Editor's Note：On May 1, 2016, the nationwide pilot program for the replacement of business tax with value-added tax (hereinafter referred to as the "BT-to-VAT Reform") was fully launched, bringing all business tax taxpayers, including those in the real estate industry, into the scope of the pilot program. To ensure that the tax burden of the real estate industry would only decrease and not increase after the BT-to-VAT Reform, the State Administration of Taxation (SAT) formulated the Interim Measures for the Administration of VAT Collection on Real Estate Projects Developed and Sold by Real Estate Development Enterprises (SAT Announcement No. 18 of 2016). The Announcement stipulates that where general VAT taxpayers of real estate development enterprises sell self-developed real estate projects and apply the general tax calculation method, the land price may be deducted when calculating the sales amount. The calculation formula is: Sales amount = (Total consideration and non-price charges - Land price permitted to be deducted in the current period) ÷ (1 + 9%).

This provision means that the state allows real estate development enterprises to offset the VAT included in the land price against output VAT. However, there are divergent views in practice on the treatment of the VAT offset against the land price in the liquidation of land value increment tax (hereinafter referred to as "LVIT"), which will have different impacts on the LVIT payment of real estate development enterprises. This paper intends to conduct analysis and discussion based on a real case for readers' reference.

I. Case Introduction

(I) Basic Facts of the Case

Company A, a real estate development enterprise and general VAT taxpayer, developed Project A to which the general tax calculation method applies. As Project A had met the liquidation conditions, Company A submitted the LVIT liquidation materials of Project A to the tax authority, with an expected refund of overpaid LVIT.

In September 2025, the tax authority issued a Tax Matters Notice containing the LVIT liquidation review conclusion to Company A. The tax authority included the output VAT offset against the land price into the total real estate sales revenue, and required Company A to make an upward adjustment to the LVIT taxable income, resulting in the expected LVIT refund turning into a supplementary LVIT payment obligation for Company A.

(II) Positions of the Tax Authority and the Enterprise

The tax authority held that the output VAT offset against the land price shall be subject to an upward adjustment to the LVIT taxable income, based on the following grounds:

Pursuant to the Announcement of the State Administration of Taxation on Several Collection and Administration Provisions on Land Value Increment Tax After the BT-to-VAT Reform (SAT Announcement No. 70 of 2016), for taxpayers applying the general VAT calculation method, the LVIT taxable income from real estate transfer shall exclude VAT output tax. Meanwhile, in accordance with SAT Announcement No. 18 of 2016, VAT output tax = (VAT-inclusive revenue - Land cost) ÷ (1 + 9%) × 9%.On this basis, LVIT taxable income = VAT-inclusive revenue - VAT output tax = VAT-inclusive revenue - [(VAT-inclusive revenue - Land cost) ÷ (1 + 9%) × 9%] = (VAT-inclusive revenue + Land cost × 9%) ÷ (1 + 9%). Therefore, the output tax reduced by the land cost deduction forms part of the LVIT taxable income.

The state allows real estate development enterprises applying the general tax calculation method to pay VAT via the differential taxation method, and the land price has already been deducted from the sales amount, reducing the enterprise's VAT burden. In the LVIT liquidation, if the output VAT offset against the land price is not included in the LVIT taxable income, the enterprise will underpay both VAT and LVIT, resulting in a reduction in the state's overall tax revenue.

Company A held that the output VAT offset against the land price shall not be subject to an upward adjustment to the LVIT taxable income, based on the following grounds:

The tax authority included the output VAT offset against the land price into the LVIT taxable income through formula derivation, which has no explicit legal basis.

The reason why the state allows the land price to offset against output tax is that the land price is a major component of the cost expenditure of real estate development enterprises. If the deduction is not allowed, the tax burden of real estate development enterprises will increase after the BT-to-VAT Reform, affecting market stability. In addition, VAT and LVIT are separate taxes. The state's measure to avoid increasing the enterprise's VAT burden shall not result in the transfer of such tax burden to LVIT.

It can be seen that the core dispute between the tax authority and the enterprise is whether the output VAT offset against the land price should be subject to an upward adjustment to the LVIT taxable income.

II. How to Treat the Output VAT Offset Against Land Price?

In fact, there is no explicit provision at the national level on the treatment of the output VAT offset against the land price, leading to divergent understandings and disputes in practice.

(I) Viewpoint 1: The output VAT offset against land price shall offset the land cost

The main representative of this viewpoint is the Fujian Provincial Tax Service of the State Taxation Administration. In the Opinions on the Treatment of Output VAT Offset Against the Land Grant Fee Paid by Real Estate Development Enterprises (General Taxpayers) Through Differential Taxation in LVIT Liquidation After the BT-to-VAT Reform, the Fujian Provincial Tax Service explicitly stated:"Recently, we have received reports from some prefecture-level and municipal tax authorities on how to treat the output VAT offset against the land grant fee paid by real estate development enterprises (general taxpayers) through differential taxation in LVIT liquidation after the BT-to-VAT Reform. Upon research and reporting to the bureau leadership for review and approval, pending further clarification from the State Administration of Taxation, the offset output VAT shall be treated as an offset against the land cost in LVIT liquidation in accordance with the relevant provisions of the Notice of the Ministry of Finance on Issuing the Accounting Provisions for Value-Added Tax (Caikuai [2016] No. 22). Projects for which the liquidation review has been completed before the issuance of these Opinions shall not be retroactively adjusted."

It can be seen that the main basis for Viewpoint 1 is the Accounting Provisions for Value-Added Tax. Among them:

Item 2, Paragraph 1 of Article 1 stipulates that the column "Output VAT Offset" records the amount of output tax reduced by general taxpayers due to deduction of sales amount in accordance with the current VAT system.

Item 1, Paragraph 3 of Article 2 stipulates that "1. Accounting treatment for cost expenses incurred by the enterprise that are allowed to be deducted from the sales amount. Where the cost expenses incurred by the enterprise are allowed to be deducted from the sales amount in accordance with the current VAT system... when compliant VAT deduction vouchers are obtained and the tax liability occurs, the allowable deductible tax amount shall be debited to 'Taxes Payable - Value Added Tax Payable (Output VAT Offset)'... and credited to 'Prime Operating Cost' and other accounts."

On this basis, Viewpoint 1 holds that with reference to the above provisions, the output VAT offset against the land price shall offset the land cost, which is consistent with the enterprise income tax and accounting treatment.

(II) Viewpoint 2: The output VAT offset against land price shall be subject to an upward adjustment to the LVIT taxable income

The main representative of this viewpoint is the Guangzhou Municipal Tax Service. The Notice of the Former Guangzhou Local Taxation Bureau on Issuing the Guidelines for the Handling of Relevant Issues in the 2016 Land Value Increment Tax Liquidation Work (Suidishuihan [2016] No. 188) stipulates:"Where a taxpayer applies the general VAT calculation method, the LVIT liquidation income shall be confirmed in accordance with the formula: (VAT-inclusive sales revenue + Land price of the project × 11%) / (1 + 11%) (Note: The current applicable tax rate is 9%). That is, the output VAT reduced by the taxpayer through deduction of the sales amount with the land price of the project in accordance with the provisions shall be subject to an upward adjustment to the LVIT liquidation income... Where a taxpayer sells a self-developed real estate project and applies the general VAT calculation method, the output VAT reduced by the taxpayer through deduction of the sales amount with the land price of the project in accordance with the provisions shall not reduce the land cost confirmed by the taxpayer in the LVIT liquidation."

The viewpoint of the tax authority in the aforementioned case is consistent with that of the Guangzhou Municipal Tax Service. In practice, tax authorities in Anhui, Inner Mongolia and other regions also support this viewpoint, whose essential logic is derived through formula deduction.

(III) Viewpoint 3: Neither offset against land cost nor upward adjustment to LVIT taxable income

The main representatives of this viewpoint are the Jiangsu Provincial Tax Service and the Beijing Municipal Tax Service.

The Jiangsu Provincial Tax Service once replied to the question "How to determine the LVIT taxable income of a real estate development enterprise applying the general VAT calculation method at the time of liquidation?", stating:"In accordance with Article 3 of the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Tax Basis for Deed Tax, House Property Tax, Land Value Increment Tax and Individual Income Tax After the BT-to-VAT Reform (Caishui [2016] No. 43), the income obtained by a LVIT taxpayer from the transfer of real estate is VAT-exclusive income. In accordance with Article 1 of SAT Announcement No. 70 of 2016, for taxpayers applying the general VAT calculation method, the LVIT taxable income from real estate transfer shall exclude VAT output tax. Therefore, for a real estate development enterprise applying the general VAT calculation method, its LVIT taxable income at the time of liquidation = Revenue from real estate transfer ÷ (1 + Applicable tax rate)."

The Beijing Municipal Tax Service made corresponding provisions in the Beijing Local Taxation Bureau Regulations on Land Value Increment Tax Liquidation Administration. Item 1 of Article 29 stipulates that "In the LVIT liquidation, where invoices have been issued in full for the real estate transferred, the income shall be confirmed in accordance with the amount stated in the invoices; where no invoice has been issued or the invoice has not been issued in full, the income shall be confirmed in accordance with the house sales amount and other gains stated in the sales contract signed by the transaction parties."

Although real estate development enterprises calculate and pay VAT through differential taxation, they issue special VAT invoices in full for the sales amount obtained. That is to say, the amount stated in the special VAT invoice is equal to the LVIT taxable income. In other words, the output VAT offset against the land price shall neither offset the land cost nor be subject to an upward adjustment to the LVIT taxable income.

(IV) Impact of Different Viewpoints on Land Value Increment Tax

To clearly demonstrate the impact of different treatment methods for the output VAT offset against the land price in LVIT liquidation on the tax burden, it is assumed that:

The VAT-inclusive revenue from house sales by a real estate development enterprise is 109 million yuan, with a VAT-exclusive income of 100 million yuan;

The land price paid is 54.5 million yuan, and the output VAT offset against the land price is 54.5 million ÷ (1 + 9%) × 9% = 4.5 million yuan;

The real estate development cost is 10 million yuan;

The real estate development expenses, related taxes and surcharges total 500,000 yuan.

The LVIT is calculated under the three viewpoints as follows:

Viewpoint	LVIT Taxable Income	Land Cost	Total Deductible Items	Land Value Increment Tax Payable
Viewpoint 1	100 million yuan (no adjustment)	50 million yuan (offset)	50 million + 10 million + 0.5 million + (60 million × 20%) = 72.5 million yuan	(100 million - 72.5 million) × 30% = 8.25 million yuan
Viewpoint 2	104.5 million yuan (upward adjustment)	54.5 million yuan(no adjustment)	54.5 million + 10 million + 0.5 million + (64.5 million × 20%) = 77.9 million yuan	(104.5 million - 77.9 million) × 30% = 7.98 million yuan
Viewpoint 3	100 million yuan (no adjustment)	54.5 million yuan (no adjustment)	54.5 million + 10 million + 0.5 million + (64.5 million × 20%) = 77.9 million yuan	(100 million - 77.9 million) × 30% = 6.63 million yuan

Through the comparison of the data in the table, it can be seen that Viewpoint 3 is the most favorable for real estate development enterprises. Viewpoint 2 leads to an increase in the LVIT burden due to the upward adjustment of the LVIT taxable income. Viewpoint 1 has a more significant impact on the LVIT burden, as the offset of the land cost by the output VAT offset against the land price reduces the base of the 20% additional deduction item, thereby reducing the total amount of deductible items.

III. The Output VAT Offset Against Land Price Shall Neither Be Subject to Upward Adjustment to Taxable Income Nor Offset Against Land Cost

(I) In the Absence of Explicit Legal Provisions, the Interpretation Favorable to the Taxpayer Shall Be Adopted

The treatment of the output VAT offset against the land price is a legal application dispute with no explicit provisions at the national level. The author holds that the tax legal relationship is a legal relationship between unequal subjects, and the interpretation of tax laws shall follow the basic principle of being favorable to the taxpayer. Where the provisions of tax laws are unclear or there are significant disputes, the interpretation favorable to the taxpayer shall be adopted, and the output VAT offset against the land cost shall neither be subject to an upward adjustment to the LVIT taxable income nor offset against the land cost.

In addition, in the Guangzhou Defa Case v. Guangdong Provincial Tax Service retried by the Supreme People's Court (SPC), the SPC explicitly pointed out:"In accordance with the basic requirements of law-based administration, without the provisions of laws, regulations and rules, administrative organs shall not make decisions that affect the legitimate rights and interests of administrative counterparts or increase the obligations of administrative counterparts; where there are multiple interpretations of legal provisions, the interpretation favorable to the administrative counterparts shall be given priority in application."

Accordingly, with regard to the treatment of the output VAT offset against the land price, there is no explicit provision from the SAT. Local tax authorities adopting interpretations unfavorable to real estate development enterprises through formula derivation and other means violate the requirements of law-based administration.

(II) The Viewpoint of Offsetting Against Land Cost Conflicts with LVIT Tax Return Filing Requirements

The Notice of the State Administration of Taxation on Revising the Land Value Increment Tax Return Forms (Shuizonghan [2016] No. 309) explicitly stipulates that "Column 6 of the Land Value Increment Tax Return (Form II) (Applicable to Taxpayers Engaged in Real Estate Development for Liquidation), 'Amount Paid for the Acquisition of Land Use Right', shall be filled in with the amount of the land grant fee actually paid (or supplemented) by the taxpayer to obtain the land use right required for the real estate development project and the relevant fees paid in accordance with the unified national regulations."

Accordingly, the LVIT tax return (applicable to liquidation) does not require the output VAT offset against the land price to be excluded from the land price. Viewpoint 1 is obviously inconsistent with the LVIT filing requirements. In addition, as mentioned above, under Viewpoint 1, not only will the base of the land cost be reduced, but also the amount of the additional deduction item will be affected, resulting in a sharp increase in the LVIT burden of real estate development enterprises, which is also inconsistent with the principle of tax equity.

(III) The Viewpoint of Upward Adjustment to Taxable Income Violates the Legislative Purpose and the Principle of Statutory Taxation

First, from the perspective of legislative purpose, there are two main reasons why the SAT issued SAT Announcement No. 18 of 2016 to allow real estate development enterprises applying the general tax calculation method to pay VAT via the differential taxation method:

As mentioned above, to ensure that the tax burden only decreases and does not increase after the BT-to-VAT Reform. Previously, real estate development enterprises paid business tax at a rate of 5% based on their business income from real estate sales. After the BT-to-VAT Reform, real estate enterprises are subject to a VAT rate of 11% (now 9%). If differential taxation is not allowed, the tax burden of real estate development enterprises will increase significantly, which violates the original intention of the reform.

To avoid double taxation. In accordance with the relevant VAT provisions, the grant of land use right by land owners is exempt from VAT. This means that the land price paid by real estate development enterprises to land owners includes VAT. However, in practice, land owners cannot issue special VAT invoices to real estate development enterprises, resulting in the inability of real estate development enterprises to deduct the input VAT. Therefore, allowing real estate development enterprises to deduct the VAT included in the land price through differential taxation can effectively avoid double taxation.

If the output VAT offset against the land price is adjusted to the LVIT taxable income or offset against the land cost, it will essentially deprive the real estate development enterprise of its VAT deduction right and transfer the VAT that should have been deducted to the LVIT, which violates the original legislative intention.

Second, the principle of statutory taxation requires that tax authorities must strictly abide by the substantive and procedural tax requirements when levying taxes on taxpayers, and shall not make expansive interpretations.

Article 2 of the Interim Regulations of the People's Republic of China on Land Value Increment Tax stipulates that "Any unit or individual that transfers the right to the use of state-owned land, buildings on the land and their attached facilities (hereinafter referred to as the transfer of real estate) and obtains income shall be the taxpayer of land value increment tax (hereinafter referred to as the taxpayer), and shall pay land value increment tax in accordance with these Regulations."

Article 5 of the Interim Regulations stipulates that "The 'income' mentioned in Article 2 of the Regulations includes the total consideration and relevant economic benefits obtained from the transfer of real estate."

Accordingly, the key issue is whether the output VAT offset against the land price falls into the scope of "relevant economic benefits". As mentioned above, the land price paid by the real estate development enterprise to the land owner includes VAT, and the VAT offset against the land price is the input VAT that the enterprise is entitled to deduct. It is neither the new value created by the enterprise's business activities, nor the fiscal funds or subsidies obtained free of charge, and does not constitute new economic benefits. Therefore, it shall not be included in the LVIT taxable income of the real estate development enterprise.

IV. What Should Real Estate Development Enterprises Do?

For Company A in this case, since the tax authority has issued the Tax Matters Notice containing the LVIT liquidation review conclusion, the enterprise shall first pay the tax in accordance with the requirements of the tax authority or provide corresponding guarantee, and then apply for administrative reconsideration to the tax authority at the next higher level. When necessary, the enterprise may engage professional tax professionals to conduct analysis and demonstration on the issue from a professional perspective, and provide support with corresponding judicial precedents and law enforcement cases to help the enterprise resolve the dispute.

For real estate development enterprises that have not yet received the tax authority's liquidation review conclusion, they shall conduct active communication with the tax authority on this issue in advance to mitigate tax-related risks at the early stage.