Laws of the People's Republic of China

The State Administration of Taxation

Notice the State Administration of Taxation on Imposing Business Income Tax in Real Estate Development

Guo Shui Fa [2006] No.31

March 6, 2006

To states tax bureaus, local tax bureaus of all provinces, autonomous region, municipalities under the Central Government, cities specifically designated in the state plan:

In order to strengthen and standardize the administration on business income tax in the enterprises concerning real estate development, in accordance with Provisional Regulations of the People's Republic of China on Enterprise Income Tax and its enforcement regulations, laws and provisions related to Law of The People's Republic of China concerning the Administration of Tax Collection Order, as well as the operational characteristics of the enterprises of real estate development, business income tax concerning real estate development enterprises is hereby given as follows:

I.

Tax handling of uncompleted development products

Where such development products as residence developed and constructed by development enterprises, commercial occupancy as well as other buildings, attaching, supporting facilities and etc. are sold by means of advance sale prior to its completion, its presale income shall, in accordance with assessable gross profit, work out quarterly( or monthly) gross profit volume of the current period and subsequently the taxable income after having deducted relevant period charge, sales tax and adjunct account and then be adjusted after the assessable cost of development products was calculated.

(i)

The item of economically affordable housing shall comply with the provisions such as Notice of the Ministry of Construction, State Development and Reform Commission, Ministry of Natural Resources, People's Bank of China on Printing and Distributing Measures for Economic Affordable Houses (Jian Zhu Fang (2004) No.77) and etc, the assessable gross profit margin rate of the presale income shall be no less than 3%. The real estate development shall, when applying for initial tax returns filing, attach the certificate documents of the related departments as well as other relevant certificate document. For those who do not comply with the provisions or fail to submit the certified documents of the related departments as well as other related certificate documents, they shall calculate the business income tax in accordance with the provisions about sale of non-economic affordable houses.

(ii)

The estimated assessable gross profit margin rate of non-economic affordable houses shall be determined in accordance with the following provisions:

1.

Where the development item is located in the urban and suburban areas of provinces, autonomous regions, and cities specifically designated in the state plan, its estimated assessable gross profit margin rate shall be not less than 20%.

2.

Where the development item is located in prefecture or its suburban region, its estimated assessable gross profit margin rate shall be not less than 15%.

3.

Where the development item is located in other areas, its estimated assessable gross profit margin rate shall be not less than 10%.

II.

Tax affairs treatment about completed development products

(i)

Those who comply with any of the following circumstances shall be deemed as having completed the development product:

1.

The certificate of project completion of the development product or (cost objective) has been submitted to the management department of real estate for record;

2.

The development product or (cost objective) has obtained the certificate of initial property right.

(ii)

After the completion of development product, development enterprises shall, in accordance with the nature and means of production of its income and means of sale as well as the principle of income confirmation, confirm rationally the presale as real sale income, and simultaneously carry forward the corresponding assessable cost and work out the gross profit of the real sale income hereof. The difference between gross profit margin of its real sale and the estimated gross profit margin shall be calculated in the tax payable of the project completion year. Where those completed development products yet fail to calculate the assessable cost in the project completion year in accordance with the related provisions, or fail to adjust the taxpaying difference between the real sale income of real sale and gross profit margin, the tax authorities is entitled to confirm or verify its assessable cost and thereby conduct taxpaying adjustment and handle it in accordance with Law of The People's Republic of China concerning The Administration of Tax Collection Order.

(iii)

After the completion of product development, development enterprises shall, prior to the annual taxpaying declaration, submit the status quo of the project completion to the taxation authorities in responsible. The development enterprises shall, when declaring annual taxpaying, submit the tax appraisal report issued by related departments concerning adjustment of difference between gross profit margin of its real sale and the presale gross profit margin as well as other related documents required by the tax authorities.

The aforesaid tax appraisal report concerning difference adjustment includes: geographical locations and survey of the development item, floor space, development usage, initial development time, completion time, salable areas and sold areas, presale income and gross profit, real sale income and gross profit margin, development cost and real sale cost and etc.

(iv)

The income of development product covers all the purchase price in the process of product development, including cash, cash equivalent as well as other economic interest. Where various fund, expenses and adjunct account charged by the development enterprise in the name of relevant departments, units and enterprises are included in cost of development product or invoice issued by development enterprise, they shall be confirmed as sale income; otherwise, they may be deemed funds to collect or remit for management.

(v)

The sale income of development product shall be confirmed in accordance with the following provisions:

1.

Where the development products are sold by means of one-off collection, the income shall be confirmed on the very day when real payment or price certificate (right) are fulfilled.

2.

Where the development products are sold by means of installment collection, the income shall be confirmed by means of the settled price and cash day. Where the payer pays in advance, the income shall be confirmed on the actual cash day.

3.

Where development products are sold by means of bank mortgage, the income volume shall be determined in accordance with the settled price determined in sale contract or agreement, its initial payment shall be confirmed on very day when it is received, the remaining part shall be confirmed on the very day when the account is transferred by means of bank mortgage.

4.

Where the development products are sold by means of entrustment, they shall be realized in accordance with the following principles:

(1) Where the development products are entrusted to be sold by means of paying service charge, fund shall be confirmed on the very day when the list of sold development products from entrusted party is received in accordance with the settled sum in sales contract or agreement.

(2) Where development products are entrusted to be sold by means of buyout, and sales contract or agreement are signed by the development enterprise or buyer, or jointly signed by the development enterprise, the entrusted party and the buyer, if the settled price in the sales contract or agreement is higher than the buyout price, the fund calculated by the settled price in the sales contract or agreement shall confirmed on the very day when the list of the sold development products from the entrusted party is received; where the settled price in the sales contract or agreement in the former two occasions is lower than the buyout price and the sales contract or agreement is signed by the entrusted party and the buyer, the fund calculated in accordance with buyout price shall be confirmed on the very day when the list of sold products from the entrusted party is received.

(3) Where the development products is entrusted to be sold by means of base price (minimum price) and profit-sharing by the two parties through excessive base price and sales contract or agreement is signed by the development enterprise and the buyer or jointly signed by development enterprise, the entrusted party, the buyer, if the settled price in the sales contract or agreement is higher than the base price, the fund calculated in accordance with the settled price in the sales contract or agreement shall be confirmed on the very day when the bill of sold development products from the entrusted party is received, and the sum paid by development enterprises to the entrusted party shall not be deducted from sales income; where the settled price in sales contract or agreement is lower than the base price, the sum calculated by base price shall be confirmed on the very day when the bill of sold development products form the entrusted party is received. Where the sales contract is directly signed by the entrusted party and the buyer, the sum calculated by base price plus the gained sum shall be confirmed on the very day when the list of sold development products from the entrusted party is received.

(4) Where the development products is entrusted to be sold by means of exclusive sales, the sum in the exclusive sales term may be confirmed in accordance with the related provisions of exclusive contract and the aforesaid items from (1) to (3); where the development products have not been sold after the expiration of the exclusive sales term, the development enterprise shall be confirmed in accordance with the price and means of paying in sales contracts or agreement.

The list of sold development products shall include such contents of the development products as name, geographical location, serial number, amount, unit price, sum, service charges and etc. are calculated on month or quarter basis regularly, and taxpaying declaration and prepay tax shall be submitted to tax authorities within the prescribed time limit. Where those fail to conduct regular settlement, taxpaying declaration and prepay tax, they should be punished in accordance with Law of The People's Republic of China concerning the Administration of Tax Collection Order.

5.

Where the development enterprises rent and then sell the development products, those who transform the development products to fixed assets, the purchase price obtained in the period of rent shall be confirmed through the amount of rent; where those fail to transform development products to fixed assets, the purchase price in the period of rent shall be confirmed through rent and then through the income from sale of development products in time of its sale.

III.

Confirmation of order-rent income of development products

Where the development enterprise sign forward contract with leaseholder prior to completing newly built development products or undertaking house property initial registration and obtaining property certificate, the order-rent income gained by the renter shall be confirmed through rent, and the order-rent expense paid by the leaseholder shall undertake pre-tax deduction in accordance with rent expense.

IV.

Tax treatment about cooperation in the construction of development products

Where the development enterprise relies mainly on itself and cooperates with other enterprises, units, individuals or through joint-venture to develop real estate item which has not established independent incorporated company, it shall carry it out in accordance with the following provisions:

(i)

Where it is settled in the development contract or agreement that development products will be distributed to all of the investors and the item has calculated its assessable cost in the first time for the development enterprise to distribute its development products, the difference between the assessable cost of the development products due to be distributed to the investor ( i.e. its cooperation and joint party, the same below) and its investment cost shall be calculated in the tax payable income; where the assessable cost is not calculated in, the investment cost shall be deemed as presale income for related tax treatment.

(ii)

The distribution of item profit settled in development contract or agreement shall be handled in accordance with the following provisions:

1.

The development enterprise shall incorporate the operating profit arisen from the item into the taxable income of the current period and apply universally for business income tax and shall not distribute profit of the item prior to tax. Meanwhile, it shall not amortize in the cost because of the acceptance of investment volume form the investor or deduct the relevant interest payment prior to tax.

2.

The operating profit gained by the investor shall be deemed as equivalent to acquisition of dividend and bonus and pay the overdue tax by holding the certificate issued by tax authorities in responsible in accordance with the provisions.

V.

Tax treatment about investment development item in the land use right

(i)

Where the enterprise or unit invests land use right in real estate development item to exchange for development products, it shall conduct it in accordance with the following provisions:

1.

Where the enterprise or unit initially acquires development products, it shall divide it into transfer of land use right and buying in development products to conduct income tax, and estimate, on the basis of fair market value of the acquired development products (including that in the first time and that acquired later) the gain and loss due to the transfer of land use right.

2.

The developer who have obtained land use right shall, when dividing it for the first time, divide it into two economic businesses for treatment of income tax: the development products needed to be divided (including the initial time and the following ones), and buying-in of the land use right, and calculate the value of land use right into the cost of this item.

(ii)

Where the enterprise or unit invests land use right in real estate development item in the form of stock rights, it shall conduct it in accordance with the following provisions:

1.

The enterprise or unit shall, on occasion of investment trade, divide it into sale of relevant non-cash asset and investment for business income treatment and estimate loss and gain from asset transfer.

Where the proportion of the income of aforesaid transfer of land use right exceeds 5 % in the tax payable of the same year, the enterprise or unit may, as of the commencement of investment trade, share equally in the taxable income by five tax years.

2.

The developer who has accepted the land use right may, in time of investment trade, calculate the aforesaid investment trade volume to confirm the cost of land use right and calculate it in the cost of development products.

VI.

Tax treatment concerning deeming development products as marketing

Such acts as the development enterprise transforms the development products to fixed assets or uses them for donate, sponsorship, welfare of staff and worker, rewarding and overseas investment, or distributes them to stockholders or investor, reclaims debt, or trades for non-cash assets of other enterprises and institutions, shall be deemed as marketing and the income (or profit) shall be confirmed on the occasion when the ownership or right of use is transformed or the actual interest and profits are gained. The means and orders to confirm the realization of income (or profit) shall be:

(i)

confirmed in accordance with the marketing price of the same kind of development products in the recent or the latest month of the enterprise;

(ii)

confirmed by the tax authority in responsible by referring to the fair market value of the same kind of development products;

(iii)

confirmed in line with the cost-profit ratio of the development product. The cost-profit ratio of the development cost shall be no less than 15%£¬ with the tax authority responsible for the determination of its detailed ratio.

VII.

Tax treatment concerning consigned project construction

(i)

Where the term of consigned project and labor service provided by the development enterprise is no more than 12 months, its receipt may be confirmed in accordance with the settlement date agreed in the contract or on the date when the project is completed; where the duration is more than 12 months, the receipt may be confirmed quarterly be means of percentage of project completion. Percentage of project completion means that receipt and expenses are confirmed in accordance with the progress of contract. Its completion progress may be determined in accordance with the proportion of the actual accumulative contract cost in estimated contract cost, the proportion of the completed contract workload in the total contract workload as well as the completed contract workload.

(ii)

Where the material, leftovers, abandoned project or scrap of the products and etc. spared by the development project in the process of project construction, labor service provisions are required to be owned by the development project, the receipt shall be confirmed in accordance with the fair market value closing cost

VIII.

Deduction of development product cost and expense

The development enterprise shall, when conducting accounting and deduction of development product cost and expenses, differentiate period expense and development product expense, accounting cost of development cost and the assessable cost hereof, the assessable cost of the sold development products and unsold development products.

(i)

The development enterprise shall, when settle the assessable cost, behave in accordance with the following provisions:

1.

Where all kinds of expenses in the process of development products construction arise in the current period, they shall be calculated in cost objective in accordance with the principle of accrual system. Where the expenses have yet not arisen and born by the current period, they shall not be calculated in the cost objective of the current period except that they are entitled to be calculated in the cost objective of the current period in accordance with tax provisions.

2.

The development products shall, in accordance with common operation and accounting conventions, rationally divide cost objective, meanwhile, divide all expenses into direct cost, indirect cost and common cost.

3.

The direct cost, indirect cost and common cost arisen prior to the completion of development products shall, in accordance with the Matching Principle, allocate them in all cost objective, of which direct cost and indirect cost may make a clear distinction between the cost incidence objectives and shall be calculated in cost objectives; where common cost and indirect cost cannot make a clear distinction between the cost incidence objective due to the simultaneous development or rolling development, the allocation shall be calculated in accordance with floor space£¬building area, or project estimate of every cost objective(project).

4.

The expenses calculated in development products shall be actual, except otherwise prescribed, all withdrawing (or accrued expense) shall not be calculated in development product cost.

5.

The expense calculated in development product cost shall comply with the provision of state tax. Otherwise, it shall be adjusted in line with tax provisions.

6.

The assessable cost shall be calculated within the prescribed time limit after the completion of development products, yet shall not advanced or put off. Should the accounting cost be settled, its tax shall be adjusted in accordance with revenue provisions.

(ii)

The following items shall be deducted in accordance with the following provisions:

1.

The assessable income of sold development products. Such cost of sold development product as is authorized to be deducted shall be confirmed in accordance with the actual sale and project cost of saleable area. The assessable cost of unit project concerning saleable area and the sold development shall be determined by the following formula:

unit project cost of saleable area= total cost of cost objective¡Â unit project cost of total area assessable cost of sold development products= actual sale of saleable area¡Á unit project cost of saleable area

2.

The expense due to calculated in development product cost by the development enterprise, including construction cost in the prior period, infrastructural construction cost, public supporting facility expenses, land acquisition and removal cost, building and installation project cost, development overhead expense and etc, shall be allocated in accordance with the following provisions:

(1) Such expenses as occur before the project completion shall be calculated into cost objective in accordance with the provisions concerning assessable cost and other relevant provisions.

(2) Such expenses as occur after the project completion shall, in accordance with provision concerning assessable settlement as well as other provision, firstly be divided between completed cost objective and the uncompleted cost objective and then divide the expenses due to be shouldered by the completed cost objective into the sold development products and unsold development products.

3.

Accrued expense. All kinds of accrued expense arisen from development enterprises may be calculated in the assessable income of development products on the strength of legal certificate or be deducted before taxpaying, provided that expense drawing is otherwise prescribed.

4.

Maintenance costs. The actual expenses spent by the development enterprise to undertake daily maintenance, upkeep, repair and etc on unsold development product and the sold development products (common part, common facilities and equipments) in accordance with the relevant laws, rules or contract provisions shall be deducted in the current period.

5.

Maintenance expenses for common part and common facilities. Where the maintenance expenses for common part and common facilities calculated by the development enterprise is transferred to relevant units and department, it shall be deducted in time of its transfer. The collected and remitted maintenance expenses and withholding maintenance shall not be deducted.

6.

Such facilities built by the development enterprise in the development zone as chambers, parking lots, property management place, electric plants, water works, physical and cultural places, kindergarten and etc shall be handled in accordance with the following provisions:

(1) Where these facilities are unprofitable or owned by all the proprietors or donated to local governments or public utilities, they may be deemed public supporting facilities, the construction expenses shall be undertaken in accordance with the provisions concerning supporting facilities.

(2) Where these facilities are profitable or owned by the development enterprise or their ownership is not clearly expressed or donated to other units except local governments or public facilities, their cost shall be calculated independently. Except that those facilities developed by the enterprises for their own use shall be used for the construction of fixed assets, others shall be used for the construction of development products.

7.

The postal and communication facilities, schools, medical facilities built in the development zone by the development enterprises shall have their cost calculated independently and handled in accordance with the following provisions:

(1) Where these facilities are completed after their investment and construction by development enterprises, they shall be handled in accordance with the standard for construction of development products, where they are rent, they shall be handled in accordance with the standard for the construction of fixed assets; where they are donated freely to the relevant national departments and units, they shall be handled in accordance with the standard for the construction of public supporting facilities

(2) Where these facilities are constructed by the development enterprises and relevant operation management departments and units through joint venture and transferred with compensation, the economic compensation given by relevant national service management departments and units may directly offset the construction cost of the project and the difference of offset shall be calculated into the assessable income.

8.

Where the house sale department (reception) and showcase houses can be deemed as cost objective for calculation independently, it may be handled in accordance with the standard for self-built fixed assets, others shall be handled in accordance with the criteria for the construction of development products. The fitment expenses shall, regardless its volume, shall be calculated in its construction cost.

9.

Bail. Where the development enterprise sells development products by means of bank mortgage, and the development enterprise presents a guarantee for bank mortgage of the buyer, the bail (caution money) shall neither be deducted from its sales income, nor deducted as expenses from its current period tax, yet the actual loss may be deducted faithfully.

10.

The advertising cost, publicity expenses and business reception expenses shall be handled in accordance with the following provisions:

(1) The presale income acquired by the development enterprise shall not be deemed as cardinal number for such three expenses as advertising cost, publicity expenses and business reception expenses until the presale income has been transferred to actual sale income.

(2) The advertising cost, publicity expenses and business reception expenses concerning the construction and sale of development products arisen from the acquisition of the first actual sale income of development products by the newly-built enterprise may be carried forward and deducted in accordance with the tax provisions with the maximum carry-forward period no more than three tax years.

11.

Interest shall be handled in accordance with the following provisions:

(1)Where the borrowing cost arisen from the borrowed capital from the development enterprises to construct development enterprise in accordance with the tax provisions prior to the completion of cost objective, it shall match the cost objective; where it arises after the completion of cost objective, it may be directly deducted as financial expenses.

(2) Where the development enterprise borrows fund from financial institution universally and lends to the other enterprises and units within its group, and the debit may present the loan certificate gained from the financial institution, its interest to be paid shall be deducted prior to tax in accordance with the tax provisions.

(3) Where the development enterprise lends its own fund to exclusively-invested enterprises (including its branches) and other relevant enterprises and the fund borrowed by the related-party is more than 50% of its registered capital, the interest expenditure for the excessive part shall not be deducted prior to taxpaying; the interest expenditure otherwise is allowed deducted prior to tax in accordance with the calculated amount calculated in line with benchmark ratio of the same kind of the same period loan in the financial institution.

12.

Charge for idle land. Where the development enterprise acquires the land use right for real estate development by means of assignment, it shall assign the contracted use of land in line with land use right and land development time limit. Where the charge of idle land is handed over because of exceeding the contracted date for commencement of construction, it shall be calculated in the construction cost of cost objective; loss arisen from the withdrawal of land use right by the country may be deemed as property loss and deducted prior to tax in accordance with tax provisions.

13.

Loss for scrap and damage of the cost objective. Where scrap and loss arisen from the cost objective of individual item or unit project in the process of its construction, they shall, after deducting net loss of scrap value and the compensation from negligence-doer from insurance companies, be calculated as project cost for continuous project construction; where the cost objective is scrapped or damaged totally, its net loss may be deemed as property loss and deducted in accordance with tax collection provisions.

14.

Depreciation. Where the development enterprise transfers the development products to fixed assets, it may deduct the depreciation expense; otherwise, it shall not deduct the depreciation expenses.

IX.

On collection management

(i)

The development enterprise shall, when declaring annual taxpaying, verify the deduction items prior to tax one by one examined, approved or recorded by tax authorities. Where the development enterprise fails to submit the relevant documents for examination, approval or record in accordance with the relevant provisions, or does not have complete documents, it shall make up the relevant procedures and documents; otherwise, it shall not be deduct the income prior to tax.

(ii)

Where any of the following circumstances occurs, the tax authorities are entitled to collect, manage and gradually standardize the previous tax payable by means of verification of collection, and to conduct in accordance with taxation laws and provisions such as Law of The People's Republic of China concerning the Administration of Tax Collection Order, however, it shall not prescribe in advance that the income tax of development enterprise should be collected and managed by means of collection verification.

1.

Account may be opened in accordance with laws and administrative regulations;

2.

Account should have been made in accordance with laws and administrative regulations;

3.

The account was destroyed the account without authorization or data of tax payments fails to be presented.

4.

The account, albeit opened, is in chaos or lack of compete cost data, income revenue, expenses certificate so that account cannot be checked;

5.

Those who fails to handle the due tax payment declaration within the prescribed time limit, or refuse to pay it albeit ordered by the tax authority to pay it;

6.

The standard for tax calculation declared by the taxpayer is rather unwarrantably low.

X.

On policies applicable to reduce or exempt tax.

In accordance with the characteristics of real estate development, real estate developer and the enterprises mainly relying on marketing (including agency factor) shall not enjoy the tax preferential policies for the newly-built enterprises.

XI On Scope of application and enforcement time of the Notice

The Notice is applicable to domestic-funded real estate development enterprises of all economic nature as well as other domestic-funded enterprises engaged in real estate development business. The state tax bureaus and local tax bureaus of all provinces, all provinces, autonomous region, municipalities under the central government, cities directly under State planning shall formulate detailed enforcement measures and apply for the record in the State Administration of Taxation.

the Notice shall come into force as of January 1, 2006. Notice of the State Administration of Taxation on Business Income Tax of Real Estate Development (Guo Shui Fa [2003]No.83 shall be repealed and nullified simultaneously. The tax particulars that do not have definite provisions and have not been handled, the Notice prevails.