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Tax arrears penalties, as a crucial mechanism in tax administration, were originally established to urge taxpayers to fulfill their tax obligations promptly and safeguard the state's tax revenue rights. However, regarding whether such penalties can exceed the principal tax amount, divergent views have persisted for years in both tax administration practices and judicial rulings. Particularly, a 2023 case published in the People's Court Case Database concerning the confirmation of bankruptcy claims involving tax payments highlighted the growing divergence between tax authorities and judicial bodies. This year, the State Taxation Administration released the new “Draft Amendment to the Tax Collection and Administration Law of the People's Republic of China,” replacing the original term “late payment penalty” with “delayed payment penalty.” Can this change truly resolve the current dispute?

1. Root of the Disagreement

The longstanding disagreement between tax authorities and judicial bodies over whether tax late payment penalties can exceed the principal tax debt stems from a regulatory conflict between the Tax Collection and Administration Law of the People's Republic of China (2015) and the Administrative Compulsory Law of the People's Republic of China.

a. Tax Authority Perspective: No Upper Limit on Late Payment Penalties, Based on the Tax Collection and Administration Law

Most tax authorities, including the State Taxation Administration, maintain that statutory late payment penalties have no upper limit and may exceed the principal tax amount owed. Their basis is the Tax Collection and Administration Law and related regulations.

Article 32 of the Tax Collection and Administration Law stipulates that where a taxpayer fails to pay taxes within the prescribed time limit, or where a withholding agent fails to remit taxes within the prescribed time limit, the tax authorities shall, in addition to ordering payment within a specified time limit, impose a late payment penalty of 0.05% per day on the overdue tax amount from the date of default.

Additionally, the current Implementation Rules of the Tax Collection and Administration Law of the People's Republic of China (2016) explicitly define the start and end dates for late payment penalties. Article 75 stipulates that the period for imposing late payment penalties under Article 32 of the Tax Collection and Administration Law shall commence on the day following the expiration of the tax payment deadline specified by laws, administrative regulations, or determined by tax authorities in accordance with such laws and regulations, and shall end on the date the taxpayer or withholding agent actually pays or remits the tax.

As the aforementioned provisions do not set an upper limit for late payment penalties, tax authorities interpret this to mean that penalties may continue to accumulate until the tax liability is fully settled. Consequently, in practice, late payment penalties may exceed the principal amount of the tax owed.

b. Judicial Rulings: From “Inconsistent Judicial Standards” to “Tendency to Cap at Principal Amount,” Based on the Administrative Compulsory Law

The judicial system's stance on this issue has undergone phased evolution. Prior to 2023, judicial standards were inconsistent, with significant variations across courts at different levels regarding whether late payment penalties could exceed the principal amount of tax owed. Some courts supported the tax authorities' position, arguing that since the Tax Collection and Administration Law—as a special law—did not set an upper limit, late payment penalties could exceed the principal amount. Other courts, however, did not support penalties exceeding the principal amount.

In 2023, following the release of a landmark case on bankruptcy claim (tax claim) confirmation disputes [(2023) Su 01 Min Zhong No. 6513] in the People's Court Case Database, judicial rulings have gradually converged—courts increasingly cite the Administrative Compulsory Law to limit late payment penalty amounts, ruling that “tax late payment penalties shall not exceed the principal amount of the tax arrears.”

Article 45 of the Administrative Compulsory Law stipulates that where an administrative organ lawfully issues an administrative decision imposing a monetary payment obligation and the party fails to perform within the time limit, the administrative organ may lawfully impose additional fines or late payment penalties. The standards for imposing additional fines or late payment penalties shall be notified to the party. The amount of additional fines or late payment penalties shall not exceed the amount of the monetary payment obligation. According to Article 12 of the Administrative Compulsory Law, methods of administrative enforcement include imposing additional fines or late payment penalties.

Based on this, courts hold that tax late payment penalties fall under the administrative enforcement methods stipulated in the Administrative Compulsory Law and are therefore subject to its mandatory provision that “late payment penalties shall not exceed the principal amount.”

Although the divergence between tax authorities and judicial organs on the above issue remains unresolved at the level of current legislation or judicial interpretations, judicial practice since 2023 has shown a clear trend toward unified adjudication.

2. Analysis of Typical Cases

Disputes over whether tax late payment penalties may exceed the principal amount of tax arrears mostly arise in bankruptcy creditor confirmation cases. Below, the author analyzes the prevailing judicial views using a 2023 case as an example.

【Case】State Taxation Administration of a District in Nanjing v. Nanjing Company Bankruptcy Claim Confirmation Dispute

● Basic Facts:

The State Taxation Administration of a District in Nanjing declared a claim of RMB 690,909.24 against the bankrupt enterprise Nanjing Company, comprising RMB 343,479.61 in tax arrears and RMB 347,429.63 in late payment penalties. The bankruptcy administrator argued that late payment penalties should not exceed the principal tax amount, thus recognizing only RMB 343,479.61 in penalty claims and rejecting the excess RMB 3,950.02.

● Points of Dispute:

Whether the tax authority's imposition of late payment penalties constitutes an administrative enforcement action. Whether such penalties should be subject to the restriction under Article 45 of the Administrative Compulsory Law that “additional fines or late payment penalties shall not exceed the amount of the monetary payment obligation.” How to apply the relationship between the Tax Collection and Administration Law and the Administrative Compulsory Law.

● Court Ruling:

First Instance Judgment: The District People's Court of Nanjing upheld the District Tax Bureau's claim, confirming its bankruptcy claim for the overdue tax penalty of ¥3,950.02 exceeding the principal tax amount.

Appellate Ruling: The Nanjing Intermediate People's Court overturned the first-instance judgment and dismissed all claims by the tax authority, holding that:

The imposition of late payment penalties by the tax authority constitutes an act of administrative enforcement. Regarding the relationship between the Tax Collection and Administration Law and the Administrative Compulsory Law, the latter, as a general procedural law governing the establishment and implementation of administrative compulsion by administrative organs, shall be applied in accordance with the law. The tax authority's imposition of late payment penalties shall be governed by Article 45 of the Administrative Compulsory Law, which stipulates that such penalties shall not exceed the principal amount of the tax.

This case clarified that the tax authority's imposition of late payment penalties constitutes an administrative enforcement action, subject to the restrictive provisions of the Administrative Compulsory Law. It thereby established the judicial principle that “late payment penalties shall not exceed the principal tax amount.” As precedent-setting cases serve as reference for similar cases, courts at all levels have generally adhered to this judicial standard over the past two years.

3. Can Changing “Late Payment Penalty” to “Delayed Payment Penalty” Resolve the Dispute?

As previously noted, the root cause of the divergence between tax administration and judicial adjudication lies in the regulatory conflict between the Tax Collection and Administration Law and the Administrative Compulsory Law. However, the core issue fundamentally concerns the nature of tax late payment penalties—specifically, whether they constitute an administrative enforcement method as defined under Article 12 of the Administrative Compulsory Law.

Current judicial opinions hold that tax late payment penalties are punitive in nature and thus constitute an administrative enforcement measure. Tax authorities, however, generally contend that such penalties are fundamentally acts of tax collection, not the “imposition of fines and late payment penalties” defined under the Administrative Compulsory Law. They argue that the two concepts differ significantly in terms of applicable laws, prerequisites for imposition, commencement periods, enforcement procedures, and compulsory nature, and therefore are not identical concepts. Consequently, they contend the Administrative Compulsory Law does not apply.

Nevertheless, the prevailing judicial interpretation has clearly put pressure on tax authorities that have long argued late payment penalties can exceed the amount of tax owed.

On March 28, 2025, the State Taxation Administration, in conjunction with the Ministry of Finance, publicly solicited opinions on the “Revised Draft of the Tax Collection and Administration Law.” Notably, the term “tax late payment penalty” was revised to “tax late payment fee.” The State Taxation Administration explicitly stated in its revision rationale: “Due to differing legal natures from administrative penalties under the Administrative Compulsory Law, the term ‘late payment penalty’ in the Tax Collection and Administration Law is amended to ‘tax payment delay fee.’”

Does the tax payment delay fee truly constitute an administrative enforcement action? Does changing the term from “late payment penalty” to “tax payment delay fee” alter its nature?

Three primary perspectives exist regarding the nature of late payment penalties:

Compensatory. This view treats tax late payment charges as economic compensation for delayed fulfillment of tax obligations, similar to interest. It holds that their purpose is to urge taxpayers to fulfill their obligations promptly and compensate for the state's loss of tax revenue due to delayed payments. Tax authorities predominantly adhere to this perspective.

Punitive. This view regards tax late payment charges as an administrative enforcement measure. Under this interpretation, given their distinct punitive and coercive nature, such charges should be subject to the principle of proportionality.

Hybrid Nature. This perspective holds that tax arrears penalties possess dual attributes: both an enforcement penalty and interest on tax arrears. That is, while tax arrears penalties exhibit characteristics of an enforcement penalty, their nature as an accessory claim to the tax debt must also be considered. The author personally tends to agree with this view.

The draft revision of the Tax Collection and Administration Law replaces “late payment surcharge” with “delayed payment surcharge,” evidently attempting to reinforce the economic compensation nature of tax arrears through conceptual differentiation. But can a mere change in wording resolve the dispute over whether this constitutes an administrative collection act or an administrative enforcement act, and settle the disagreement over whether the surcharge can exceed the amount of tax owed?

The author observes that while the draft revision replaces “late payment penalty” with “delayed payment penalty,” the collection rate remains unchanged at 0.05% per day—equivalent to an annualized rate of 18.25%. This rate significantly exceeds current market financing costs. In September 2025, the People's Bank of China announced a one-year Loan Prime Rate (LPR) of 3% and a five-year LPR of 3.5%. Accordingly, the current interest rate cap for private lending is only 12% (four times the one-year LPR).

Under these circumstances, tax late fees clearly carry punitive characteristics. Persisting in the view that tax late fees merely represent losses from occupying tax funds is hardly convincing, nor can altering a single character change the inherent punitive nature embedded within them.

4. Legal Perspective

In summary, resolving the current debate over whether tax late payment penalties can exceed the principal tax amount cannot be achieved merely by changing the term from “late payment penalty” to “delayed payment fee.” Instead, the principle of “substance over form” should be followed.

If tax authorities contend that tax late payment penalties or late payment fees merely represent losses incurred by the state due to taxpayers' delayed fulfillment of tax obligations, it is recommended to reduce the collection rate to a reasonable standard based on market financing benchmarks. For instance, drawing from the approach in judicial interpretations on private lending, the standard for late payment charges or delinquency fees could be reasonably determined based on a certain benchmark of the Loan Prime Rate (LPR). Otherwise, it cannot be ruled out that judicial authorities may still apply the “substance over form” principle to classify “tax delinquency fees” as late payment charges under the Administrative Compulsory Law.

Case Source: Tax Authority of a District in Nanjing City, State Taxation Administration v. Nanjing Company Bankruptcy Claim Confirmation Dispute (Case No.: 2023-08-2-295-004) First Instance: (2022) Su 0115 Min Chu 15643 Second Instance: (2023) Su 01 Min Zhong 6513 Relevant Legal Provisions: 1. Article 45 of the Administrative Compulsory Law of the People's Republic of China: Where an administrative organ lawfully issues an administrative decision imposing a monetary payment obligation and the party fails to perform within the prescribed time limit, the administrative organ may lawfully impose additional fines or late payment penalties. The standards for imposing additional fines or late payment penalties shall be notified to the party. The amount of additional fines or late payment penalties shall not exceed the amount of the monetary payment obligation.

2. Article 32 of the Tax Collection and Administration Law (2015): Where a taxpayer fails to pay taxes within the prescribed time limit, or where a withholding agent fails to remit taxes within the prescribed time limit, the tax authorities shall, in addition to ordering payment within a specified time limit, impose a late payment penalty of 0.05% per day on the overdue tax amount from the date of default.

3. Implementing Rules of the Tax Collection and Administration Law of the People's Republic of China (2016) Article 75: The period for imposing late payment penalties as stipulated in Article 32 of the Tax Collection and Administration Law shall commence on the day following the expiration of the tax payment deadline prescribed by laws or administrative regulations, or determined by tax authorities in accordance with laws or administrative regulations, and shall end on the date the taxpayer or withholding agent actually pays or remits the tax.

4. Article 41 of the Draft Revised Tax Collection and Administration Law of the People's Republic of China: Where a taxpayer fails to pay taxes within the prescribed period or a withholding agent fails to remit taxes within the prescribed period, the tax authority shall, in addition to ordering payment within a specified time limit, impose a tax delinquency penalty of 0.05% per day on the delinquent tax amount from the date of delinquency.