CHINA Law and Practice Contributed by: Nancy Zhang, Xiaoying Tian, Qian Gu and Liangqian Ying, JunHe
For a small-scale taxpayer (ie, whose VAT-tax - able sales are no more than CNY5 million per year), the simplified method at an applicable rate of 5% will be applied. If VAT-taxable sales are no more than CNY100,000 per month, such tax - payer is exempt from the payment of VAT. 8.2 Mitigation of Tax Liability An equity deal is often chosen by companies over an asset deal as a way to mitigate tax liabilities. However, the State Administration of Taxation has issued certain official replies on a case-by-case basis to collect land appreciation tax from the seller in equity transfer transactions where the main asset of the target company acquired was the real estate. As a result, there might be potential exposure to land appreciation tax liability in similar equity deals. 8.3 Municipal Taxes Property tax and urban land use tax are the main municipal taxes paid on the occupation and usage of real estate: • for property tax, the applicable rate is 1.2% if it is calculated based on the residual value of the real estate (ie, the original price of the real estate reduced by 10% to 30%), and 12% if the tax is calculated based on the rental income from the real estate; and • the applicable rate of urban land use tax var - ies from CNY0.6 per square metre to CNY30 per square metre, depending on where the real estate is located. 8.4 Income Tax Withholding for Foreign Investors In the case of an offshore entity holding an onshore project company, which, in turn, holds
real estate in the PRC, such offshore entity is subject to: • withholding income tax at an applicable rate of 10% on any dividends received from the onshore project company; and • withholding income tax at an applicable rate of 10% on the net income generated from the transfer of equity in such onshore project company, if under each circumstance such offshore entity has no establishment in the PRC or such income has no actual connec - tion with such establishment, unless other - wise provided in a more preferential bilateral tax treaty. In the case of an offshore entity directly holding real estate in the PRC, which existed before July 2006, such foreign investor, if it has no estab - lishment in the PRC or the income generated in the PRC has no actual connection with such establishment, is subject to: • withholding income tax on the net income generated from the transfer of the real estate at a rate of 10%; and • withholding income tax at a rate of 10% on the rental proceeds generated by the real estate. 8.5 Tax Benefits According to the PRC Enterprise Income Tax Law, real estate held by a company is typically treated as fixed assets, which may be depreci - ated, and the relevant depreciation amounts are allowed to be deducted from taxable income. The land use right held by companies is usually treated as a non-tangible asset, which may be amortised, and the relevant amortised amount may be deducted from taxable income.
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