Laws of the People's Republic of China

Circular of the State Administration of Taxation on the Related Matters Concerning the Settlement Management of Land Value-added Tax on Real Estate Enterprises

Cai Shui Fa [2006] No.187

The local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and cities specifically designated in the state plan, the state taxation bureaus of Tibet Autonomous Region and Ningxia Autonomous Region:

In order to further enhance the settlement management of land value-added tax on real estate enterprises, in light of the Law of the People's Republic of China on the Administration of Tax Collection, the Provisional Regulations of the People's Republic of China on Land Value-added Tax and the related provisions, related issues are hereby notified as follows:

1.

Settlement unit for land value-added tax

The land value-added tax shall be settled for each real estate development project examined and approved by related authorities of the state; if any project is developed by stages, it shall be settled for each stage of the project.

In case a development project comprises both ordinary housing and non-ordinary housing, the added value shall be respectively calculated.

2.

Settlement requirements for land value-added tax

(1)

In case of any of the following circumstances, the taxpayer shall perform the settlement of its land value-added tax:

(a)

a real estate development project has been finished and sold out;

(b)

a real estate development project that has not been finished and is subject to final accounts is transferred as a whole;

(c)

the land use right is transferred directly.

(2)

In case of any of the following circumstances, the competent tax authority may require the taxpayer to carry out the settlement of its land value-added tax:

(a)

As regards a real estate development project that has been finished and accepted, the proportion of the building area that is already transferred to the whole project area is more than 85 percent; or while this proportion is lower than 85 percent, the residuary salable building area has been leased or used for self-purpose;

(b)

The sale is not yet finished upon the expiration of three years as of the day when the sale ( advance sale) license is obtained;

(c)

The taxpayer has filed an application for writing-off tax registration but has not handled the formalities for settling the land value-added tax yet;

(d)

Other circumstances as prescribed by the tax authorities at the provincial level.

3.

Determination of the revenues generated from the real estate used for non-direct sales and self-use

(1)

Where the development products of a real estate enterprise are used by this enterprise as the welfare of its workers, reward, foreign investment, distributions to the shareholders or investors, compensation for debts, substitution for the non-monetary assets of any other entity or individual, etc., in case the ownership is transferred, it shall be deemed as the sale of real estate, and its revenues shall be determined under the methods and sequence as follows:

(a)

the revenues shall be determined subject to the average price of the same kind of real estate that was sold by this enterprise at the same district and in the same year;

(b)

the revenues shall be determined by the competent tax authority with reference to the market price or appraised value of the same kind of real estate that was sold at the same district and in the same year.

(2)

Where a real estate enterprise changes the use of some real estate it develops to self-use, lease or for any other commercial purpose, in case of no transfer of property ownership, it shall be exempted from the land value-added tax, the revenue therefrom may not be listed in the settlement of tax payment, and the costs and expenses may not be deducted accordingly.

4.

Deductible items of land value-added tax

(1)

A real estate enterprise shall calculate the amount under the deductible items concerning the settlement items pursuant to the provisions of Article 6 of the Interim Regulations of Land Value-added Tax and Article 7 of the rules for the implementation thereof when handling the land value-added tax settlement. It shall provide the legal and effective vouchers when deducting the part paid for obtaining land use right, real estate development costs, expenses and the related taxes paid for the transfer of real estate; otherwise, no aforesaid expenses may be deducted, unless it is prescribed otherwise.

(2)

In case the vouchers or materials on prophase construction costs, building and installation engineering costs, infrastructural costs and development overheads, the deduction of which is granted to a real estate enterprise when it performs the settlement of land value-added tax, fail to satisfy the settlement requirements or are fallacious, the local tax authority may check and ratify the standards for calculating the unit area amount of the aforesaid four development costs with reference to the materials on construction costs and ratings published by the local administrative department of construction cost and integrating the building structure, purpose and location and other related factors into consideration, and make corresponding calculations and deductions. The tax authorities at the provincial level shall be responsible for the determination of the specific measures for check and ratification.

(3)

As regards any public facilities as neighborhood committee or police station, chamber, parking lot (garage), premise for realty management, transformer substation, thermal station, water plant, premise for cultural and sports activities, school, kindergarten, nursery, hospital, facility for postal and communications, which is developed and built by a real estate enterprise and is auxiliary to the settlement items, it shall be disposed subject to the principles as follows:

(a)

if its property right is owned by all proprietors after it has been finished, its costs and expenses may be deducted;

(b)

if it is gratuitously transferred to the government or any public utility entity for non-profitable social public service after it has been finished, its costs and expenses may be deducted;

(c)

if it is transferred with compensation after it has been finished, the revenues therefrom shall be calculated and the costs and expenses may be deducted upon approval.

(4)

As regards any decorated premise sold by a real estate enterprise, the decoration fees may be incorporated into the real estate development cost.

The expenses drawn by a real estate enterprise in advance may not be deducted except it is prescribed otherwise.

(5)

The deductible amount under the settlement items of the common costs or expenses cost by more than one real estate projects shall be calculated and determined subject to the proportion of the salable building area under the settlement items to the total building area of all the projects concerned or in any other reasonable means.

5.

Materials to be submitted for the settlement of land value-added tax

A taxpayer that satisfies the provision of Subparagraph (1) of Article 2 of this Circular shall handle the formalities for settlement at the competent tax authority within 90 days as of the data when it meets the settlement requirements; a taxpayer that satisfies the provision of Subparagraph (2) of Article 2 of this Circular shall handle the formalities for settlement within the time limit prescribed by the competent tax authority.

When performing the settlement of land value-added tax, a taxpayer shall submit the materials as follows:

(1)

application in written form for the settlement of land value-added tax and land value-added tax returns;

(2)

statements on the final accounts of finished projects, vouchers regarding the payment of land price for obtaining land use right, contracts about the transfer of state-owned land use right, requisitions on the settlement of bank loan interests, settlement bills of project construction contracts, statistical statements on the contracts for sales of commercial housing and other evidential documents concerning the revenues, costs and expenses of transferring real estate;

(3)

other evidential documents concerning the settlement of land value-added tax as required to be submitted by the competent tax authority.

With respect to a settlement account checked and verified by an intermediary entrusted by the taxpayer, it shall also submit the Verification Report on the Settlement of Land Value-added Taxes issued by the intermediary.

6.

Check and verification of the settlement items of land value-added tax

An intermediary of taxation shall issue authentication report in light of the format prescribed by the tax authority when checking and verifying the settlement items upon entrustment. The tax authority may adopt an authentication report that satisfies the related requirements.

The tax authorities shall suggest explicit requirements on access conditions, work process, content to be verified, legal responsibilities, etc., for the intermediaries of taxation embarking on the settlement and verification work of land value-added tax, and make sure the work on leading and managing these organs.

7.

Collection of land value-added tax upon verification

In case of any of the following circumstances occurs to a real estate enterprise, the tax authority may, collect land value-added tax against it upon verification on the basis of the levying rate that is no less than the advance levying rate with reference to the tax burdens of the local enterprises similar to it in terms of development scale and income level:

(1)

it fails to establish accounting books as it should do so in light of the provisions of laws and administrative regulations;

(2)

it destroys the accounting books without permission or refuses to offer the data of tax payments;

(3)

it has set up accounting books, nevertheless, the accounting items are perplexing, or its cost data, revenue vouchers and expense vouchers are mutilated and incomplete and the transfer income or amount under the deductible items is difficult to be determined;

(4)

it complies with the settlement conditions of land value-added tax, but it fails to handle the formalities for settlement within the prescribed time limit, and it is ordered to perform settlement within a certain time limit by the tax authority but still fails to do so in case of the expiration;

(5)

the taxable basis declared is clearly on the low side and no justifiable reason exits.

8.

Handling of transferring real estate after settlement

Where any real estate fails to be transferred when conducting the settlement of land value-added tax but is sold or transferred with compensation after the settlement, the taxpayer shall file the land value-added tax returns pursuant to related provisions. The amount under the deductible items shall be calculated by multiplying the cost for unit building area with the areas sold or transferred.

the cost for unit building area = the amount under the deductible items of the settlement ¡Â total building area of the settlement

This Circular shall come into force as of February 1, 2007. All provincial tax authorities shall formulate specific administrative measures for settlement subject to the provisions of this Circular and upon the actual situation of each province.

The State Administration of Taxation

December 28, 2006