Foreign Investments in PRC Real Property – A Legal Perspective

John Y. Lo

March 24, 2010

23/4/12

23/4/122

Different Players and Scenarios

Individual investors

First time investor

Repeat players

Corporate players

Investing

Developing

Operating

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Subject Investor and the Regulated Environment

China is highly regulated in terms of foreign investment in real property

(1) The status of the investor, (2) the nature of the subject property, and (3) the intended use of the property all trigger different regulatory restrictions

Investors face a regulated environment very different from less regulated environments such as HK or USA

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Types of Investor and Types of Property in Question

Individuals

- Personal residence (1)

- Rental unit (2)

- Commercial /office unit (3)

Corporate entities

- Operating a non-real property focused business (4)

- As Investor acquiring property (5)

- As Developer developing land (6)

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Key Questions and Concerns

When Considering Investing

- Am I allowed to buy in a particular locality?

- How do I bring in the purchase money?

- Financing possibilities?

- Holding method?

- Tax and other expenses?

During period of holding and when selling

- ……later concerns

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(1) Individual InvestorsAcquiring a Personal Residence

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Permission to Purchase Personal Residence

Are you allowed to buy in a particular locality?

Depends on the locality, and also the period during which restrictive measures may have been imposed

Location based restrictions – major cities such as Beijing, Shanghai, Shenzhen, ..

Note distinction is sometimes drawn between “foreigners” and “Taiwan-HK-Macau compatriots” in the application of restriction

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北京《关于规范境外机构和境外个人购买商品房的通知》 (2/07)

境外个人、港澳台地区居民和华侨在境内工作、学习超过一年，因为生活需要可以在京购买一套自用、自住的商品房。购房前，必须到北京市公安局出入境管理处办 理《境外个人在境内居留状况证明》。 一人只能购买一套自住商品房境外机构在北京设立分支、代表机构的，可以在北京购买自用商品房。境外机构购买自用商品房时，必须提交有关部门批准其在北京设立分支、代表机构的证明文 件，并书面承诺所购商品房符合实际自用需要。如境外机构违反相关规定购房，将由工商部门对其查处。境外机构和境外个人购买自用、自住商品房，须提交该商品房是符合实际需要自用、自住的书面承诺；购买后不得随意出租、转让，但境外机构在北京设立的分支、 代表机构注销的，可以按规定办理商品房的转移登记手续。 各国驻华大使馆、各国际组织驻华代表机构及其享有外交特权与豁免权的人员在京购买商品房的，应提交外交部同意其购房的照会。 “商品房”包括预售商品房、现售商品房和存量房屋 并没有搞“一刀切”，比如，允许境外机构或个人成立企业投资房产。对于无理由多买房的短期炒房行为进行限制。

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Comments

Above decree applies to Beijing only

Certain other major cities may have similar rules, but second tier cities are probably not affected in practice

May purchase only 1 unit

May be only for personal residence

One year rule : if you have not stayed in Beijing for 1 year, then you do not qualify

May not “rent out or transfer” without discretion. Q: enforcement?

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Obtaining RMB for Purchase Proceeds?

Officially authorized method – apply to SAFE to remit foreign currency from abroad

Non-official method

RMB already in China

Trickle-in approach

Unauthorized channels

Practice in Pearl River Delta

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Availability of Mortgage?

Yes, they are available

Domestic bank – RMB loans

- Rates

- Eligibility criteria

- Terms

Foreign banks can offer RMB and $HK loans (repayment)

[Covered by co-presenter]

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Title holding: Can you use an offshore company?

Practically speaking not an option for individual investors, because of

Its unfamiliarity in Mainland

Much extra paper work involved

Possibly running afoul of regulatory regime regarding “real name” system (Circular 171, Sec 11)

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Tax Concerns?

Many PRC taxes that impact on real property ownership and transaction

Most are not big ticket items and also not avoidable through planning

Key impact upon disposition Business tax (preferential treatment for small size

units and those held under 2 or 5 years) Land appreciation tax (local variation)

Probably not yet a major disincentive for foreign investors

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(2) Individuals to Invest in Additional Residential Units

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Can You Do That?

Yes

Non-restricted regions, including some major cities and probably all second tier cities

When the relevant restrictions have been removed in a major city that has previously imposed such rules (e.g. year 2009)

No

Beijing, Shanghai, Shenzhen, Guangzhou, … during periods when restrictive rules are imposed (e.g. 2007 - 2008)

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A History of Restriction Against Foreigners ( 限外令 )

Initially imposed under Circular 171 in 2006 Local government enacted rules: e.g. Beijing 01/29/07, （ Notice re Rules on Purchase

of Commodity Real Property by Foreign entities and individuals) (关于规范境外机构和个人购买商品房的通知）

From late 2007 through early 2009, PRC experienced a generally depressed real

property market

In early 2009, various locations including Beijing, Shanghai, Guangdong Province

and Shenzhen began to lift the restrictions temporarily

Beijing (01/29/09) 关于贯彻国办发（ 2008 ） 131 号文件精神促进本市房地产市场健康发展的实施意见

Guangdong (03/04/09) 广东省人民政府办公厅关于促进我省房地产市场平稳健康发展的若干意见

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Resumption of Restriction Against Foreigners in 2010

In light of heated market in 2009, the State Council reinstated the policy of the restriction in [December] 2009

Notice re Rules on Purchase of Commodity Real Property by Foreign entities and individuals continues to apply from beginning of 2010

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Restrictive Rules Against 2nd Unit

《国务院办公厅关于促进房地产市场平稳健康发展的通知 》国办发〔 2010 〕 4 号 ( 国务院办公厅 2010 年 1 月 7 日 )

对已利用贷款购买住房、又申请购买第二套（含）以上住房的家庭（包括借款人、配偶及未成年子女），贷款首付款比例不得低 于 40% ，贷款利率严格按照风险定价。

个人购买普通住房与非普通住房、首次购房与非首次购房的差别化税收政策 - 个人销售普通住房营业税、个人住房转让营业税免征时限由 2 年恢复到 5 年；未满 5 年的普通住房和已满 5 年的非普通住房买卖时，营业税按全额缴纳的，方可享受 个人所得税按总额 1%缴纳的优惠。

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Mortgage Policy

During periods of tightening, the requirement for the amount of down payment, and mortgage interest rate for any unit purchased by non-first time buyer is made less favorable

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(3) Individuals Investing in Commercial Property

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Section 1 of Circular 171

一、规范外商投资房地产市场准入

( 一 ) 境外机构和个人在境内投资购买非自用房地产，应当追循商业存在的原则，按照外 商投资房地产的有关规定，申请设立外商投资企业，经有关部门批准并办理有关登记后方可按照核准的经营范围从事相关业务。

　　

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Comments

Under Circular 171, all investors for “non-self use property” are required to establish an on-shore entity

Such “non-self use property” should include rent out property, whether residential or commercial

Query whether the purchase of a small shop unit in Shenzhen or Guangzhou by a HK resident will fall under such requirement?

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(4) Corporations with Business Operations

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“Self-use Property” ( 自用房地产 )

Refers mostly to many of the foreign invested enterprises in the Mainland whose main line of business is not real property investment or development

Such enterprises, when acquiring real property, are presumably not subject to the rules imposed on “Foreign Invested Real Property Enterprise.” ( 外商投资房地产企业 “ FIRPE”)

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Problem

When such non-FIRPE starts to rent out part of its premises to third parties, it will in effect starts to turn the “self use” property to “non self-use” property and trigger regulatory issues.

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(5) Corporate Investors to Acquire Property

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Circular 171 - Impact on Institutional Investors

Opinions on Regulating Foreign Investment in Real Property Market and Administration thereof ( 关于规范房地产市场外资进入和管理的意见）

Requires foreign investors to have commercial existence ( 商业存在 ) in China, and the establishment of Foreign Invested Real Property Enterprise ( 外商投资房地产企业 “ FIRPE”) to invest in or acquire non-self use property

Imposes debt equity ratio for different investment amounts

Implications: since the establishment of a FIRPE will require government approval, new investments will be subject to government control and can be held up in foreign investors’ attempts to enter the PRC market

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Offshore SPV

Real Property

PRCRental income

Offshore SPV

Real Property

FIE

Dividend

Rental income

Before Circular 171 After Circular 171

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Key Circulars at a Glance

Issue DateIssue Date Key IssuesKey Issues Circular #Circular #

12 July 2006 Foreign investors need to hold property via “commercial existence” in China

Distinction between self-use and non-self-use properties

Restrictions on FIRPE

171

1 Sept 2006 SAFE tightens FX approval for FIE/foreign individuals/FIRPE

47

23 May 2007 Foreign investors need a project to establish FIRPE

50

10 July 2007 FIRPE established after 1 June 2007 cannot borrow foreign debt

130

1 July 2008 Power to verify foreign-invested RE projects delegated to provincial level authority

23

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Issues Raised and Efforts to Get Around

Investing through acquisition of existing off-shore and on-

shore structures

Seeking localities still issuing approval (less developed

areas) and then set up branch in intended investment

locations.

Drawing a fine point between what is “real property

development and operation” ( 房地产开发、经营 ) and what

not (e.g. hotel, shopping mall leasing?)

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Circular 50 (2007)

Circular on further Tightening and Regulating the Approval and

Supervision of Foreign Investment in the Real Property

Industry ( 进一步加强、规范外商直接房地产业审批和监管的通知 )

Makes project existence a prerequisite for foreign investor to

invest in real estate

Created certain real practical problems for intending developers

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Circular 23 (2008)

Circular on Improving Filing Procedures in relation to

Foreign Investment in the Real Estate Industry ( 商务部关于做好外商房地产业备案工作的通知 )

as of 1 July 2008, the authority under Circulars 50 and 171 to

verify foreign-invested real estate projects has been delegated

to the provincial level authority under MOFCOM

Generally regarded as a loosening move as provincial authority

typically is more lenient and welcoming of foreign investment

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Tax Advantages of Using a HK Company

Avoidance of Double Taxation Agreement with Hong Kong (effective on 1 April 2007)

Reduction/exemption of withholding tax on

Dividends

from 10% to 5% if recipient is a company that

holds at least 25% of the capital of the Chinese

company

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Tax Advantage of HK Holding Company

Interest and royalties

- reduced from 10% to 7%

- Interest is defined as income from debts or claims of

any kind

- Royalties include payments for the use of or right to

use intellectual property and “know-how.”

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(6) Developers

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Additional Issues Facing Developers

Differences between investors and developers

Investors basically acquire, hold and manage, and then dispose property

Developers will in addition face all issues that arise in the development process, and will encounter many more legal and regulatory issues

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A Plateful of Common Issues

Acquiring land use rights from government or existing owner

Auction, tender and listing process

Negotiated process

Dealing with special land title issues, such as rural collective land and conversion of such land

Dealing with removal issues in urban built areas

Land use issues and plot ratio

Construction issues

THANK YOU.

Questions & Comments

John Y. Lo

John.lo@kingandwood.com.hk