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China Real Estate Market - Taxation System

By Xiannian Ye
 

This article is from realtor.org. Please contact the author with any questions.

China's tax laws and policies are made by the National People's Congress and its standing committee, State Council, the Ministry of Finance, State Bureau of Taxation, State Council Customs Duty Regulation Commission, and General Administration of Customs. The main tax law for foreign investors is Foreign Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises, adopted at the Forth Session of the National People's Congress and promulgated by the Order No. 45 of the President of PRC on April 9, 1991. According to Article 5 of the law, the income tax on enterprises with foreign investment and the income tax which shall be paid by foreign enterprises on the income of their establishments or places set up in China to engage in production or business operations shall be computed on taxable income at the rate of 30%. Local income tax shall be computed on taxable income at the rate of 3%. 

Generally, China's tax policy toward foreign invested enterprises grants preferential tax to the industries and regions that are encouraged by China to receive investments. The income tax on enterprises with foreign investment and foreign enterprises established in special economic zones is levied at the reduced rate of 15%. In addition, foreign enterprises that have been operating for more than 10 years may be exempt from enterprise income tax in the first and second profit-making years and enjoy a 50% reduction in the following three years. 

Other taxes that may affect foreign businesses include land-use tax, land value-added tax, housing tax, contract tax, stamp tax, business tax, tax on urban maintenance construction, tax on the occupation of cultivated land and tax on vehicles and ships. There are certain tax treaties that offer foreign businesses operating in China some breaks. China has signed agreements with 60 countries on avoiding double taxation and tax evasion, and 51 agreements of which have gone into effect by July 1999. The first income tax treaty between China and U.S. known as the Agreement for the Avoidance of Double Taxation and the Prevention of Tax Evasion (Sino-U.S. Agreement) was signed in 1984. The agreement aimed "to reduce double taxation of income earned by residents of either country from sources within the other country. Another goal of the agreement was to prevent avoidance of the income taxes imposed by the taxing authority of either country". Under the treaty, China cannot tax U.S. business income unless the business activities in China are "substantial enough to constitute a permanent establishment or fixed base".16

Foreign investors may also be exempt from personal income tax on the after-tax profits (dividends, bonuses) they obtain from the foreign-funded enterprise. Production and management equipment, building materials and vehicles used for production and other goods imported as part of the total investment may be exempt from import duties, value-added tax and consumption tax. Moreover, in order to competing with other provinces/regions, local governments often have their own incentives for foreign investors. The following chart shows the existing taxes implemented in China. 


The Existing Taxation System in China

Tax Categories Contents
Turnover Tax
Value-added tax, consumption tax, business tax
Income Tax Enterprise income tax, foreign-invested enterprise and foreign enterprise income tax, and individual income tax
Resources Tax Resources tax, and city and town land use tax
Special Purpose Tax City maintenance and construction tax, tilling land possession tax, fixed assets investment orientation regulated tax, and land value-added tax
Financial Tax Housing property tax, city real estate tax, and inheritance tax (not yet collected)
Act Tax Car and boat use tax, car and boat license tax, stamp tax, contract tax, securities trading tax, slaughter tax, and banquet tax
Agricultural Tax Agricultural tax, and husbandry tax
Customs Duty Imported and exported merchandise
Source: China Council for the Promotion of International Trade

 

1. Turnover Tax. This consists of value-added tax, consumption tax and business tax, three kinds in all. These taxes are collected according to the sales income or business income obtained by the taxpayers in the process of production, circulation or service. 

2. Income Tax. This includes enterprise income tax (applicable to domestic enterprises such as State-owned enterprises, collective enterprises, private enterprises, joint enterprises, and shareholding enterprises), foreign-invested enterprises and foreign enterprises income tax, and individual income tax, three kinds in all. These taxes are collected according to the profits or income obtained by producers, managers or individuals. 

3. Resources Tax. This consists of resources tax and city and town land use tax, two kinds in all. These tax are collected from those who engage in resources development or use city and township land, and this will realize the compensated use of the State resources and regulate the resources differentiate income of the taxpayers. 

4. Special Purpose Tax. This includes city maintenance and construction tax, tilling land possession tax, fixed asset investment orientation regulated tax and land value-added tax, in four kinds. These taxes are set for special purposes and to regulate special objects. 

5Financial Tax. This includes housing property tax, city real estate tax and inheritance tax (not yet collected), three in all. 

6. Act Tax. This includes car and boat use tax, care and boat license tax, stamp tax, contract tax, securities trade (not yet collected), slaughter tax and banquet tax, in seven kinds. These taxes are collected on special acts.

7. Agricultural Tax. This includes agricultural tax and husbandry tax, in two kinds. These taxes are collected from enterprises, units and individuals that have obtained agricultural income and husbandry income. 

8. Customs Duty. This is collected on merchandise and products that enter into or go out of China. 

Please note that the above taxes are not necessarily to be collected from each enterprise, unit or individual.Generally speaking, profit-making enterprises should pay enterprise income tax. Enterprises producing consumption goods that should be taxed should pay consumption tax. Businesses engaged in fixed asset investment should pay fixed asset investment orientation regulated tax. In addition, enterprises should pay stamp tax for their production, business account and contracts signed with others, and enterprises owing houses and cars should pay housing tax and car use tax. 

Apart from tax, the State stipulated that there are three non-financial administrative income items that should be collected by the tax authority, which include additional education fee, mine use fee and cultural undertaking construction fee. According to the stipulations of the State Council, provincial governments may require the collection of social insurance fee by tax departments. Check with a local attorney or accountant to make sure how taxation system works in China. 

Real estate related taxes in China include Sales Tax, Land Appreciation Tax, Cultivated Land Usage Tax, Transfer Tax, Property Tax, City and Town Land Usage Tax, Urban Construction Tax, Stamp Tax, and Income Tax. In addition, the local government or service providers levy various fees on real estate transactions. For instance, There are about three categories of real estate fees in Shanghai. They are: 1. Transaction handling and registration fees; 2. Public notary and land measurement fees; 3. Others consisting of appraisal, broker, auction, and exchange fees. The following table shows major residential real property transaction related taxes. 


Real Property Transaction Related Taxes**

 
Tax Category
Rate
Calculation
(X = Multiply)
Payer
Note
Purchase New Commercial Housing Transfer  3%  Sales Price X 3%  Title Receiver  Up to 50% of the tax may be subsidized by local revenue agency
Stamp  0.5%  Contracted Price X 0.5%  Both parties   
Real Property Transactions Stamp  0.5%  Contracted Price X 0.5%  Both parties   
Mis. Tax*  5%  Sales Price X 5%  Seller  Maybe refunded if the seller bought another home within 6 months before or after the sale
Rental Property Stamp  0.1%  Contracted price X 1% Both parties   
Mis. Tax*  10.5%  Rental income X 10.5% Owner or Landlord  For rent income over RMB 2,000
7.5%  Rental income X 7.5% Owner or Landlord  For rent income below RMB 2,000
Property Exchange Stamp  0.5%  Contracted price X 0.5% Both parties   
Mis. Tax  5%  Sales price X 5% Party with income  Maybe refundable if bought a new home before or after the transaction
Transfer  3%  The difference between the two exchanged properties X 3% The Party who paid more money Maybe subsidized with 50%
* Include Sales Tax, Urban Construction Tax, Education Tax, Property Tax, and Income Tax.
** There may also have some fees associated with the transaction.
Source: Zhang Yongyu/Fang Chen, Practical Real Estate Handbook, Shanghai Oriental Press, 1999.
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