China: Taxes

Tax on acquisitions

Types of taxes
In an asset transfer, the purchaser is subject to the taxes set out in the following table:

Purchasers may enjoy tax reduction or exemption upon satisfaction of certain requirements.

Onshore Share Transfer
In an onshore share transfer, the purchaser is subject to stamp duty, which is payable at 0.05% of the share transfer price. In the context of an intra-group restructuring, subject to certain criteria, such transactions may be considered as special reorganization and the recognition of the gain or loss on the transfer of the shares or assets will be deferred, resulting in deferral of EIT liability.


Recurring Taxation

Profits tax
Income arising from an investment in real estate generally includes the following:

  • Rental income; and
  • Sales income.

Value-added tax (VAT)
For enterprise lessor:

  • Small-scale VAT taxpayers: 5% on rental income but exemption might be available depending on the amount of the VAT taxable income
  • General VAT taxpayer: 11%

For individual lessor:

  • 1.5% for letting of residential property and 5% for letting of non-residential property. Exemption might be available depending on the amount of the rental income.

Urban construction and maintenance tax (UCMT)
1%, 5% and 7% on paid VAT depending on the location of the taxpayer

Education surcharge (ES)
3% on paid VAT

Local education surcharge (LES)
1% or 2% on paid VAT, collected in some cities such as Shanghai

Stamp duty (SD)
0.1% payable by both the lessor and lessee, but exemption is available in the case of letting of the residential property by an individual

Real estate tax
12% of the annual rental income, and exemption or reduction might be available in the case where the lessor is an individual

Urban and township land use tax
In the range of RMB0.6 to 30 per square meter depending on the location of the property, but exemption is available in the case where the lessor is an individual

Individual income tax (IIT)
For individual lessor:

20% on rental income after certain deduction, and reduction might be available in some cities

Enterprise income tax (EIT)
For enterprise lessor:

  • Rental income forms part of taxable income for calculation of EIT if the enterprise lessor is a PRC registered entity. The statutory EIT rate is 25% of net profit and favorable tax treatment (such as reduced tax rate) may be available under certain circumstances
  • 10% of the rental income if the enterprise lessor is a foreign entity

Property tax
Owners of property are subject to Real Estate Tax (房产税, “RET”). Depending on the use of the real property, the rate and the tax base for RET will differ. For properties held for lease, a rate of 12% of the annual rental income is imposed. For self-used properties, a rate of 1.2% of the property’s adjusted cost (with a 10% to 30% deduction from the original cost) is imposed. The implementation practice might vary depending on location.

Individuals are normally exempted from RET on residential property. Shanghai and Chongqing released interim pilot measures relating to RET on residential property owned by individuals.

Other costs
Urban and Town Land Use Tax is imposed on the entity or individual which/who uses the land in cities, counties, administrative towns, industrial and mining areas. The amount payable depends on the size of the land (in square metre). This differs among different regions from about RMB0.6 to RMB30 per square metre, and is calculated on an annual basis and paid in installments pursuant to the local regulations.

Tax on sale of real estate

Asset transfer
In an asset transfer, the seller is subject to the taxes:

Value-added tax (VAT)
Rate: 5% of the difference between the transfer price and original purchase price, but exemption may be available under certain circumstances where the individual seller sells his/her ordinary residential property satisfying some qualifying conditions

Urban construction and maintenance tax (UCMT)
Rate: 1%, 5% and 7% on paid VAT depending on the location of the taxpayer

Education surcharge (ES)
Rate: 3% on paid VAT

Local education surcharge (LES)
Rate: 1% or 2% on paid VAT, collected in some cities such as Shanghai

Stamp duty (SD)
Rate: 0.05% of the transfer price but exemption is available in the case of sale of the residential property by an individual

Land value appreciation tax (Land VAT)
Rate: For individual seller

  • Residential property: exempted
  • Non-residential property: progressive rates ranging from 30% to 60% on the appreciation amount For enterprise seller – Non-residential property: progressive rates ranging from 30% to 60% on the appreciation amount.

Individual income tax (IIT)
Rate: For individual seller
20% on net gain but tax exemption or reduction may be available depending on the nature, size, holding period, location and other conditions of the property.

Enterprise income tax (EIT)
Rate:

  • Gains arising from the property transfer form part of taxable income for calculation of EIT if the enterprise seller is a PRC registered entity. The statutory EIT rate is 25% of net profit and favorable tax treatment (such as reduced tax rate) may be available under certain circumstances
  • 10% of the share transfer price if the enterprise seller is a foreign entity

Onshore Share Transfer
In an onshore share transfer, the seller is subject to:

  • Stamp Duty: 0.05% of the share transfer price;
  • EIT applicable to company seller:
    - 10% of the share transfer price if the seller is a foreign entity;
    - Capital gains arising from the Onshore Share Transfer form part of taxable income for calculation of EIT if the seller is a PRC registered entity. The statutory EIT rate is 25% of net profit and favorable tax treatment (such as reduced tax rate) may be available under certain circumstances.
  • IIT applicable to individual seller: 20% of net gain and IIT may be reduced or exempted under certain circumstances;
  • Land VAT: Technically speaking, pursuant to the PRC Land VAT regulations, the transfer of equity interest in a PRC tax-resident enterprise should not give rise to Land VAT as any underlying real estates are not directly transferred. However, the tax authorities may seek to impose Land VAT on the transfer of an equity interest in a PRC company that directly holds real estate if the transfer consideration is equivalent to the value of the real estate and/or the primary purpose of the equity transfer is to transfer the land use right and/or real property (rather than the company).

In the context of an intra-group restructuring, subject to certain criteria, such transactions may be considered as special reorganization and the recognition of the gain or loss on the transfer of the shares or assets will be deferred, resulting in deferral of EIT liability.

Offshore Share Transfer
Generally, for an Offshore Share Transfer under the PRC’s existing offshore indirect transfer reporting and taxation rules, if an offshore indirect transfer of Chinese taxable assets (including shares, immovable assets, etc.) by a non-PRC-resident enterprise is considered without reasonable commercial purposes, the transaction would be re-characterised as a direct transfer of Chinese taxable assets and subject to PRC EIT at the rate of 10%.

The potential exposure of Land VAT discussed under the above onshore share transfer section might also apply.

Taxation of distributions
Withholding EIT of 10% is imposed when dividend distributions are transferred by the onshore vehicle to non-PRC tax resident enterprise shareholders, which may be reduced to as little as 5% under certain tax treaties. On the other hand, dividends distributed to PRC tax resident enterprise shareholders and non-PRC tax resident individual shareholders are currently tax exempt in Mainland China.

Tax treaties

The PRC has 107 signed Agreement on Avoidance of Double Taxation (“DTA”) as of 12 December 2018, among which 100 DTAs have already taken effect, and more than 10 tax information exchange agreements and 1 multilateral convention of mutual administrative assistance in tax matters. The DTAs of China basically followed the Model Treaty Convention of the OECD. Mainland China has also entered into arrangements with Hong Kong, Macau and formed an agreement with Taiwan for avoidance of double taxation.

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