Case introduction

         Ms. Zhang and Mr. Wang signed the "Beijing Stock Housing Sales Contract" and "Housing Sales Deposit Agreement" through the Happiness Real Estate Intermediary Company (hereinafter referred to as the "Happiness Company"), agreeing that Ms. Zhang will purchase Mr. Wang's house with an area of 47.1 square meters and a price of 3.5 million yuan. The contract also stipulates that on the day of signing the contract, Ms. Zhang shall pay a deposit of 500000 yuan to Mr. Wang, and the ancillary facilities, equipment, and decoration of the house shall be transferred to Ms. Zhang together with the house. Mr. Wang shall deliver the house to Ms. Zhang on the day of receiving the full house payment. Within 90 days from the date of signing the contract, both parties shall apply for the transfer of house ownership registration procedures.

         On the day of contract signing, Ms. Zhang paid a deposit of 500000 yuan to Mr. Wang, and Happiness Company processed the online signing procedures according to the procedure. The agreed transaction price for the house in the online signing contract was 2.7 million yuan. The bank account provided by Mr. Wang was submitted as a regulatory account in the online signing agreement. Later, there was a dispute between the two parties regarding the discount payment for the ancillary facilities, equipment, and decoration of the house. Mr. Wang cancelled his bank account as a regulatory account, resulting in the inability to complete the online signing and Ms. Zhang's inability to pay the purchase price on time.

        Ms. Zhang filed a lawsuit claiming that she had paid a deposit to Mr. Wang on schedule. The Beijing Stock Housing Sales Contract clearly stipulated that the ancillary facilities and decoration of the house would be delivered together with the house, and the house price already included the decoration discount. Mr. Wang's cancellation of his bank account violated the contract, and it has been 90 days since the deadline for transferring the house. Therefore, she filed a lawsuit with the court requesting Mr. Wang to continue fulfilling the contract. Mr. Wang believes that the price of the online signed contract is 2.7 million yuan, which is different from the actual transaction price agreed upon in the house. It is a yin-yang contract and should be considered invalid. He has the right to refuse to continue performing the contract and now requests the termination of the contract.

Court Trial

        After trial, the court found that the "Beijing Stock Housing Sales Contract" signed by Ms. Zhang and Mr. Wang stipulated a housing price of 3.5 million yuan, which is in line with the market value at the time of signing the contract. Mr. Wang's request to increase the discount for the ancillary facilities and decoration of the involved house lacks legal basis. This contract is a true expression of the intentions of both parties and does not violate any mandatory provisions of relevant laws, therefore it is legal and valid, and should continue to be performed according to the house price. The agreed house price in the online contract signed by both parties is 2.7 million yuan, while the actual "Beijing Stock House Sales Contract" signed by both parties is 3.5 million yuan. The online contract is actually for tax avoidance considerations, so the price agreement of 2.7 million yuan is invalid, but it does not affect the performance of both parties in accordance with the "Beijing Stock House Sales Contract". The court ultimately ruled that Ms. Zhang would pay the remaining house price to Mr. Wang, and Mr. Wang would cooperate with Ms. Zhang to handle the transfer of property ownership procedures. The relevant taxes and fees would be borne by Ms. Zhang according to the actual transaction amount of the house.

Judicial interpretation

        "Yin Yang contract" refers to two or more contracts entered into by the contracting parties for the same matter with different contents, one internal and one external. Among them, the external "positive contract" is aimed at avoiding supervision, reducing housing prices, and thus reducing taxes and fees, rather than expressing the true intentions of both parties. The actual transaction price is agreed upon by the "negative contract".

        Article 146 of the Civil Code of the People's Republic of China stipulates that civil legal acts committed by the perpetrator and the counterparty with false intentions are invalid. The validity of concealed civil legal acts expressed with false intent shall be dealt with in accordance with relevant legal provisions. Article 153, Paragraph 1 stipulates that civil legal acts that violate mandatory provisions of laws and administrative regulations are invalid. However, this mandatory provision does not result in the invalidity of the civil legal act. Article 154 stipulates that civil legal acts of malicious collusion between the perpetrator and the counterparty, which harm the legitimate rights and interests of others, are invalid.

        Paying taxes in accordance with the law is an obligation that every citizen should fulfill. In this case, Ms. Zhang and Happiness Company deliberately lowered the housing price to evade taxes, and the price terms agreed upon in the online contract were invalid. When Ms. Zhang and Mr. Wang signed the second-hand housing sales contract, they negotiated through equal means and both expressed their true intentions, so the housing sales contract is still valid. The price terms in the online contract are invalid and do not affect the continuation of the property transaction between both parties. Ms. Zhang should pay taxes based on the true transaction price of the property. Mr. Wang cannot claim that the entire property purchase and sale contract is invalid based on the "yin-yang contract", and should continue to fulfill the contractual obligations according to the true intentions expressed by both parties.

       In practice, signing "yin-yang contracts" in second-hand housing transactions may seem like tax avoidance on the surface, but in reality, there are huge legal risks hidden. According to Article 63 (1) of the Tax Collection and Administration Law of the People's Republic of China, if a taxpayer evades taxes, the tax authority shall recover the amount of tax not paid or underpaid, late fees, and impose a fine of 50% to 5 times the amount of tax not paid or underpaid. In addition, Article 201 of the Criminal Law of China stipulates that if a taxpayer uses deception or concealment to make false tax declarations or fails to declare taxes, and evades a large amount of tax payments that account for more than 10% of the taxable amount, it may constitute the crime of tax evasion. On March 18, 2024, the Supreme People's Court and the Supreme People's Procuratorate issued the "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases Involving Harmful Tax Collection and Management", which clearly recognized the signing of "yin-yang contracts" as a "means of deception and concealment" as stipulated in Article 201 of the Criminal Law. Therefore, signing a "yin-yang contract" for the sale and purchase of second-hand houses not only fails to avoid taxes, but may even violate criminal law, constitute a crime, and must not be done.

         This article is transferred from the WeChat official account of "Beijing Haidian Court" and thanks.