Legal analysis: liquidated damages need to be taxed According to Item (3) of Article 3 of the Notice of the Ministry of Finance of People's Republic of China (PRC), State Taxation Administration of The People's Republic of China on Some Policy Issues concerning Business Tax, when units and individuals provide taxable services, transfer intangible assets and sell real estate, the compensation income obtained by the transferee due to breach of contract shall be incorporated into the turnover to collect business tax.

Legal basis: Notice of the Ministry of Finance of People's Republic of China (PRC) and State Taxation Administration of The People's Republic of China on Some Policy Issues concerning Business Tax Article 3 When units and individuals provide taxable services, transfer intangible assets and sell real estate, the compensation income obtained from the transferee due to the transferee's breach of contract shall be incorporated into the turnover to collect business tax.