Apr 6, 2016

Background:
On 24 March, the Ministry of Finance and State Administration of Taxation jointly issued a circular that will expand VAT programme to all industries, including real estate, construction, finance and consumer services industries, starting on 1 May 2016. The reform is expected to lower tax burdens and tax-related costs as well as to mitigate multiple taxation for businesses and companies. The circular confirmed that an 11% VAT rate will be applied to real estate industry.

Figure 1: Comparison of Business Tax and VAT in Real Estate Sector

Business Tax

VAT

Tax rate

5%

11%

Assessment

Gross basis (output only)

Net basis (output minus input)

Tax character

Tax included in price

Tax excluded in price

Calculation method

Transaction price × 5%

Output VAT minus Input VAT

Payment to

Local Taxation Bureau

State Administration of Taxation

Source: Government agencies, 2016

The circular includes several key points related to real estate:

  • For real estate projects that are obtained on or before 30 April 2016, a 5% VAT tax will apply. 
  • For real estate assets obtained after 1 May 2016, businesses can deduct a VAT credit over a two-year period, with a 60% credit in the first year and a 40% credit in the second.

Colliers’ View:
Despite that the market reaction is expected to be limited in the short term, Colliers expects the following long-term effects.

Impact on developers’ land cost varies
Developers subject to the 11% VAT will be allowed to deduct the land purchase cost from sales revenues. This will reduce the tax burden, as land costs are a major expense, especially for residential and commercial land. For industrial projects, the low land price will limit the impact of the new tax structure.

Landlords of leased properties may increase rent
Landlords are subject to an 11% VAT on their rental revenues instead of the previous 5% business tax, which will increase their tax burden. In order to ensure their profits, landlords have the intention to pass this cost on to tenants by increasing rents, especially in markets that favour landlords. Landlords of high-quality properties in prime locations with high occupancy rates will be in a particularly strong position to transfer this cost to tenants. On a more general level, this will be an issue in negotiating new leases and renegotiating existing leases in the long term.

Tax on second-hand home transactions may decrease slightly
The new VAT structure continues to discourage speculation in residential properties and encourage self-use purchases. Although the tax rate on second-hand home transactions will remain unchanged under the new rule, the difference in calculation method will lead to a slight decrease in the tax burden for second-hand home transactions.

Figure 2: Second Hand Home Transaction Tax under VAT Regime

City

VAT

≥2 years

<2 years

Beijing, Shanghai, Guangzhou and Shenzhen

Ordinary home: Exempt

SP/(1+5%)×5%

Unordinary Home: (SP-BP)/(1+5%)×5%

Other cities

Exempt

Note: SP refers to selling price; BP refers to buying price

Source: Government agencies, 2016

In general, the effect of the transition from a business tax structure to a VAT structure on the real estate industry will emerge in the long term and will be of interest to all individuals and companies involved in real estate in China.

Disclaimer
Colliers International has made its best efforts to interpret the above new policy but accepts no liability for any error, omission, inaccuracy, misinterpretation or misunderstanding created by the above comments. If any discrepancies exit, the original Chinese version issued by the central government should prevail.

For further information, please contact:


Carlby Xie
MSc, MRICS
Head of Research
China
+86 21 6141 3688
Carlby.Xie@colliers.com



Ines Li
MPhil
Associate Director | Research
North China
+86 10 8518 1633
Ines.Li@colliers.com



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