Be prepared for real estate property tax

Jin Mao PRC Lawyers
Steven Chen and Chu Bo Chen
[email protected]; [email protected]

In order to retain some control over ever-increasing real estate prices, the State Council, the National Development and Reform Commission, the Ministry of Land and Resources and the Ministry of Housing and Urban-rural Construction have each declared the debut of their respective new policies. These address a number of essential sectors of the real estate market such as taxation, credit loaning and land transferring.

These policies include the 'Opinions on the Major Tasks for Deepening Economic Restructuring for 2010', which was drafted by the NDRC and later approved and promulgated by the State Council. And the Opinions include 'the gradual promotion of the reform of real estate property tax' as one of the goals of the reform of the financing and taxation systems for this year.

Controlling house prices

The government's original intent behind levying a real estate property tax was, as its ultimate objective, to prevent house prices from skyrocketing. The hope was that placing a tax burden on the owners of large-sized housing units and non-self-stay luxurious residences would help bring real estate investment under control. However, it is now likely that the scope of such a tax is about to expand to include common residences as additional tax targets. Such a trend of reform has been a highlight, and Shanghai is expected to bear the brunt of such real estate property tax reform.

The current real estate property tax system is built upon the 'Provisional Ordinance on Real Estate Property Tax', which was issued by the State Council in 1986. The Ordinance provides that the owners of real estate properties in all cities, counties, organic towns and industrial and mining areas are required to pay real estate property tax to the amount of 1.2% of the residual value of the properties or 12% of the rent per annum. At the same time, however, it exempts 'real properties owned by individuals and not for business use' from being levied on.

Should the authorities decide to impose real estate property tax on 'real properties owned by individuals and not for business use', they will face the following major problems:

i) Definition of 'taxed area': is such tax to be levied on the average per-capita living area of one household or the average number of the housing units owned by one household?

ii) The base for tax calculation: is such tax to be levied on the assessed value, the dealing price or the residual value of the property?

iii) Enforcement: if calculated on the assessed value, how do they expect the need for appraisals of a massive number of properties to be met? And how and when will the taxes be collected? Are they ready to handle the delay of tax payment by an enormous population of taxpayers?

Beneficiaries

Despite the above, from a lawyer's perspective, it appears to be rational to take a long view on the outcome of this real estate property reform rather than to be dedicated to the debate on whether the reform will take place. If reform does occur, those real property appraisal agencies that are already registered in China will be the first intermediary agencies that directly benefit from what will be an explosive volume of appraisal business.

It is also a good time for lawyers to explore possibilities for new business against such a background. Such possibilities include providing tax-avoidance schemes, offering legal advice on disputes arising from the division of the tax burden by transacting parties, handling tax payment-related issues for clients, and liaising with or retaining the real property appraisal agencies.