August 2017
Circular on Adjusting the Incentive Policies on Deed Taxes and Business Taxes in Real Estate Transactions(Mainland China)
James Cheng
Transfer of real estate ownership often gives rise to tax issues such as deed taxes, business taxes, personal income taxes and stamp taxes. On February 17, 2016, the Ministry of Finance, the State Administration of Taxation and the Ministry of Housing and Urban-Rural Development jointly promulgated the Circular on Adjusting the Incentive Policies on Deed Taxes and Business Taxes in Real Estate Transactions ("Circular"). Beginning from February 22, 2016, deed taxes and business taxes in real estate transactions that meet certain conditions are eligible for incentive policies.
About the deed tax policy
According to Article 3 of the Interim Regulations of the People's Republic of China on Deed Taxes, the deed tax rate is 3% to 5%. The original deed tax incentive policy is based on "ordinary residential units", but difference regions have different standards. In Shanghai, a single unit with an area of less than 140 square meters or a residential unit with an actual closing price lower than 144% of the average trading price of residential units on lands of the same class shall be "ordinary residential units"; the unit is eligible for the incentive policies if it is the only residential unit of a family (including the purchaser, spouse and underage children).
The new incentive polices are no longer based on this Òordinary residential unitÓ standard. Instead, it is now based on whether the area of the house is 90 square meters. Regardless of whether a residential unit is the only residential unit, it is subject to a 1% tax as long as its area is smaller than 90 square meters. A residential unit that is the sole residential unit of a family and is over than 90 square meters in area is subject to a 1.5% deed tax. A second residential unit with an area of over 90 square meters is subject to a 2% deed tax.
About the business tax policy
The original business tax incentive policy is based on the precondition that the unit has been purchased at least five years ago before further applying different standards depending on whether the unit is an Òordinary residential unit.Ó Under the new business tax incentive policy (compare the Circular on Adjusting the Business Tax Policy for Transfer of Residential Units by Individuals (Cai Shui [2011] No. 12), "ordinary residential units" and "non-ordinary residential units" are not differentiated. All residential units which have been purchased by individuals for over two years (including two years) that are for sale are exempt from business taxes.
About the scope of application
Except for Beijing, Shanghai, Guangzhou and Shenzhen, the Circular apply to all cities and regions. Since Beijing, Shanghai, Guangzhou and Shenzhen are not enforcing the deed tax incentive policy provided under Article 1, Paragraph 2 of the Circular and for the business tax incentive policy under Article 2, the second residential unit purchased in Beijing, Shanghai, Guangzhou or Shenzhen is not eligible for the deed tax incentive policy, and business taxes arising from the transfer of individual residential units in Beijing, Shanghai, Guangzhou and Shenzhen are still enforced pursuant to the Circular of the Ministry of Finance and the State Administration of Taxation on Adjusting the Business Tax Policy for the Transfer of Residential Units by Individuals (Cai Shui [2015] No. 39).
Transfer of real estate ownership often gives rise to tax issues such as deed taxes, business taxes, personal income taxes and stamp taxes. On February 17, 2016, the Ministry of Finance, the State Administration of Taxation and the Ministry of Housing and Urban-Rural Development jointly promulgated the Circular on Adjusting the Incentive Policies on Deed Taxes and Business Taxes in Real Estate Transactions ("Circular"). Beginning from February 22, 2016, deed taxes and business taxes in real estate transactions that meet certain conditions are eligible for incentive policies.
About the deed tax policy
According to Article 3 of the Interim Regulations of the People's Republic of China on Deed Taxes, the deed tax rate is 3% to 5%. The original deed tax incentive policy is based on "ordinary residential units", but difference regions have different standards. In Shanghai, a single unit with an area of less than 140 square meters or a residential unit with an actual closing price lower than 144% of the average trading price of residential units on lands of the same class shall be "ordinary residential units"; the unit is eligible for the incentive policies if it is the only residential unit of a family (including the purchaser, spouse and underage children).
The new incentive polices are no longer based on this Òordinary residential unitÓ standard. Instead, it is now based on whether the area of the house is 90 square meters. Regardless of whether a residential unit is the only residential unit, it is subject to a 1% tax as long as its area is smaller than 90 square meters. A residential unit that is the sole residential unit of a family and is over than 90 square meters in area is subject to a 1.5% deed tax. A second residential unit with an area of over 90 square meters is subject to a 2% deed tax.
About the business tax policy
The original business tax incentive policy is based on the precondition that the unit has been purchased at least five years ago before further applying different standards depending on whether the unit is an Òordinary residential unit.Ó Under the new business tax incentive policy (compare the Circular on Adjusting the Business Tax Policy for Transfer of Residential Units by Individuals (Cai Shui [2011] No. 12), "ordinary residential units" and "non-ordinary residential units" are not differentiated. All residential units which have been purchased by individuals for over two years (including two years) that are for sale are exempt from business taxes.
About the scope of application
Except for Beijing, Shanghai, Guangzhou and Shenzhen, the Circular apply to all cities and regions. Since Beijing, Shanghai, Guangzhou and Shenzhen are not enforcing the deed tax incentive policy provided under Article 1, Paragraph 2 of the Circular and for the business tax incentive policy under Article 2, the second residential unit purchased in Beijing, Shanghai, Guangzhou or Shenzhen is not eligible for the deed tax incentive policy, and business taxes arising from the transfer of individual residential units in Beijing, Shanghai, Guangzhou and Shenzhen are still enforced pursuant to the Circular of the Ministry of Finance and the State Administration of Taxation on Adjusting the Business Tax Policy for the Transfer of Residential Units by Individuals (Cai Shui [2015] No. 39).
