On January 1, 2009, China abolished the Interim Regulations on Urban Real Estate Tax. Under those regulations, the Urban Real Estate Tax had been levied on real property purchased in China by: 1) Chinese enterprises with foreign investments; 2) foreign enterprises; or 3) foreign individuals (all three collectively referred to below as "Foreign Investors"). As a result of this change, Foreign Investors who purchase real property after January 1, 2009, are now subject to China’s Interim Regulations on Real Property Tax (i.e., the same regime applicable to domestic Chinese owners of real estate).
Prior to 2009, when entities or individuals purchased real property in China, domestic buyers paid the Real Property Tax, whereas Foreign Investors paid the Urban Real Estate Tax. The difference between these two taxes was that a higher rate could be applied under the Urban Real Estate Tax depending upon the way in which the taxable value of real property was calculated. If the taxable value of the property was calculated by reference to its value, then the applicable rate under both taxes was 1.2%. However, if taxable value was calculated by reference to annual lease income, then the tax rate under the Real Property Tax rate was 12%, while the applicable rate under the Urban Real Estate Tax rate was 18%. Foreign Investors will therefore benefit from the abolition of the Urban Real Estate Tax to the extent that they will now be eligible to pay tax at the 12% rate on property that is valued by reference to annual lease income.
As a historical note, the Urban Real Estate Tax was applied to Foreign Investors in 1994, as part of a broader resolution of a variety of tax issues relating both to Chinese enterprises with foreign investments and to foreign enterprises. The abolition of the Urban Real Estate Tax does not yet, however, appear to be part of any broader relaxation of certain policies instituted by the Chinese government from 2006 to discourage the entry of foreign funds into the Chinese real property market. Whether China will take further steps to modify these policies still remains to be seen.