Whether invoices should be issued for liquidated damages ruled by courts?

In contract dispute cases, if a court determines that the defendant has breached the contract, it often orders the defendant to pay liquidated damages. Whether the plaintiff should issue an invoice for such liquidated damages?

Firstly, for those who are ordered to bear compensation liability due to the fault of one party in the contract, since the contract has not been established, is invalid or revoked, which means the business has not actually occurred, the plaintiff should not issue an invoice. Article 29 of the “Implementing Rules for the Administrative Measures for Invoices” (2024 Edition) prescribes that, where an invoice is issued or obtained without purchasing or selling commodities, providing or receiving services or engaging in other business activities, such circumstance shall be deemed as “inconsistency with the actual business situation”. Article 26 of the “Implementing Rules for the Administrative Measures for Invoices” (2019 Edition, has been revoked by the above 2024 Edition) explains more specific regarding this issue, that is, “No invoice shall be issued without occurrence of a business transaction.” From the perspective of the payer’s financial accounting management, it could require the payee to issue a receipt.

Secondly, if the defendant is the buyer (usually resulting in disputes due to unilateral termination of the contract), it will lead two paths. The first path is that the seller has already fulfilled all or part of the contract, then the seller shall issue an invoice for the additional liquidated damages paid by the buyer. Article 18 of the “Administrative Measures for Invoices” stipulates that, “For any entity or individual engaged in the sales of commodities, provision of services and other business activities, when collecting payment in business activities with external parties, the payee shall issue an invoice to the payer. However, under extraordinary circumstances, the payer may issue an invoice to the payee.” Article 5 of the “Provisional Regulations on Value-added Tax” prescribes that, “For occurrence of a taxable sale by a taxpayer, the output tax amount shall be the VAT amount computed in accordance with the sales amount and the tax rate stipulated in Article 2 of these Regulations. …” Article 6 prescribes that, “The sales amount shall be the total price and out-of-pocket expenses collected by a taxpayer for a taxable sale, but shall exclude output tax amount collected….” Article 12 of the “” prescribes that, “”Out-of-pocket expenses” as referred to in the first paragraph of Article 6 of the Regulations shall include processing fees collected from the buyer, …liquidated damages, late payment fines, deferred payment interests, compensation, ….” In view of the above provisions, the liquidated damages for breach of contract is defined as the “Out-of-pocket expenses”, and the payee should issue an invoice to the payer. The second path is that the seller has not fulfilled the obligation and the actual business has not yet occurred, then the payee could issue a receipt instead of an invoice.

Thirdly, if the defendant is the seller, the issue related invoice shall be determined case by case. According to the “Notice of State Administration of Taxation on Several Issues Relating to Determination of Revenue subject to Enterprise Income Tax”, a concession on sale price given by an enterprise due to substandard quality of commodities sold, etc. shall fall under sales concession. According to Article 26 and 27 of the “Implementing Rules for the Administrative Measures for Invoices”, the seller shall issue an invoice in red ink for a sales discount. These provisions could be implemented in dealing with the liquidated damages for breach of contract. How about other causes for breach of contract, such as the liquidated damages for delayed delivery? Normally the payee shall issue a receipt, because there is no legal basis for it to issue an invoice.

In summary, normally the invoicing party should be the payee in the transaction, if liquidated damages are not directly related to the object of the transaction, there is no legal basis for the payee to issue an invoice. In addition, we have also noticed that Article 18 of the “Administrative Measures for Invoices” stipulates that “under extraordinary circumstances, the payer may issue an invoice to the payee.” But we have not found any official explanation on whether such extraordinary circumstances include the situation where the seller has paid a penalty for breach of contract other than due to sales discounts. In current practice, the mainstream view of tax authorities is that the buyer should issue a receipt instead of an invoice.