This is the sort of situation that gives developers an attack of the vapors. They need to take two Aspirin and have a nice lie down before considering the implications.

On April 7, 2008, the State Administration of Taxation issued a circular governing provisional Corporate Income Tax payment issues for real estate developers , which is retrospectively (note that word for it gives one pause) effective from January 1, 2008.
It applies to the following enterprises:

(i) Chinese resident enterprises that are engaged in the real estate development business, including both domestic Chinese enterprises and foreign-invested enterprises; and
(ii) Those enterprises that make monthly or quarterly provisional CIT payments based on actual profits.

The provisional CIT payable is the result of multiplying such profit by the CIT rate (standard rate of 25% from January 1, 2008). That may be a little difficult to follow but take it that it does not make the life of a real estate developer any easier.

After the final completion of a project that has been pre-sold, the prepaid CIT will be reconciled with the actual CIT payable, based on the project’s actual profits.

In other words when you have made your profit the tax that can be demanded will be worked out.

For typical real estate projects, the profit rate shall be:

Not lower than 20%, for projects located in provincial capital cities as well as certain cities in special administrative regions and other designated cities.
Not lower than 15%, for projects located in second-tier cities.
Not lower than 10%, for projects located in other areas.
For low cost residential, the profit rate shall not be lower than 3%.

For real estate developers this does not bode well. Indeed, it bodes ill. Much, much more on this in a Mondaq special report which you can find by clicking HERE.
Source: Mondaq

A State Administration Taxation official has dismissed market rumors that the property tax levy is likely to start within the year.

Basically what he said was the it could not happen in a hurry because the departments concerned were not connected and thus unable to administer the tax.

The official said previous reports that the central government would start to collect the tax before June were wrong

The Guangzhou Daily quoted this unnamed official as saying: ‘The levy will not start in the next two years. The property tax involves too many issues to be dealt with easily.’

At the end of last year Liu He, vice-minister of the Office of the Central Leading Group of Financial and Economic Affairs, suggested the levy would start in pilot areas in 2008. From this started the concern over an immediate implementation of the property tax.

It is known that preparations for the introduction of the property tax started early in 2003. It was seen as part of a systematic tax adjustment aimed at unifying the current housing property tax, urban real estate tax, land value-added tax and land-leasing fees under a single name.

If the land-leasing fees, which constitute a key component of property prices now, become part of the property tax, which would be spread more evenly to 40 to 70 years after the purchase, housing prices will be reduced significantly.

However, the official explained, basically what it was about was inter-departmental lack of connectedness.

He said, ‘At present the tax, financial and real estate departments are not completely connected, we cannot even effectively communicate our information through the network, let alone levy a property tax that involves all the three systems.’
Source: Shanghai Daily

The Duke of Westminster’s property developer is gearing up for a $1 billion Chinese property fund. Note that the duke owns much of central London and a few years back asked for a special act of Parliament exempting his estate from death duties so that it could retain its appalling inequalities for generations to come. He was told to go away.

Now Grosvenor, the Duke of Westminster’s property developer and fund manager, has bought a pair of luxury housing blocks in Shanghai as it gears up for a $1 billion Chinese property fund.

Grosvenor paid about $80 million for the two towers in the Lakeville Regency, part of 91-acre Tai Ping Qiao development complete with lake and park.

Grosvenor, which manages £11 billion of assets world-wide, only made its first investment in China this April, buying a 12 storey- building with 105 units in the wealthy Gubai area of Shanghai.

Nick Loup, managing director of Grosvenor’s Asia-Pacific business said, ‘We are planning a significant business in China over the long term . . . we would expect Lakeville Regency to remain a key part of our portfolio for many years to come. We may never sell this ever.’
Source: The Times

There will probably be more restraining policies on the property sector over the next few months as the government tries to to rein in the real estate sector which is spiraling somewhat out of control.

Zhu Zhongyi, secretary-general of the China Real Estate Association, said soaring property prices raise the possibility that further cooling measures could be on the horizon.

Zhu Zhongyi said, ‘The government may launch measures targeting some key cities if property markets there get out of control. Or it could release uniform policies covering the entire country.’

According to the National Development and Reform Commission (NDRC), property prices in China’s 70 large- and medium-sized cities climbed by 7.1% year-on-year in June. And that is the highest it has been since last year.

Real estate investment jumped by 28.5% year-on-year, topping RMB988.7 billion in the first six months.

Zhu Zhongyi said, ‘Given the accelerating growth in prices, the government’s attitude on restraining foreign investment in the property market shows no signs of loosening in the next half-year.’ He added that although foreign investors are not the major driving force in increasing property prices, their overall impact cannot be overlooked.

With strong capital backing, foreign investors usually offer higher prices when bidding for land, potentially boosting property prices around the region.

According to Yang Hongxu, an expert with E-house China R&D Institute, there may be stronger policies in the pipeline. He said foreign acquisition of entire buildings might be prohibited or more restrictive measures may put on foreign-funded development of high-end properties.

A contrarian view was presented by Pan Shiyi, chairman of SOHO China, a Beijing-based property developer who said, ‘A less-developed pre-owned house market, curbed by too much taxation on transactions, is the crux of the imbalanced market.’On the other hand Liu Futan, ex-director of the macro-economy institute of the NDRC, called for the levy of a property tax as soon as possible.

Liu said, ‘As a tax levied on the ownership of property, it helps to reduce speculative investment into the real estate market.’ Indeed, there seems to be no consensus of opinion as to what action should be taken.
Source: China Daily

According to a report by the National Development and Reform Commission property prices in 70 major mainland cities increased an average 7.1% year-on-year last month, compared with a 6.4% rise in May.But an economist said price rises will ease (Note carefully there is no suggestion they will stop) in the second half.

Liao Qun, chief economist and strategist of China banking at CITIC Ka Wah Bank, said property sales in the three months ended May accelerated to 30% year on year, from less than 20% in the previous three months.

Liao Qun said, ‘Acceleration in prices is still under way in major cities. Prices in Shenzhen and Beijing were up 14.25 and 9.6% year on year, respectively, in May.’

He said this is mainly due to the ‘wealth effect’ arising from the stock market boom. He said, ‘The stock market boom in China is expected to be a long- standing factor underpinning the property sector in the years ahead.’

The government introduced tightening measures in 2004 to curb excessive real estate investment, rising sales and prices.

Liao Qun said the recent move by the China Banking Regulatory Commission urging commercial banks to limit loan growth to no more than 15% a year will have a greater impact on the real estate market than the increase in interest rates.

He said the new round of monetary moves was mainly aimed at stabilizing the rapidly expanding economy, not to rein in the property market. But, he expects property price increases in the 70 major cities will slow to 5.3% in the second half. Which, no matter how it is argued, is still an astounding price spiral.
Source: The Standard