Iris Qi
With the global situation remaining tense and as the fight against the epidemic carries on, the general real estate market situation remains highly unpredictable and complex.
In this perspective, just before the Chinese National Holiday, several central government departments announced important policies intending to support the real estate market, such as:
- On 29th September, the People’s Bank and the China Banking Regulatory Commission notified that eligible city governments were authorized to relax the lower interest rate limit for commercial loans for first time home buyers;
- On 30th September, the People’s Bank decided to lower the interest rate for personal housing fund loans for the first house, latest rates are: 2.6% for those with less than 5 years (5 included) and 3.1% for those with more than 5 years;
- On 30th September, the Ministry of Finance and the State Taxation Administration issued an Announcement on Individual Income Tax (“IIT”) Policies for Supporting Residents’ Housing Purchases (the “Announcement”).
The first two policies are obviously quite straightforward – lowering loan interest rates in order to reduce people’s mortgage burden. The third policy, i.e. “IIT refund for housing replacement” is interesting as well and requires some more clarification?
What is the “IIT refund for housing replacement”
In summary, from 1st October 2022 to 31st December 2023, taxpayers who sell a housing property and purchase another housing property in the same city within one year (12 months), will be allowed to a refund on the IIT paid on the net gains resulting from the sale of the property.
To benefit from the refund requires that the following three conditions are met:
- The sale must be made before the purchase of the new property and the two transactions must be completed within 12 months from each other;
- Both properties must be located in the same city – the term “same city” refers to the entire administrative region under the same centrally-administered municipality, sub-provincial city or prefecture-level city (prefecture, autonomous prefecture or league).
- The seller in the first transaction and the purchaser in the second, must be the same taxpayer. Where the property sold was co-owned by several persons or where the newly purchased property is co-owned by several persons, the sales price or the purchase price eligible for the refund shall be determined in accordance with the taxpayers’ share of the property rights in the property.
To be noted that there is no condition linked to the actual residence of the taxpayer in either of sold and bought property. In other words the refund is available even if the property is rented out for instance.
The specific calculation of the refund amount is as follows:
- If the purchase price for the new property is higher or equal to the sales price of the “old” property, the tax refund amount will be the full amount of the IIT paid on the sales of the “old” property;
- If the purchase price is lower than the sales price, the tax refund amount will be determined as follows: (purchase price ÷ sales price) × the IIT paid on the sales of the “old” property;
Direct Impacts
It is clear that the policy is principally aimed at benefitting those home owners who are seeking to change their current residence for another for instance larger or newer residence. Indeed not only will they benefit from the tax reductions directly applied to the sales price, but they will also enjoy the lower mortgage rates for purchasing the new property. Also, the new policy will be specifically welcomed by those home owners who do not yet meet the 5 year condition for the previously existing IIT exemption, but still want to sell their property. As such it is expected that the new policies will positively impact the activity of the second-hand housing market.
In reality it is to be expected that the policy will primarily benefit the buyer of the “old” property. Indeed in second-hand housing transactions it is common practice that the tax burden is passed on to the buyer of the property. As such, the tax rebate offered to sellers will in fact reduce the cost for buyers. Of course for this benefit to be realized it requires a coordinated action and cooperation between buyer and seller. As a result this policy may actually provide the buyers more bargaining power as they will select properties from sellers who fall within the conditions of the tax rebate and agree to pass on the benefit to the buyer.
Unforseen Side-effects
Clearly it is expected that this policy will help drive up the volume of transactions on the second-hand market. However it may also have some unforeseen side-effects. For instance it could be expected that the average negotiation and transaction cycle will be lengthened. As the sale and purchase must be completed in that order and within one year, those who intend to replace their property will be very careful to sequence the transactions accordingly and will want to confirm the sale before they identified the acquisition. In addition since buyers will have more bargaining power as analyzed above, one should also expect that the negotiations will take longer time as buyers will be more careful in in choosing the target property they intend to buy.
In addition, it may be expected that this measure will help to regulate the second-hand property market better. Indeed it is a fairly common practice that parties to a second-hand property transaction would agree to “lower” the contract price as referenced on the online deed so as to lower the tax burden undertaken by the buyer. With this IIT refund policy in place there is no longer any interest to “lower”’ the contract price, as it will limit the effect of the tax reduction. This will certainly help to stamp out all sorts of shady practices which are known to sometimes occur in the margin of such transactions.
In this respect it is also interesting to point out that the Announcement provides that the housing authority should establish an information sharing system with the tax bureau in order to allow information, such as online contract filings and cancellations, to be shared in real-time with the tax bureau. It appears that data sharing will be implemented between more and more government departments in real time, so that we may expect that different taxable, compensable or refundable situations of taxpayers will be more accurately and automatically observed by the tax bureaus.
More to come?
The new policies are obviously part of series of measures undertaken by the government to support the real estate market. They follow on the heels of a new lowering of the LPR in August (3.65% for 1-year and 4.3% for 5-year) and the further lowering in September of the foreign exchange reserve ratio, after the domestic reserve ratio was previously lowered in April.
With only three months left before the end of 2022 the question is whether the government will introduce additional policies in this respect? We will have to wait and see but we will keep you abreast if anything develops.
DaWo Law Firm has extensive experience in assisting clients with real estate transactions and disputes. If you have any questions, please feel free to contact us.
