Member Article

On 11 July 2006, six Chinese ministries (Ministry of Construction, Ministry of Commerce, National Development and Reform Commission, The People’s Bank of China, State Administration for Industry and Commerce and State Administration of Foreign Exchange) jointly issued a circular “Opinions on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market” Jianzhufang [2006] Circular No.171, which sets out administrative measures aiming to tighten and regulate foreign investment in the deemed overheated real estate market. Circular 171 restricts foreign investors (both corporate entities and individuals) from using offshore companies to purchase and to hold real estate properties in China that are developed for any purposes other than for self-use. Foreign investors investing in Chinese real estate properties must now set up onshore real estate investment companies, which may be wholly foreign owned or joint ventures, with approvals from the relevant authorities. The registered capital of such an onshore foreign invested company must not be less than 50% of the total investment amount if such amount exceeds US$10 million. The measures also prohibit an onshore property development company from obtaining any financing (either domestic or foreign) until its registered capital has been fully paid up, it has obtained the relevant land use right certificate or at least 35% of the total project development amount has been funded. There are tax implications for bringing foreign property investments onshore. Such an onshore company would be subject to a corporate tax rate of 33%, whereas before for an offshore investor a 10% withholding tax is payable. For those real estate investment trusts (REITs) which invest in Chinese properties, this would impact on their potential dividend distributions and there will be added costs in setting up onshore property holding companies under the new measures. Separately, for foreign companies with branches or representative offices in China and foreign individuals, they may now only purchase real estate properties (office premises or residential) for self-use. Foreign individuals must prove that they will work or study for more than one year, though this restriction does not apply to individuals from Hong Kong, Macau and Taiwan. On 1 September 2006, the State Administration of Foreign Exchange and the Ministry of Construction jointly issued a circular “Notice on Regulating the Administration of Foreign Exchange in Real Estate Market” Huifa [2006] Circular 47, which sets out the administrative measures, procedures and documentation requirements relating to foreign exchange matters for the implementation of Circular 171. As a result of Circular 171, more detailed implementation rules are expected to be issued by the local city and provincial governments.