What are the tax consequences for the transfer of land to a wholly foreign-owned enterprise in China?
Stamp Duty - Under the Provisional Regulations of the PRC on Stamp Duties issued in 1998, both the transferor and the transferee will have to pay stamp duty. The amount of stamp duty is 0.05% of the transfer price and must be paid on each original of the transfer contract. As both parties hold one original, they must each pay the stamp duty.
Business Tax - The transferor of the land use rights must pay business tax at a rate of 5% of the transfer price in accordance with the 1994 Provisional Regulations of the PRC Concerning Business Tax.
Deed Tax - Under the Provisional Regulations of the PRC on Deed Tax, effective from October 1, 1997, deed tax, also known as contract tax, must be paid by the unit or individual to whom land use rights or premises ownership rights inside China are transferred, that is, the transferee. The transferee must pay the deed tax. Rates of deed tax are not the same throughout China as provincial governments have been given the freedom to set a provincial rate of between 3% and 5% of the transfer price. Deed tax is imposed when land use rights or premises ownership rights are transferred on the basis of a contract. Transfers of land use rights or premises ownership rights include:
- Grant of State-owned land use rights;
- Assignment of land use rights, including by means of sale, gift or exchange but excluding transfer of contracted operation rights to rural collectively owned land;
- Purchase and sale of premises;
- Transfer of premises by means of gift; and
- Exchange of premises.
Land value-added tax - Another tax that has to be paid by a person or unit who transfer land in China is the land value-added tax ("Land VAT"). Pursuant to the Provisional Regulations of the PRC Concerning Land Value-Added Tax, effective from January 1, 1994, the transferor will be required to pay Land VAT on the amount that the land it is selling has appreciated in value since the company first acquired the land. This appreciation ("Value-Added Amount") is calculated as the difference between the transfer price and so-called "base costs". In practice, this means that the following base costs may be deducted from the sale price of the land:
The amount paid to obtain the land use rights (that is, the original purchase price):
- Costs and expenses for land development;
- Costs and expenses for construction of new buildings or the appraised price for old buildings;
- Taxes related to the assignment of the real property; and
- Other deductions as determined by the Ministry of Finance.
The Land VAT is levied by way of four progressive rates to the Value Added Amount. The tax authorities have the power to levy Land VAT on the basis of a higher deemed transfer price if they believe (and they usually do) that there has effectively been an appreciation in the value of the property since the transferor acquired it even after subtracting all the expenses that the transferor has poured into the development of the land.
Registration fees and miscellaneous levies - Both the transferor and the transferee are also required to pay certain registration fees and other miscellaneous fees. Generally, these levies amount to about 0.5 percent of the transfer price for each party.
On March 9, 1998, the State Administration of Taxation and the State Land Administration issued the Notice on Relevant Issues Concerning the Administration of the Levy and Collection of Deed Tax. Whilst the Notice largely deals with the rights and responsibilities of deed tax levy and collection entities, Item 2 states that when an entity applies for an amendment to a land registration, the relevant PRC land administration department will examine the application. If the authorities are satisfied with the details of the application, they will then require the parties concerned to produce a receipt that confirms that the deed tax has been paid or evidence that no deed tax needs to be paid.