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New Individual Income Tax Rules on Transfer of Housing Property in China
The State Administration of Taxation ("SAT") has recently issued a circular, namely Guo Shui Fa [2006] 108 ("Circular 108") to introduce new Individual Income Tax ("IIT") rules on transfer of property in China. Meanwhile, Circular 108 has further provided clarifications to some key terms. All such changes have become effective 1 August 2006. Amongst all, we would summarise below the salient points applicable to commodity housing properties which may draw most people's attention.
Computation formula
Taxable income = sales proceeds - cost - reasonable expenses
IIT payable = taxable income x 20%
Definitions
Sales proceeds is defined as the transaction price for the subject transfer of property. Moreover, tax authorities reserve a right to deem the sales proceeds amount if it is unreasonably lower than the market price.
Cost is defined as the consideration paid for purchase of property, including relevant taxes and expenses. In this connection, taxes refer to business tax, city maintenance tax, education surcharge, land appreciation tax, stamp duty, etc. paid during the course of transfer of property.
Reasonable expenses include finishing and renovating expenses and mortgage loan interest paid in relation to the residential property as well as handling fee, notary fee, etc. Unlike previous circulars, Circular 108 provides more details on the scope of "reasonable expenses". It seems to cover more deductible expenses, for instance, finishing and renovating expenses and mortgage loan interest.
It is noteworthy that to qualify as one of the deductible expense items, the relevant finishing and renovating expenses should fulfil the following conditions:
- The expenses must be supported by consolidated invoice where the owner of the subject property should be shown as the payee on the consolidated invoice.
- The maximum deduction amount is 10% of the cost of the subject property.
- In case of residential properties which were finished at the time of purchase, such deduction may be denied.
In addition, when applying for deduction of mortgage loan interest, documentary proof issued by the lending bank must be in place.
Deeming provision
In the absence of any documentary proof for the cost of a property, tax authorities may assess IIT liabilities arisen on the transfer of property at a range from 1% to 3% of the sales proceeds. For example in Shanghai, deemed IIT rates for (1) non-ordinary housing properties and (2) ordinary housing properties, self-built properties, economical apartments, purchased public housing properties and compensation housing properties for relocation are set at 2% and 1% respectively.
Exemption and reduction provisions
Consistent with the previous rules, IIT exemption is available to any individual who has held a property for over five years given that the property is the individual's sole residential property.
Meanwhile, an individual may apply for a complete or partial refund of IIT paid in respect of any sale of residential property if the individual has repurchased another residential property within one year. |
