Market entry barrier
Unlike the past practice, Circular 171 requires foreign investors to set up foreign investment enterprises ("FIEs") to house their investment properties in China. For setting up a real property FIE of total investment exceeding USD10 million, it is required to inject registered capital amounting to at least 50% of total investment. It would be more stringent than the general requirements which allow 40% for FIEs of total investment ranging from USD10 million to USD30 million and 33% for FIEs of total investment exceeding USD30 million.
In cases of acquisition of real property FIE by way of equity transfer or other methods by foreign investors, it is necessary to pay the relevant consideration in one lump sum.
Circular 171 has also imposed restrictions on property investment for branches or representative offices of foreign enterprises as well as foreign individuals. Such branches, representative offices and foreign individuals who have stayed in China for over one year for working or studying are allowed to purchase real properties for self-use purpose. Furthermore, foreign enterprises without any establishment in China and foreign individuals who have stayed in China for less than one year are not allowed to acquire any real properties. As a concessionary treatment, residents of Hong Kong, Macao and Taiwan or overseas Chinese may buy real properties with area limitation for living purpose. Pursuant to a subsequent circular issued by properties administration authority, each of the aforesaid residents is allowed to buy one apartment. Meanwhile, the properties administration authority will not process any registration in respect of purchases made by unqualified entities or individuals.
Post establishment of a real property FIE
After meeting the above registered capital requirements, real property FIE will be issued with a one-year approval permit and business license. The documents evidence the official establishment of a real property FIE. However, a permanent business license will be issued only when the real property FIE has fully paid up the land premium and got the land use right certificate.
Meanwhile, funding by loans is not allowed before the following conditions can be met:
- Registered capital is fully paid up.
- The land use right certificate has been obtained.
- 35% of the total project investment injected as the required registered capital of the project.
Separately, for joint venture real property FIEs, it is not permitted to include any guarantee provision for fixed return in joint venture contract, articles of association, equity transfer contract or other documents.
More importantly, it clearly stipulates that no tax incentive should be granted by local governments to real property FIEs.
Exit stage
It specifically emphasizes that necessary compliance review and tax clearance procedures must be completed before remitting any sales proceeds of real properties out of China. It seems that more restrictive foreign exchange administration measures in this regard will be released in the future.
Headquarters or regional headquarters
It is defined that headquarters or regional headquarters (collectively referred to as "HQ") is a legal entity performing management function to its investee enterprises and enterprises entrusted by others located in several regions. Foreign wholly owned investment holding companies and management companies are included.
To qualify for incentives, the following conditions should be fulfilled:
- A separate legal entity.
- Total asset value of its parent company should not be less than RMB3 billion.
- Cumulative investment in China by its parent company should not be less than RMB200 million.
- Number of enterprises under its control or management should not be less than three.
- Capability to perform centralized accounting and consolidated income tax filing.
Separately, it provides that foreign invested management company of minimum registered capital amounting to RMB20 million also qualifies.
Financial subsidies are available to newly set up HQ on a progressive scale based on registered capital amount of the subject HQ.
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Registered capital |
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Financial subsidy |
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RMB1 billion or more |
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RMB20 million |
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RMB500 million (RMB500 million inclusive) - RMB1 billion |
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RMB15 million |
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RMB100 million (RMB100 million inclusive) - RMB500 million |
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RMB10 million |
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Furthermore, subject to certain criteria, expatriate senior management personnel may enjoy a refund of paid individual income tax ("IIT") to the extent of the IIT portion retained by the local government.
In addition, in respect of contribution to housing fund for staff, a cap at 15% of the total salaries and wages is allowed for income tax deduction purpose. By the same token, individual can also exclude maximum 15% of his/her salary and wage from the IIT taxable amount when making his/her housing fund contribution.
Regarding other aspects, priority will be given to HQ when arranging utilities and assistance may also be rendered to HQ when applying residence permit for their expatriate and Chinese returnee staff as well as their spouses and children.
Financial institutions For financial institutions ("FI"), the following financial subsidies are available:
- A subsidy at a rate of RMB1,000 per square meter for any purchase of office premises.
- Exemption of deed tax and exemption of real property tax for three years in respect of newly purchased or built office premises for self-use purpose.
- Refund of 50% of business tax for the first three years after operation.
- Refund of income tax at a cap of the retained portion by the local government for three years starting from the first profitable year.
- By the end of 2010, a subsidy at a rate of RMB150,000 for every RMB100 million increment of year end balance of loan or trust extended to small and medium sized enterprises, individuals or farmers.
Besides, senior management personnel working in FI for two consecutive years may enjoy a subsidy if an individual makes the first purchase of apartment, automobile or training in Tianjin. The subsidy amount is effectively the lower of the individual's IIT payment portion retained by the local government in the preceding year or the actual amount paid by the individual for the purchase of apartment, automobile or training in Tianjin.
Observation
Although it is encouraging to see this incentive policy, there are still a few areas remaining unclear. For instance, whether and how a FIE may fulfill the conditions to qualify as a HQ, particularly requiring the enterprise to possess the capability to perform centralized accounting and consolidated income tax filing. Additionally, whether the 15% cap for housing fund contribution by HQ may be implemented given a different statutory cap has been imposed by the Ministry of Finance and the State Administration of Taxation.
