The land VAT settlement period of real estate enterprises is generally after project development and sale, while land VAT often could be deducted after payment, which makes many real estate enterprises deficit when calculation and settlement. According to Chinese tax law, current deficit shouldn’t be switched back to precious year for reducing taxable income, hence, period inconformity might raise the tax burden and cash cost to real estate enterprises. In practice, some real estate enterprises should make special negotiations with tax authorities on the above issues, which takes very long time. On Dec 24 2010, SAT issued “Notice on EIT treatments before real estate enterprises’ cancellation” (Notice No 29 in 2010 of SAT) and stipulated that before real estate enterprises’ cancellation, overpaid EIT tax due to land VAT settlement could be refunded, which provides legal ground to solve the above issues.
Notice No 29 stipulated that real estate enterprise could share land VAT during settlement period to previous year, and if land VAT has been settled with deficit during calculation and settlement, real estate enterprises could apply refund when cancel tax registration. The specific calculation method is: shared land VAT=total amount of land VAT*(project yearly sale revenue/total project sale revenue), enterprise then use shared land VAT minus current deducted land VAT, the balance is land VAT that shall be supplement deducted. Enterprise could apply tax refund to overpaid tax.
Notice No 29 retroactive implements to Jan 1 2010. To enterprises that cancel tax registration after Jan 1 2010, if in line with the above conditions, could apply tax refund to tax authorities. To enterprises that cancel tax registration before Jan 1 2010, there is no regulations in Notice No 29. Hwuason law firm suggests those enterprises consult and negotiate with tax authorities for the utmost tax refund possibilities. Now is 2010 EIT calculation and settlement period, hwuason suggests enterprises who are preparing financial statements of the fourth quarter of 2010 or the all-year pay great attention to Notice No 29 and make relevant financial and tax treatments.
I. After real estate development companies (hereafter as Companies) conducted land value added tax (land VAT) settlement of the development project, when applying for proceeding with tax registration cancellation, if there’s deficit of final calculation and payment in the year of cancellation, exceeded enterprise income taxes of past project development years before cancellation shall be calculated in follow ways and according taxes shall be refunded:
1. Land VAT on the company’s whole project should follow the project selling incomes of the project development annual’s proportion in selling incomes of the whole project, and be spread among all project development years, specifically per follow equation:
Annual spread due land VAT=whole land VAT *(selling incomes of the project development annual÷selling incomes of the whole project)
Selling incomes in This Notice include incomes of equal selling of real estate, but do not include selling of common standard living house on which the added value does not exceed 20% of deducting project.
2. Annual due spread land VAT of project development annual minus annual deducted land VAT before tax, the balance is due supplementary land VAT which should be deducted in current year; Companies should adjust the taxable incomes of the year, and calculate due refunded enterprise income tax accordingly; if prepaid enterprise income tax does not satisfy the refunding amount, the due refund should be considered as deficit and carried down to next years, and follow taxable incomes shall be adjusted.
3. In the year of company’s land VAT settlement, if the annual due tax amounts is a positive number by adjustment in usage of above methods, enterprise income tax shall be paid accordingly.
4. Estimated refund amount by above way shall not exceed actual paid enterprise income taxes in all project development years.
II. When applying for tax refund, companies should provide written documents to the tax authority to prove the calculation process of due refund amount of enterprise income taxes, including the whole amount of land VAT paid upon the entire project of the company, the whole selling income amount of the project, annual selling incomes of the project, Annual spread due land VAT and already deducted land VAT before tax, tax rate of the year, etc.
III. After companies’ settlement of land VAT on the development project accordingly, when applying for cancellation of tax registration with the tax authority, if there’ s deficit of final calculation and payment in the cancellation year, but no deficit of land VAT settlement, or though there’s deficit of land VAT settlement but already recovered in previous years before the cancellation year according to tax laws, This Notice shall not be implemented.
Tax authority shall determine whether not to implement This Notice referring to final calculation and payment status from the year of land VAT settlement to cancellation year, and shall confirm due refund enterprise income taxes.
IV. This Notice shall be put into effect from January 1, 2010.
December 24, 2010
For the past 6 months the Chinese government has been pondering the introduction of a property tax – an annual tax imposed on owners of property – to cool down the perceived the real estate “bubble”. Four trial cities have now been indicated – Beijing, Chongqing, Shanghai and Shenzhen. The tax will apply to residential properties. It is not clear yet whether the tax will be applied on all homes or merely properties that are not the owner’s principal residence. The policy reasons behind the tax would suggest that the tax should only be applied to investment properties.