Land Appreciation Tax

views updated

17 Land Appreciation Tax

This tax is levied on any appreciation in land value that arises from the transfer of real estate, the purpose being to regulate transactions in the real estate market and to reasonably adjust benefits arising from land appreciation. The Provisional Regulations of the People's Republic of China on Land Appreciation Tax currently in force were promulgated by the State Council on December 13, 1993, and came into effect on January 1, 1994.

Land Appreciation Tax is administered by the local tax bureaus. The revenue collected belongs to the local governments. In 2003, revenue from Land Appreciation Tax amounted to 3.73 billion yuan, accounting for 0.2% of the country's total tax revenue.

TAXPAYERS

General Guidelines

Entities Subject to Tax

Any of the following entities that receive income from the disposal of or other transfers of State-owned land-use rights or buildings (including auxiliary facilities above and below ground) and their attached facilities (hereafter referred to as transfers of real estate), may be subject to the tax.

State-owned enterprises (SOEs), collectively owned enterprises, private enterprises, joint-equity enterprises, enterprises with foreign investment, foreign enterprises, and other enterprises.
Administrative units, institutions, social organizations, and other units.
Individual business operators and other individuals.

TAX BASE

General Guidelines

Tax is based on the appreciation in land value enjoyed by taxpayers from real estate transfers.

What Constitutes Taxable Appreciation

The appreciation amount is the balance of the proceeds received by the taxpayer from the transfer of the real estate, after deducting allowable deductible items.

Proceeds received include the total payment for the transfer, plus relevant economic benefits, whether these benefits are received in cash, in kind, or in some other form.

Valuation Principles

Tax payable shall be calculated by taking the most basic accounting items related to the cost accounting for the real estate, or the object of accounting, as the accounting unit.

Appraised Price

The appraised price of a tract of real estate is computed with reference to the price of real estate in similar locations and of a similar type by real estate appraisal institutions that are recognized by the relevant local tax offices and approved by the People's Government.

Collection by Assessment

Where the value of the real estate falls below the appraised price after the transfer, the relevant tax department shall, in any of the following cases, compute and collect tax based on the appraised price:

Where the taxpayers can offer no acceptable reasons for the drop in value.
Where they conceal or under-report the transaction price.
Where they falsify the value of deductible items.

Treatment of Deductible Items

Transfer by Stages

Where taxpayers receive the use rights for a tract of land, then develop the land, and transfer the real estate plot by plot, or by stages, the value of allowable deductible items may be amortized in the following manner:

Based on the portion of the land-use rights transferred in relation to the total land area.
Based on the construction area.
Based on other methods approved by the relevant tax department.

Deductible Items

Allowable deductible items fall into various categories that are discussed below:

Acquisition of Land-Use Rights

Sums paid for the acquisition of land-use rights, or relevant fees paid as stipulated by the State, may be deductible.

Land Development, Construction of New Buildings

Costs Incurred

Costs incurred for land development, or for the construction of new buildings or necessary facilities, may be deductible. These include the following items:

Compensation fees for the takeover of the land, for the dismantling of buildings, or for evacuation.
Preconstruction engineering expenses, construction or installation expenses, or expenses for infrastructure.
Expenses for supplementary public utilities.
Indirect expenses for development.

Expenses Incurred

Expenses incurred for land development, or the construction of new buildings or attached facilities, may be deductible. These include the following items:

Sales expenses.
Overhead expenses.
Financial expenses related to the real estate development projects.

Only a certain proportion of these expenses can be deducted. The percentage to be deducted shall be specified by the People's Government at the provincial level, after considering local circumstances.

Additional Deductions for Real Estate Development

Where taxpayers are engaged in real estate development, additional deductions may be granted, amounting to 20% of the following items added together:

Sums paid for the acquisition of land-use rights, or relevant fees paid as stipulated by the State.
Costs incurred for land development, or for the construction of new buildings or necessary facilities.

Transfer-Related Taxes

Taxes paid that are related to the transfer of real estate may be deductible. These include the following taxes:

Business Tax.
City Maintenance and Construction Tax.
Stamp Tax.

Educational Surcharge

Any educational surcharge paid by the taxpayers in the transfer of real estate may also be deducted as tax paid.

Assessed Prices

The assessed price, as confirmed by the relevant local tax offices, of old houses or buildings, may be deductible.

Assessed prices are based on the replacement cost of the houses or buildings, as appraised by real estate appraisal institutions that are approved by the government, and the depreciation ratios for the houses or buildings, as computed using their remaining useful life. The following formula is used for computation:

Assessed price = Replacement cost × Depreciation ratio

TAX RATES

There are four grades of progressive rates applied.

Table 17.1 Tax rates
Grade	Tax base	Rate (%)
1	For that portion of the appreciation amount not exceeding 50% of the sum of deductible items	30
2	For that portion of the appreciation amount exceeding 50%, but not exceeding 100%, of the sum of deductible items	40
3	For that portion of the appreciation amount exceeding 100%, but not exceeding 200%, of the sum of deductible items	50
4	For that portion of the appreciation amount exceeding 200% of the sum of deductible items	60

COMPUTATION METHODS

General Guidelines

To calculate tax payable, first determine the appreciation amount by deducting the sum of the deductible items from the proceeds derived from the transfer of the real estate.

Next, determine the applicable rate for each portion of the appreciation amount, taken as a proportion of the sum of the deductible items. Then, compute the tax payable for each portion.

Finally, add up the tax payable for all portions, to obtain the total tax payable.

Computing Tax Payable

In general, the following formula is used to compute tax payable:

Tax payable = Σ (Appreciation amount × Applicable tax rate)

Example

An enterprise sold a building at a price of 50 million yuan. The sum of deductible items (costs, expenses, taxes) totals 20 million yuan.

Appreciation amount = 50 million yuan – 20 million yuan = 30 million yuan
Tax payable = (10 million yuan × 30%) + (10 million yuan × 40%) + (10 million yuan × 50%) = 12 million yuan

Other Methods

Tax payable can also be calculated in the following manner:

Appreciation Exceeds 50% of Total Deductions

Where the appreciation amount does not exceed 50% of the sum of the deductible items, tax payable is calculated using the following formula:

Tax payable = Appreciation amount × 30%

Appreciation Exceeds 50% of Total Deductions, but not 100%

Where the appreciation amount exceeds 50% of the sum of the deductible items, but not 100%, tax payable is calculated using the following formula:

Tax payable = (Appreciation amount × 40%) − (Sum of deductible items × 5%)

Appreciation Exceeds 100% of Total Deductions, but not 200%

Where the appreciation amount exceeds 100% of the sum of the deductible items, but not 200%, tax payable is calculated using the following formula:

Tax payable = (Appreciation amount × 50%) − (Sum of deductible items × 15%)

Appreciation Exceeds 200% of Total Deductions

Where the appreciation amount exceeds 200% of the sum of the deductible items, tax payable is calculated using the following formula:

Tax payable = (Appreciation amount × 60%) − (Sum of deductible items × 35%)

Example

See previous example for details.

Tax payable = (30 million yuan × 50%) − (20 × million yuan × 15%) = 12 million yuan

Exchange Rate Conversions

The yuan is the basic unit used for tax computation.

When income received from transfers of real estate is in foreign currency, it should be converted into yuan at the exchange rate quoted by the People's Bank of China on the day of payment, or on the first day of the month in which payment is made (or at the rate worked out in accordance with relevant rules).

TAX REDUCTIONS AND EXEMPTIONS

General Guidelines

Taxpayers may apply to the relevant local tax offices to receive tax exemptions related to the following items:

Some Common Exemptions/Reductions

Transfers of Self-Owned Houses

Where individual taxpayers transfer self-owned houses because of individual work changes or to achieve better living conditions, exemptions or reductions may be granted in the following manner, upon approval by the relevant tax offices:

If the taxpayer has lived in the house for 5 years or longer, the transfer may be exempt from tax.
If the taxpayer has lived in the house for less than 5 years, but not less than 3 years, the tax shall be reduced by half.

Transfers Related to Relocations

Transfers of real estate by taxpayers who have to relocate because of city planning requirements or State construction requirements, may be exempt.
Where real estate is taken over and repossessed in accordance with prevailing laws because of city planning requirements or State construction requirements, exemptions may be granted.

Others

Exemptions may be granted for the construction of ordinary standard residences (i.e., residences constructed in line with standards for local residences) for sale, where the appreciation amount does not exceed 20% of the sum of the deductible items.
Where individuals exchange the real estate of their self-owned residential houses, exemptions may be granted.

Temporary Exemptions

Temporary exemptions may be granted under the following circumstances:

Real Estate Used for Investment/Joint Business Operations

Where real estate is used for investment or joint business operations, and where one party uses the real estate value as the investment or as the terms for a joint business operation, and transfers the real estate to the invested or jointly operated enterprise, temporary exemptions may be granted.

Cooperative Construction of Houses

Where houses are built by way of cooperative construction (i.e., one party provides the land and the other party provides the funds), temporary exemptions may be granted.

After construction is completed, the houses shall be divided on a proportionate basis for self-use.

Others

Where enterprises merge, transfers of real estate by the merging enterprises to the merged enterprise may be granted temporary exemptions.
Transfers of privately owned ordinary residences by individuals may be granted temporary exemptions.

TIME LIMIT AND PLACE FOR PAYMENT

General Guidelines

Overall Procedure

Within 7 days of the date that the contract governing the transfer of the real estate is signed, the taxpayer should report to the relevant local tax office in the locale where the real estate is situated.

At the same time, the taxpayer should submit the following items:

Documents that show the ownership of the house or building.
The land-use rights certificate.
Contracts related to the land transfer and the sale or purchase of the house.
An appraisal report on the real estate.
Other related documents.

Then, the taxpayer should pay tax in accordance with the assessed value, within the time limit specified by the relevant tax office.

The Land Administration Department and the House Property Administration Department shall not handle any formalities related to title changes unless the taxpayer has paid tax in accordance with prevailing rules.

Frequent Receipts of Income from Transfers

Where taxpayers frequently receive income transfers of real estate, and where the taxpayers face difficulties in making a declaration after each transfer, they may report and pay the tax on a monthly basis, or within the time limits specified by the local tax bureaus at the provincial level.

Changes in Reporting Mode

Where the taxpayers choose to make periodic reports, they should file their choice with the local tax bureaus in the locale where the property is situated.

Once the mode is determined, no change shall be allowed for 1 year.

Problems with Calculating Actual Appreciation

Where tax cannot be computed on an actual basis for various reasons because income is received from the transfer of the real estate before the entire project is completed, tax may be prepaid in accordance with rules stipulated by the local tax bureaus at the provincial level.

A final settlement of the tax payment shall be made upon completion of the entire project, with any excess refunded or deficiency made good.

Taxation in China