CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
• Stamp duty: loan contracts are taxed at 0.05% of the loan amount (exempt for loans between financial institutions and micro-small enterprises); security contracts (eg, guarantee contracts) are generally not subject to stamp duty. • VAT: lenders pay VAT on interest income (6% for general taxpayers, 3% for small-scale taxpayers), plus additional taxes such as urban maintenance and construction tax and education surcharge. • Property tax: if the secured property is real estate, the mortgagor pays real estate tax and urban land use tax during the mortgage period; the lender has no such obligation. If real estate ownership is transferred (eg, enforcing the mortgage), deed tax is payable (by the buyer). 4.3 Foreign Lenders or Non-Money Centre Bank Lenders The tax concerns and mitigation measures for foreign lenders and non-money centre bank lenders are as follows. • Tax concerns: foreign lenders face withholding tax and VAT (overseas lenders pay 6% VAT on loan services, withheld by domestic borrowers); non- money centre banks may face stricter tax audits on interest income due to lower regulatory ratings. • Mitigation: use tax treaties to reduce withholding rates (requiring filing as a non-resident taxpayer to enjoy treaty benefits); overseas lenders com- plete tax registration for legal input VAT deduction; non-money centre banks improve interest income accounting and retain fund use certificates to respond to tax inspections. Additionally, foreign lenders must complete foreign debt registration to ensure compliant cross-border fund flow. 5. Guarantees and Security 5.1 Assets and Forms of Security Common secured assets include: • real estate (buildings, land use rights); • movable property (production equipment, vehicles, inventory); and
• rights (equity, intellectual property, accounts receiv- able, deposit certificates). Main security forms include: • mortgage (for real/movable property, requiring a written contract); • pledge (delivery of movable property for chattel pledge, registration or delivery of right certificates for pledge of rights); and • lien (statutory security, eg, creditor possesses debtor’s movable property and claim is due). Formalities and Perfection A written contract is required for mortgage/pledge, and registration is mandatory for real estate mortgag- es and equity pledges (with authorities such as real estate registration centres or the State Administration for Industry and Commerce (SAIC)). Without registra- tion, the mortgage/pledge contract is valid, but the mortgage/pledge right is not legally established (or cannot be enforced against third parties). Timeline Registration takes three to ten working days. Costs include registration fees (eg, RMB550 per real estate mortgage) and appraisal fees (0.1%-0.5% of asset value if appraisal is needed). 5.2 Floating Charges and/or Similar Security Interests PRC law does not have the “floating charge” con- cept under common law, but the Civil Code provides a “floating charge on movable property” system: enterprises, individual businesses, and agricultural producers may create a mortgage over their exist- ing and future production equipment, raw materials, semi-finished products, and products. Its core fea- tures include: • before the secured property is determined, the mortgagor may freely dispose of it (eg, sell, lease); and • the secured property is determined upon default after maturity, the mortgagor’s bankruptcy/dis- solution, or the occurrence of agreed mortgage enforcement events.
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