Property Buyers’ Guide to China

Property Buyers’ Guide to China

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China’s property laws are not easy to see through if you have never been there or are not familiar with local laws and customs. On our journey through the online world of information we came across many contradicting messages and while trying to sort through all the stuff we came up with the following information. To stay true to all the sources we have quoted many and hope the result is a somewhat informative guide to buying real estate in China.

According to a recent report by WorldBank, 120 cities and regions within China have been surveyed for their overall investment climate.

Taken into account were differences in the importance of state-owned enterprises (SOEs) in local industries, over staffing of labor, firm access to bank loans, confidence in protection of property and contract rights and overall adequacy of local transport and power.

Some losses appear measurable since the last survey taken in 2001/2002. Some losses of power in southern China as well as increased taxes and fees have been noted.

We have gathered some information that should help you look in the right directions if you consider investing into the Chinese property market.

1.) Key Cities to Invest

According to the report by WorldBank, some of the regions in China have performed better than others. They are ranked according to the best investment climates in the country.

  1. Southeast (Jiangsu, Shanghai, Zhejiang, Fujian, and Guangdong;
  2. Bohai (Shandong, Beijing, Tianjin, and Hebei);
  3. Central (Anhui, Henan, Hubei, Hunan, and Jiangxi);
  4. Northeast (Heilongjiang, Jilin, Liaoning);
  5. Southwest (Yunnan, Guizhou, Guangxi, Sichuan, Chongqing, and Hainan); and
  6. Northwest (Shanxi, Shaanxi, Neimenggu, Ningxia, Qinghai, Gansu, and Xinjiang).

When we look at key cities, six of them stand apart from the rest due to their outstanding performances in investment climate. Hangzhou, Qingdao, Shaoxing, Suzhou, Xiamen, and Yantai have all performed excellent with overseas and domestic firms, while Hunan is looking promising due to its strategic location.

In 2007, 66 out of the 88 land transactions identified by Knight Frank involving foreign investment were located in second tier cities. Nine out of the 66 cities are located in the Pearl River Delta, 18 in the Bohai Rim Region and 13 in the Yangtze River Delta.

The Knight Frank 2008 Report indicates that China’s first tier investment cities are mainly Shanghai, Beijing, Guangzhou and Shenzhen. But with surging land prices and the lack of urban land availability in those cities, property developers have gradually shifted their attention to China’s second tier cities instead.

2.) How to buy – from developers or agents

Buying real estate in China is regulated by strict laws. if you buy through a property agent from overseas, your agent will negotiate on your behalf with the vendor. Once a price has been agreed on, a Customer Confirmation Agreement is signed by all parties and the deposit is held by the agent until all conditions have been met by the parties.

Now, a visit to the Realty Transaction Department will begin the official transfer process. A Property Purchasing Registration Form and a Property Selling Registration Form will have to be completed and filed with the Property Ownership Certificate. Once this has been fulfilled, the Realty Transaction Department will give the vendor and investor a date for the official Realty Transfer Notice to be given.

When this date arrives, all parties or their representatives (lawyers, notaries) meet at the Realty Transaction Department for the finalization of the transaction.

Buying from developers will still invite similar procedures as before. The process might vary from city to city and you are advised to seek legal counsel before you sign anything.

3.) Purchase taxes to be aware of

Buyers of Chinese property also need to be aware of the following additional costs:

  • 3% stamp duty
  • 2% maintenance taxation
  • 1.5% contract tax
  • 0.1% stamp duty for a resale property

These costs will need to be factored in by investors.

4.) Legal aspects of Purchasing Property

The legal aspects of property ownership in China are quite detailed. So much so in fact that it is impossible to list them all in this post. The new law has made it a lot harder for overseas investors to buy property in China.

We suggest you use the following site as a starting point to shed light on the whole structure:

5.) Ownership Costs

The cost of ownership could become massive if buyers were to lose their right to live in China while owing property. If legal battles ensue, they could lose their property in an instant.

Since the law is very strict, it might not be possible for an alien resident to keep hold of the property once they are extradited from the country for any reasons.

Cost of legal counsel, stamp duty, taxes and the cost of property will have to be considered by potential buyers.

6.) Renting Property and Building a Portfolio

Investors who have international residence and want to buy Chinese property for the purpose of renting and building a portfolio need to observe the Chinese rule of property investment. Foreign individuals and foreign companies can buy commercial real estate in China only if they do so in the name of a Chinese corporation either as a Wholly Foreign-Owned Enterprise (WFOE) or Joint Venture (JV) established for this purpose.

This clearly establishes that individuals cannot own Chinese property unless they live in the country by means of legal resident status. Even then, the rule clearly indicates that only one property can be bought and only if the resident has been living in China for longer than one year, either being employed, or as a student. Remember that a way around this is to own commercial property (which can be a buy-to-let property) either as a WFOE or JV.

7.) Selling Property – issues to be aware about

Many foreign owners of real estate in China ignore the Chinese requirements of individuals income tax law. Therefore they fail to file the appropriate tax returns which can have serious implications. According to the taxation law, taxes are owed on the income earned from the sale of real property and the Chinese government will not approve the property’s sale until the tax issue is resolved (hence paid in full).

Also, in accordance to some rules regarding the forex method, we have an excerpt of the China Blog, explaining the detailed process of converting foreign monies to RMB.

This month (Feb 07), SAFE also issued new rules concerning the conversion of foreign exchange to RMB, called the Method for Management of Foreign Exchange by Individuals (“Forex Method”) and the Detailed Rules on the Method for Management of Foreign Exchange by Individuals (“Detailed Rules”). The new system works as follows:

a. Individuals can freely convert foreign exchange to RMB up to an annual limit of $50,000 US.

b. When individuals exceed the $50,000 US annual limit, they must obtain permission for the exchange, which permission is automatic, provided the individual provides proof the exchange is for a specific and legitimate purpose.

c. The Forex Method provides that a foreign individual’s sale and purchase of real estate is a legitimate purpose and should be processed according to existing rules. Section 21 of the Detailed Rules provides that such transactions should be processed according to the Forex Notice discussed above.

To further step up the fight against “hot money” coming into China for fast and short term profits, three Chinese central governmental departments started a trial check on July 14th to control foreign exchange receipts and exports settlements.

China’s tax rates are progressive and as of March 2008 they are as follows:

  • The tax on an individual’s income is progressive. As of 2008, an individual’s income is taxed progressively at 5% – 45%.
  • The 2008 corporate tax rate for domestic and foreign companies is 25%.
  • Companies which started their operations before 2008 can enjoy the previous 15% tax rate, or tax holidays for a period defined.
  • Small companies pay 20% corporate tax in certain cases.

Capital gains taxes:

  • An individual’s capital gains taxes in China are at the rate of 20%.
  • Capital gains tax for a Chinese company is added to the regular tax.
  • A 10% deduction at source is made from the capital gains of a foreign company in China.
  • On taxing capital gains from the sale of real estate, when calculating the capital gain the purchase cost is deducted from the sale price at the 20% rate. When the capital gains are in excess of 50% of the purchase price, the rate of capital gains tax fluctuates between 30% – 60%. (It is 60% when the capital gain is over 200% when compared to the cost).

Overseas Income:

  • Individuals and companies who are Chinese residents and are also taxed on their income outside China receive a credit for overseas taxes paid.
  • Here are the qualification for residence for an individual:
    Permanent residence in China while an individual who has no permanent residence in China but has lived in China for less than 5 years is taxed on his income in China, or overseas income that has its origins in China.

Source: Worldwide Tax