Did you issue the correct invoice for the assignment of creditor’s rights?

In business activities, scenarios such as the assignment of creditor’s rights, transfer of debts, or collection/payment on behalf of others are not rare. While all parties may reach an agreement on the flow of funds, but may ignore the tax treatment, specifically, “how to issue invoices”.

Article 18 of the “Measures for the Administration of Invoices” stipulates: “Units and individuals that sell goods, provide services, or engage in other business activities and collect payments for external business transactions shall issue invoices to the payers; under special circumstances, the payer shall issue invoices to the payee.” Therefore, business activities are the foundation for issuing invoices. Then, do the assignment of creditor’s rights, transfer of debts, or collection/payment on behalf of others belong to business activities?

First, collection/payment on behalf of others is definitely not a business activity. The third party merely collects or makes payments on behalf of others, and the two parties involved in the underlying transaction remain unchanged. Therefore, in cases of collection/payment on behalf of others, the seller shall issue invoices to the buyer in accordance with the transaction; the third party shall not issue or receive invoices.

Second, there are two scenarios for the assignment of creditor’s rights and transfer of debts (hereinafter collectively referred to as the “Two Transfers”):

If the Two Transfers essentially involve the assignment of rights or obligations under a transaction, this is equivalent to changing the counterparty within the transaction, in which invoices may be issued to the newly added third party or by that third party. For example: Party A and Party B sign a sales contract, and Party A has delivered the goods to Party B. Party C promises to pay to Party A, and three parties sign an agreement stipulating that the rights and obligations of Party B (the buyer) under the sales contract are transferred to Party C. According to Article 24 of the “Detailed Rules for the Implementation of the Measures for the Administration of Invoices”: “Units and individuals issuing invoices must issue invoices when business activities occur and operating income is confirmed. …” If such income has not yet been confirmed yet and Party A has not issued an invoice to Party B, Party A may issue the invoice to Party C. If Party A has already issued an invoice to Party B, the relevant invoice shall be processed as a red-letter invoice (to cancel the original), and then Party A shall issue a new invoice to Party C. In the case of (2022) Lu 04 Min Zhong No. 1450, Party A sold goods to Party B, then assigned its creditor’s rights to Party C. Party A claimed that the invoice should be issued by Party C. The court held that since no income was confirmed at the time of the creditor’s rights assignment, Party A could not issue an invoice; as the actual seller in the transaction had changed, Party C should issue the invoice.

If the Two Transfers essentially only involve a change in the flow of funds. For example: Party A owes money to Party B, and Party B owes money to Party C. Party C agrees to accept payment from Party A for the debt owed by Party B. For Party B, this means transferring its debt to Party A and assigning its creditor’s rights to Party C. This scenario does not involve a change in the transaction subjects. According to article 18 of the “Measures for the Administration of Invoices”, the issuer or recipient of the invoice shall not change. In the case of (2022) Chuan 34 Min Zhong No. 1251, “the three parties agreed that the payee (Party B) would issue an invoice to the debt transferee (Party C) before Party C made the payment. Later, because Party B failed to issue the invoice, Party C refused to make the payment, and Party B filed a lawsuit. Ultimately, the court held that the payee (Party B) was not issuing the invoice to the debt transferee (Party C) based on the sale of goods; this agreement violated mandatory provisions and was therefore invalid, and ordered Party C to make the payment to Party B.”

In cases involving the second scenario, if the final payee refuses to issue an invoice, resulting in the payer lacking supporting documents for input tax deduction (preventing the payer from deducting input tax and causing losses from un deductible input tax), the payer may request compensation from the payee in accordance with Article 26 of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Provisions of the Contract Chapter of the Civil Code”. However, to avoid such dispute, it is recommended to clearly stipulate the subject responsible for invoice issuance, the time limit for issuance, and other relevant matters in the relevant agreements in advance.