Perspective | Determining and Defending Against Profit-Distribution Terms in Real Estate Joint Development Projects—An Empirical Analysis Centered on the Claim of “Unsold and Unpaid Taxes”
Published:
2025-12-12
In disputes arising from real estate joint development contracts, the party bearing the primary responsibility for development and operation often argues—on the grounds that “the project has not been fully sold” or “statutory taxes and fees have not been fully settled”—that the conditions for profit distribution have not been met, thereby refusing to pay the cooperating party its due share of profits. Such defenses not only involve the interpretation of contractual terms but also touch upon the nature of the joint development legal relationship, the distinction between internal settlement and external tax obligations, and the boundaries of the application of the principle of good faith and fair dealing in commercial practice. Drawing on a final-instance case successfully litigated by the author, this article systematically examines the reasoning behind judgments in such disputes and provides an analysis of relevant judicial trends.
Abstract
In disputes arising from real estate joint development contracts, the party bearing the primary responsibility for development and operation often argues—on the grounds that “the project has not been fully sold” or “statutory taxes and fees have not been fully settled”—that the conditions for profit distribution have not been met, thereby refusing to pay the cooperating party its due share of profits. Such defenses not only involve the interpretation of contractual terms but also touch upon the nature of the joint development legal relationship, the distinction between internal settlement and external tax obligations, and the boundaries of the application of the principle of good faith and fair dealing in commercial practice. Drawing on a final-instance case successfully represented by the author, this article systematically examines the reasoning behind judicial rulings in such disputes and provides an analysis of relevant judicial trends.
I. Summary of the Case and Definition of the Nature of Cooperation
This case involves a contractual dispute arising from a joint venture and cooperative real estate development agreement based on the “Development Agreement.” The cooperating parties agreed to make joint investments, share profits, and bear risks jointly in developing and constructing a certain project. Specifically, one party primarily provided the funding, while the other party was responsible for project development, construction, sales, and day-to-day operations. The court explicitly characterized this cooperation model as a loosely structured contractual partnership rather than an equity investment relationship following the establishment of a project company or a partnership governed by the Civil Code. The rights and obligations of each party are primarily determined according to the terms of the agreement; this characterization serves as the logical starting point for subsequent analysis of the right to claim profit distribution.
II. Core Dispute: Can “unsold and untaxed” prevent profit distribution?
In this case, the party responsible for project development (hereinafter referred to as the “Operator”) has consistently maintained throughout both the first and second trials that the project still has a small number of parking spaces and property-use units unsold, and that major taxes such as land value-added tax and corporate income tax have not yet been finally settled and paid. Therefore, the project does not meet the conditions for profit distribution. This argument seeks to transform the project’s ongoing administrative legal obligations toward external parties into a permanent impediment that prevents the internal cooperating parties from realizing their contractual rights.
In response to this defense, the agency’s work focuses on the following levels:
1. Separation of legal relationships: Internal settlement is independent of external tax obligations.
First, it must be clarified that the cooperating party, pursuant to the agreement, is exercising its contractual claim by requesting profit distribution; whereas the operator, as the entity responsible for project development, bears the legal obligation to pay taxes. The two parties have fundamentally different natures and are governed by different legal bases. Unless the cooperation agreement explicitly stipulates “completion of all tax clearance” as a condition precedent for profit distribution, the fulfillment status of one legal obligation cannot automatically negate the exercise of another contractual right. In this case, the agreement contains no such prerequisite provision.
2. A settlement agreement has been reached: the profit is now certain.
The key evidence lies in the fact that both parties jointly signed a detailed settlement statement on December 31, 2019. This document provides a comprehensive accounting of the project’s revenues and costs—including costs already paid as well as “taxes payable but not yet paid,” which were estimated by both parties—and clearly specifies the amount of post-tax profit. In other legal proceedings, the operator has already acknowledged the authenticity of this settlement statement. This indicates that the two parties have completed their internal commercial settlement regarding the project’s financial performance up to that point, meaning that the profit distribution now has a solid, quantifiable basis rather than remaining in an uncalculable state.
3. Review of Abuse of Rights and the Principle of Good Faith
In its judgment, the court pointed out that the operator, as the taxpayer, had long neglected to initiate the liquidation procedure despite the fact that the project was essentially sold out and met the conditions for land value-added tax clearance. Relying on its own failure to fulfill statutory obligations and on a small number of self-held assets that were not commercial in nature—such as property-use premises and public restrooms—the operator sought to thwart the cooperating party’s clear contractual rights. Such conduct, characterized by subjective intent to delay or even obstruct the distribution process, blatantly violated the principle of good faith and fair dealing. If such defenses were upheld, the investors’ right to profits would become entirely dependent on whether the operator actively discharged its administrative obligations, which would clearly amount to an unfair outcome.
III. Case Law Support: Judicial Practice Rejects the Position of “Refusal to Distribute Without Tax Clearance”
To strengthen the legal argumentation, we conducted a systematic search of relevant case law. Relevant judicial practice indicates that courts generally do not accept “unpaid taxes” as an absolute ground for refusing profit distribution.
1. Case No. Yu07 Min Zhong 6342 (2022) explicitly states that the wording in the Company Law regarding “post-tax profits” cannot be directly interpreted to mean that “profits cannot be distributed unless taxes have been paid.” Otherwise, it might lead to the controlling party abusing its rights and using tax issues as an excuse to indefinitely postpone profit distribution, thereby harming the interests of other shareholders.
2. Case No. 2300 of the Second Instance Civil Division, Sichuan 01 (2019) emphasizes that the party claiming that distribution is impossible due to unpaid taxes bears the burden of providing evidence to substantiate the specific amount of tax owed. If such party fails to provide sufficient evidence, its defense will not be accepted.
3. The reasoning in case No. Xin 01 Min Zhong 458 (2024) is highly consistent with the present case: In partnership disputes, the court directly deducts the tax cost proportion already agreed upon and confirmed by both parties in the reconciliation statement when allocating assets, rather than making the completion of the full tax settlement a prerequisite for distribution.
The common judicial principle revealed by the above-mentioned case is this: Provided that profits can be determined through internal accounting, priority should be given to protecting the investing party’s right to realize its returns. Tax issues fall within the management responsibilities of the company or project operator and can be addressed through measures such as setting aside funds or pursuing recovery in separate proceedings—rather than being used as a means to negate the distribution itself and leave the cooperating party’s rights dangling without redress.
IV. Implications of the Case and Legal Theoretical Discussion
The outcome of this case and the logic upon which it is based hold reference value for handling similar disputes arising from collaborative development projects.
1. The decisive role of internal settlement documents: The phased or final settlement documents, duly confirmed by both parties, can effectively “lock in” the project’s operational results at a specific point in time. These documents serve as the strongest evidence for asserting rights to profit distribution and can help counter disputes arising from future uncertainties.
2. Substantive review of the defense grounds: With regard to defenses raised on the basis of external factors such as “unpaid taxes” or “unsold inventory,” it is necessary to thoroughly examine their connection to internal allocation conditions, determine whether the party asserting the defense has been negligent in fulfilling its own obligations, and assess whether such a defense constitutes an abuse of rights.
3. The nature of the cooperation determines the applicable law: It is crucial to clarify that the cooperation constitutes a “contractual joint development” rather than a “partnership” or “equity investment.” This distinction determines that the Contract Section of the Civil Code, rather than the special provisions on property division or profit distribution found in the Partnership Enterprise Law or the Company Law, should be primarily applicable. By doing so, potential technical hurdles—such as the prohibition on dividing property before the termination of the partnership—are avoided.
Conclusion
In disputes over cooperative real estate development, if one party argues that the conditions for profit distribution have not been met on the grounds that the project has not been fully sold and statutory taxes and fees have not been fully settled, such a claim is unlikely to receive judicial support. The key points of review lie in whether the cooperating parties have already confirmed distributable profits through settlement, whether the party refusing to pay bears any fault or malice regarding the status of “unsold units and unpaid taxes,” and whether this defense would lead to a serious imbalance of interests, thereby violating the principle of good faith. In this case, the litigation strategy—based on a precise characterization of the legal relationship, reliance on crucial settlement evidence, and alignment with prevailing trends in judicial practice—has provided a clear path for both prosecution and defense in similar cases.
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