China’s new Deed Tax Law is about to come into force on September 1, 2021. Foreign companies are subject to deed tax if they acquire real estate and/or land use rights in China, and this often occurs when the company reorganizes. Fortunately, China has extended deed tax exemptions to support certain types of corporate restructuring and reorganization.
China announced the elevation of the deed tax regulation into national law on August 11, 2020. The new Deed Tax Law is going to take effect on September 1, 2021, repealing the Interim Regulations on Deed Tax promulgated in 1997.
Deed tax is a tax levied on the assignees of land use rights and real property ownership. For businesses, it often applies when there is company restructuring and reorganization (including merger, split-up, transfer of assets, etc.).
For qualifying restructuring and reorganization of enterprises and public institutions, China granted deed tax exemptions. The exemption policies, previously extended to December 31, 2020, were further extended until December 31, 2023.
What is deed tax?
According to the Deed Tax Law, any organization or individual to whom the title to the land use rights or the real properties has been transferred within the territory of China should pay deed tax.
The transferee bears the tax obligation, under any of the following three scenarios:
- Acquisition of granted land use rights from the State;
- Transfer of granted land use rights (“土地使用权”), either by sale, exchange, or gifting – excluding the transfer of land contracting management right (“土地承包经营权”) and land management right(“土地经营权”); or
- Purchase and sale, exchange, or gifting of real property situated on the land.
For transfer of title to the land use rights or real properties by way of conversion into investment (equity participation), debt payment, allocation, reward, and the like, the deed tax shall also be levied pursuant to the provisions of the law.
How is deed tax calculated? China’s deed tax rates range from three to five percent. The new law states that local governments can choose a specific rate within the said range.
Formula for calculating the amount of real estate transfer tax to be paid: The amount of real estate transfer tax to be paid = the assessment basis × the applicable tax rate
What are the new changes in the Deed Tax Law?
Compared with existing Interim Regulations on Deed Tax, the new Deed Tax Law clarified the deed tax collection policies on the title transfer of land use rights and real properties in forms of conversion into investment (equity participation), debt payment, allocation, and reward.
- a conversion into an investment (equity investment),
- a debt redemption,
- an allocation
- and a reward.
In addition, regarding what may be exempt from the deed tax, the new Law expands the scope, including:
- non-profit schools
- medical institutions
- social welfare institutions from deed tax in instances where they use land or premises for office space, teaching, healthcare, scientific research, elderly care, or relief purposes
- barren land (including land in mountains or on beaches) for agricultural, forestry, animal husbandry or fisheries production
- change of ownership between spouses during marriage
- inheritance of land use right and real property ownership by legal heirs
- assuming title to the land use right and real properties by foreign embassies, consulates, and representative offices of international organizations in China.
Further, the law specifically requires tax authorities and their employees to keep confidential the personal data of taxpayers in the process of tax collection and administration.
Deed tax exemption policies for company restructuring and reorganization
To support certain types of corporate restructuring and reorganization, on April 26, 2021, the Ministry of Finance (MOF) and State Taxation Administration (STA) jointly released the Announcement on Continued Implementation of Relevant Deed Tax Policies for Restructuring and Reorganization of Enterprises and Public Institutions (MOF STA Announcement [2021] N.17), which is retroactively effective from January 1, 2021, to December 31, 2023.
Under these rules, there are exemptions from the real estate transfer tax for:
- inheritance and transfer of land use rights and real estate in cases of complete restructuring of enterprises,
- public institution restructuring
- merger and split,
- transfer as part of bankruptcy proceedings
- transfer of assets between enterprises with common owners
However, the succession of land use rights originally allocated to the restructured enterprises or public institutions through assignment or state capital contribution does not qualify for the exemption.
Furthermore, during the process of corporate restructuring and reorganization, in addition to deed tax, the enterprises can also be exposed to other taxes, including land appreciate tax, value-added tax, corporate income tax, and stamp duty.
Bigger background: Law-based tax administration
In 2015, the STA released the Guiding Opinions on Comprehensively Promoting the Governing of Taxes according to Law (Shui Zong Fa [2015] No.32), stipulating that China will accelerate the process of upgrading relevant tax regulations into law, to improve the certainty of tax policies, enhance the authority of the tax documents, and ensure the efficiency of tax administrations. This is an important part of China’s broader efforts to achieve rule of law, that is, law-based governance of the country. Businesses are well-advised to keep a close eye on the future developments of China’s tax laws as it is related to how they will pay tax in China.
This article first appeared in Asia Briefing, published by Dezan Shira Associates. The firm advises international investors in Asia and has offices in China, Hong Kong, Indonesia, Singapore, Russia and Vietnam.