The Ministry of Construction, Ministry of Commerce, National Development and Reform Commission, the People’s Bank of China, the State Administration for Industry and Commerce and the State Administration of Foreign Exchange jointly issued the Opinions on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market on 11 July 2006. The Opinions set out administrative measures designated to tighten the regulation of foreign investment in what is considered to be an overheated real estate market.
Restrictions
The Opinions restrict the purchase by foreign real estate investors (both corporate entities and individuals) of properties that are not intended for their own use (“non self-use properties”). Foreign investors must now form an onshore foreign investment enterprise “real estate FIE” to invest in and purchase non self-use properties. Although not specifically stated in the Opinions, it is understood that real estate FIEs may take the form of wholly foreign-owned enterprises as well as joint ventures. They may engage in the business activities approved by the relevant authorities. The registered capital of a real estate FIE must not be less than 50% of the total investment amount (the normal rate is 40%) if the amount exceeds US$10 million.
The Opinions further prohibit a real estate FIE from obtaining any financing (both domestic and foreign) until:
• its registered capital has been fully paid up;
• the relevant land use rights certificate has been obtained; or
• at least 35% of the total project development cost has been funded.
Separately, foreign companies with branches or representative offices in China and foreign individuals may only purchase office premises or residential properties for self-use after one year. Foreign individuals must prove that they will work or study in China for more than one year, though this restriction does not apply to those from Hong Kong, Macau and Taiwan.
Tax implications
Real estate FIEs will be subject to a corporate tax rate of 33%, unlike the previous 10% withholding tax rate for offshore investors. This will affect the potential dividend distributions and result in added cost in setting up real estate FIEs for those real estate investment trusts (REITs) that invest in Chinese properties.
Further regulation
On 1 September 2006, the State Administration of Foreign Exchange and the Ministry of Construction jointly issued the Notice on Several Issues in Standardising the Control of Foreign Exchange in the Real Estate Market. This Notice sets out the administrative measures, procedures and documentation requirements relating to foreign exchange for the implementation of the principal measures set out in the Opinions. It is expected that the city and provincial governments will issue more detailed implementation rules for the Opinions.
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