Tax On Real Estate Profits Comes Into Force In China

by Mary Swire, Tax-News.com, Hong Kong

03 June 2005

A tax on the profits of property speculators has come into force in China, one of a series of measures that the government hopes will cool the housing market in hotspots such as Shanghai and encourage the development of more affordable homes.

From June 1 2005, a 5% tax will be applied on the profits accrued from the sale of a property which has been held for less than two years. Also, in cities where real estate prices have been rising the fastest, local governments will have the ability to place higher taxes on luxury homes.

For example, buyers of luxury properties in Nanjing, capital of Jiangsu Province, now face a 4% tax, up from 2% previously.

The tougher tax regime, which is said to be backed by seven government agencies, is designed to discourage the development of commercial and luxury real estate and ensure that an adequate supply of affordable housing stock remains available for low income workers.

Last month, the Xinhua state news agency reported that local governments have been ordered to put in place a number of other measures to limit developers' ability to make a profit. These include clarifying prices and housing sizes before granting land use rights, limiting credit for property deals and confining real estate developers' profits to a maximum of 3%.

In addition, developers who fail to build within a year after buying land will be penalized, and those that fail to build within two years after buying property would lose their rights to the land.

While property prices in Shanghai fell back slightly in the month between mid-April and mid-May, analysts doubt whether the measures will have the desired effect in the long-term whilst the level of demand for property remains so high.

Average house prices rose by 14.4% last year, despite the government taking a series of macro-control measures, including an interest rate rise, to cool the market. Prices have risen a further 12.5% year-on-year during the first quarter of this year.

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