests. In this case, the town government has no right to unilaterally change or terminate the agreement.

IV. How should the town government fulfill the Article 4 of the underlying subsidiary agreement.

The town government believed that the development company did not directly pay taxes to the town government but to the tax authorities. The taxes paid were not retained by the town government as income tax, and the incentive fees should not be calculated based on the taxes paid by the development company; since the agreement clearly stipulated that Party B will be rewarded only after the “confirmation by Party A”, there is no such reward as long as it is not confirmed by the town government; the land transfer taxes paid by the development company were not taxes paid during the development of real estate, but the prerequisite for obtaining the right to use the land, and therefore, it should not be included.

We believed that the town government’s explicit refusal to pay the reward was itself an act of refusal to make the confirmation. Therefore, the act of “confirmation” should not be used as a prerequisite for its performance of its obligations. At the same time, the development company agrees to exclude taxes that cannot be proved to be related to the underlying project. Therefore, the remaining taxes on the underlying project should be recognized within tax scope of the town government, and be used as the basis for payment of the reward.

1. As far as general administrative litigation is concerned, the judgment should not directly clarify the specific method and content of the administrative organ’s administrative act, but the dispute in this case is about contractual obligations rather than statutory administrative duties. Statutory duties are subject to legality review, while contractual obligations are subject to contractual review. If the administrative organ fails to perform its contractual obligations, the court may directly order the administrative organ to performance the obligations in accordance with the administrative contract.

2. In this case, although Article 4 of the underlying subsidiary agreement stipulated that “Party A will give the reward after confirmation”, judging from the lawyer’s letter sent by the town government to the development company and the content of the defense, the town government had made it clear that it would not perform the agreement. In the circumstance that the specific method and content of the performance of the obligation can be clarified, the court can of course directly order the town government to perform it.

3. Differences in understanding “taxes paid to Party A” in Article 4 of the underlying subsidiary agreement  between the two parties: the development company believed that the base for calculating the reward amount should be all taxes paid in the development of the underlying plot; the town government believed that the base for calculating the reward amount should be the part of the paid tax which was reserved by the town government, and should not include the taxes paid by the development company for the land transfer.

To clarify the above-mentioned differences in understanding, two basic facts should first be clarified:

First, Paragraph 1 of Article 5 of the Law of the People's Republic of China on the Administration of Tax Collection stipulates that the national tax bureaus and the local tax bureaus in various places shall administer tax collection respectively within the limits set by the State Council. Therefore, the tax collection and administration department in China is the tax department rather than the local people’s government at all levels. Strictly speaking, there is no such thing that the development company “pays the taxes to Party A”;

Second, although taxation is not directly levied by the government, according to China’s fiscal system, the finance departments of provinces, prefectures, cities and counties at each level stipulate the sharing ratio between them and the direct subordinate level. As to the income allocated to the township level, fiscal revenue is allocated through the departmental budget of the county-level government. Therefore, the amount of fiscal revenue of the township government does not exactly correspond to each tax. The Statistical Analysis of the Settlement of the Town’s Financial System and the Town’s Financial Final Accounts since 2005 submitted by the town government in the second instance of this case also showed that the proportion of fiscal revenue shared by the town government from the county-level finances varied every year, and its fiscal revenue and the taxes paid by the enterprise are not exactly matched. Therefore, the base for determination of the reward should not be the corresponding amount retained by the town government as calculated based on the taxes paid by the development company.

Given the differences between the two parties in contract interpretation, according to Article 125 of the Contract Law of the People’s Republic of China, the true meaning of the parties thereof shall be determined according to the words and sentences used in the contract, the common interpretation, the principle of good faith, as well as the relevant provisions, so as to maintain transaction safety.

Based on the above basic facts, the literal interpretation of “taxes paid to Party A” cannot be interpreted as taxes paid directly to the town government, nor can it be interpreted as the party of paid taxes retained by the town government. At the same time, since the town government did not fulfill the underlying agreement or prove the actual performance of similar clauses signed with other investment enterprises, the town government did not have the historical facts regarding this clause. Therefore, this term cannot be interpreted customary interpretation.

From the perspective of the principle of good faith, administrative organs should be more familiar with the relevant policies, rewards and punishments, and redemption of investment attraction in their jurisdiction than enterprises. Before entering into investment attraction agreements, they should fully consider the legality, enforceability, and expected benefits that may be brought to the enterprise. When there is ambiguity in the terms of the agreement, if an interpretation that is favorable to the administrative organ, it may lead to the administrative organ’s unwillingness to clarify and indicate the true meaning of the terms of the agreement to the counterparty at the time of signing the agreement, and induce or allow the counterparty to develop high expectations for the understanding and performance of the terms of the agreement, so as to achieve the purpose of attracting the investment. Later, the administrative organ will propose a relatively unfavorable interpretation in performance of the agreement, which is obviously contrary to the principle of good faith; if the interpretation by the investment enterprise is adopted, it is more in line with the investment purpose and the expected benefits based on the agreement, and is also in line with the value pursuit of honesty and trustworthiness of the administrative organ.

In summary, according to the rules of contract interpretation and based on the principles of fairness, rationality and good faith, the “tax paid to Party A” in Article 4 of the underlying subsidiary agreement should be determined as the tax paid by the development company in the underlying real estate development project.

4. As to whether the tax stipulated in Article 4 of the underlying subsidiary agreement as the incentive base includes the 100,400 yuan land transfer tax paid by the development company, since the underlying agreement was a subsidiary agreement to the land transfer agreement signed by the development company, the main agreement was signed before the development company paid the land transfer tax. At the same time, the underlying subsidiary agreement was not an agreement on the development of the project after the land was transferred, but an agreement on the entire real estate development of the development company, including the land transfer, where obtaining the right to use the land was itself a part of real estate development. Therefore, the land transfer tax paid by the development company shall be included in the reward base.

 

[Key points of judgment]

The courts of first and second instance fully adopted our opinions, believing that the subsidiary agreement between the development company and the town government was an administrative agreement that reflected the true meaning of both parties. Since it did not violate laws or regulations and can be continued to be fulfilled, the town government shall pay the reward in accordance with the agreement. Therefore, it ruled to support the main litigation claims of the development company.

 

This case seems to be simple, but the judgment logic contains a wealth of applicable rules of law:

1. The business and investment attraction agreements signed by administrative organs with relevant enterprises within the scope of their powers for the needs of administrative management shall be administrative agreements;

2. As to whether the performance of the agreement harms the public interest, it cannot be judged simply based on whether the administrative organ makes a profit in the agreement. Instead, it is necessary to comprehensively consider the profits and losses of the administrative organ and the public interest. If it does not seriously harm the national or public interest, the administrative organ has no right to unilaterally change or terminate the agreement;

3. In the performance of the agreement, it is necessary for administrative organs to fully consider the legality and enforceability of the terms of the agreement, as well as the possible expected interests of the enterprise. When there are different interpretations of the terms of the agreement, the relevant terms should be interpreted in a manner that is beneficial to the counterparty of the administrative agreement in accordance with the principle of good faith;

4. The court’s review of the content of the administrative agreement shall include contractual review. If it believes that the administrative organ constitutes a failure to perform the reward obligations stipulated in the agreement when they can be continued to be performed, it may directly order the administrative organ to perform its obligations in accordance with the agreement.