Laws of the People's Republic of China

Official Reply of the State Administration of Taxation about How to Deal With the Tax Issues Concerning the Incomes Obtained by Foreign-funded Enterprises Engaging in Real Estate Development from Leaseback Business

Guo Shui Han [2007] No.603

The State Taxation Bureau of Hunan Province:

We have received your Request for Instructions on Tax Issues Concerning the Incomes Obtained by Enterprises Engaging in Real Estate Development and Operation from Leaseback Business (Xiang Guo Shui Fa [2006] No.106). We hereby make a reply as follows:

1.

In case any foreign-funded enterprise that engages in real estate development and operation transfers any estate such as premise or building, etc, as built and developed by itself by means of distribution, and then leases back the estate from the buyer, it shall split the leaseback business into distributing business and leasing business, and handle the tax affairs of each business respectively whatever leasing mode it takes. The balance between the income as obtained by the enterprise from distributing or transferring the title to the estate and the related cost and expenses on the title to the transferred estate shall be counted into the taxable amount of income in the current period as the business profits and losses in the current period.

2.

In case any enterprise transfers one or more of the following rights and interests or risks of assets via leaseback business, it shall be regarded as that the enterprise has transferred part or whole title to the estate no matter whether the formalities for the alteration of legal ownership of the estate (such as estate rights registration or ownership transfer) has been handled:

(1)

rights and interests to obtaining the income from the appreciation of fixed assets;

(2)

assuming the losses as incurred from various kinds of damage (including physical damage and depreciation);

(3)

rights and interests to the possession of assets;

(4)

rights and interests to using assets during the period of continued existence of the assets in the future;

(5)

rights and interests to disposing the assets.

3.

With respect to any leaseback transactions of estate between an enterprise and any of its affiliated parties, the provisions of this Reply, as well as related taxation administrative provisions on business contact between affiliated enterprises shall be applicable.

4.

Where overdue tax or tax refund is involved when handling tax affairs under the provisions of this Reply, it shall be handled pursuant to the related provisions of the Law of the People's Republic of China on the Administration of Tax Collection and the Detailed Rules for its implementation.

State Administration of Taxation

May 31, 2007