Authored by: Lei Xu

Case Background

On November 4, 2022, the First Inspection Bureau of the Kunming Municipal Tax Service, State Taxation Administration, issued a Tax Treatment Decision following a tax audit of Company A. The decision stated that:

"If your company disagrees with our tax determination, you must first, within the time limit set by this decision, pay the taxes and late payment surcharges or provide a corresponding guarantee."

Company A proposed to pledge its patent rights as a tax guarantee. However, on January 3, 2023, the First Inspection Bureau issued Tax Notification No. [2023] 2, rejecting the application and refusing to confirm the patent rights as acceptable collateral for tax purposes.

Company A filed for administrative reconsideration. The Kunming Municipal Tax Service rendered Reconsideration Decision No. [2023] 4 on April 6, 2023, affirming the original rejection. Company A then filed an administrative lawsuit against both the First Inspection Bureau and the Kunming Municipal Tax Service. The first-instance court upheld the reconsideration decision. The appellate court dismissed Company A's appeal and affirmed the lower court’s ruling.

Courts' Reasoning

First-Instance Court

The primary issue was whether a patent right could be accepted as a tax collateral under Chinese administrative law system.

The court referred to Article 25 of the Interim Measures for Tax Payment Security (Order No. 11, State Administration of Taxation, 2005), which provides that:

"Tax pledge means that, with the consent of the tax authority, a taxpayer or tax guarantor transfers movable property or certificates of rights into the possession of the tax authority as security for tax and late payment surcharges. If payment is overdue, the tax authority may dispose of the pledged property or certificates in accordance with law. Tax pledges may involve movables or rights. Pledgable rights include bills of exchange, checks, promissory notes, bonds, and deposit certificates. Where the asset exhibits significant value fluctuation, the tax authority at or above the level of a municipality with districts may refuse to accept it as collateral."

The court held that this provision contains an express and exhaustive list of rights-based instruments eligible for tax pledges. Patent rights are not included. Moreover, under Article 1 of the Interim Measures, the regulatory purpose is to safeguard national tax revenue and protect taxpayers' legitimate interests. Unlike civil law, which governs equal private parties, tax enforcement is part of administrative law and prioritizes public interest.

The court emphasized that even pledgable assets may be rejected if they exhibit material value fluctuation, thus reinforcing the administrative discretion afforded to tax authorities. Accordingly, the rejection of the patent pledge by the tax authority was not improper.

Second-Instance Court

The appellate court further noted that, to effectively safeguard the enforcement of tax claims and public revenue, assets proposed as tax pledges should ideally:

• be capable of being physically possessed or controlled by the tax authority,

• be easily realizable,

• have stable and ascertainable value,

• and be enforceable under administrative procedures.

Patent rights do not meet these requirements.

Additionally, under Article 444 of the Civil Code, a pledge over intellectual property such as patent rights is established only upon successful registration. According to Article 11 of the Measures for the Registration of Patent Pledges (Order No. 56, CNIPA), the National Intellectual Property Administration has discretion to approve or reject a pledge registration within seven working days after receiving the application.

Therefore, even the validity of the pledge itself is uncertain at the time of application. More importantly, in the event of default, the tax authority would not be able to dispose of the patent right directly to offset the tax debt—an essential feature of tax pledge enforcement.

The appellate court confirmed that the tax authority had acted in compliance with administrative procedures prescribed by the Administrative Reconsideration Law and the Rules on Tax Administrative Reconsideration. Accordingly, Company A's appeal was dismissed.

Legal Framework and Practical Implications

Article 88 of the Law on the Administration of Tax Collection requires that when a taxpayer disputes a tax determination, they must first pay the tax or provide a legally recognized guarantee before applying for administrative reconsideration. A party dissatisfied with the reconsideration outcome may then bring an administrative lawsuit.

Under Article 2 of the Interim Measures for Tax Payment Security, tax guarantees must be confirmed or accepted by the tax authority. Therefore, the authority has discretion to determine whether the proposed form of security meets legal and practical requirements. A taxpayer cannot unilaterally designate a particular asset—such as a patent—as tax collateral without such confirmation.

Article 25 of the Interim Measures reiterates this position. Furthermore, Articles 27 and 28 provide detailed procedures for pledging negotiable instruments such as checks, promissory notes, corporate bonds, and deposit certificates. These procedures do not extend to patent rights, and the Measures contain no operational guidance for accepting patents as tax pledges.

In China's civil law system, administrative authorities are strictly bound by the principle of legality (legality of administration). This means that tax authorities may only exercise powers that are explicitly authorized by law or regulation. The categories of assets eligible for tax pledges cannot be expanded through analogy or judicial interpretation.

While the Civil Code does recognize patent rights as pledgable assets in private law relationships, that regime governs contracts and obligations between civil subjects of equal legal standing. It does not apply to administrative enforcement relationships between taxpayers and tax authorities. As the Interim Measures are enacted pursuant to the Law on the Administration of Tax Collection, they form part of the administrative law system and take precedence in matters involving public tax enforcement.

Conclusion

Patent rights are not within the scope of legally recognized collateral for tax payment under Chinese administrative law. Although patent rights are recognized as pledgable assets under the Civil Code, that provision applies to civil relationships between equal parties. Tax collaterals, by contrast, are governed by administrative law and concern the vertical relationship between the state and taxpayers. As such, the rules governing civil pledges under the Civil Code cannot be analogically applied to tax enforcement scenarios, which are governed by different objectives and legal principles.

Tax collaterals in China are subject to strict administrative procedures aimed at ensuring certainty, enforceability, and the realization of state revenue. Accordingly, tax authorities are justified in refusing forms of collateral—such as patent rights—that do not meet these standards. This case reaffirms the primacy of the principle of legality and the limited scope for analogical application in administrative legal practice under China's civil law framework.