Too good to be true?

In order to stimulate the residential property market and to reduce the vacancy level in Shanghai, the Shanghai Municipal Government on May 13, 1998 issued circular Hu Fu Fa [1998] No. 19 setting out a list of broad policies to encourage residential property transactions. Some of these policies are, essentially, generous tax incentives for individuals purchasing residential properties in Shanghai.

The most appealing tax incentive offers Individual Income Tax (IIT) refunds to individuals by offsetting an individual's taxable income against the purchase price, including payments of principal and interest on mortgage loans, paid by the individual for the acquisition of residential property. At first glance, such a deal seems too good to be true. For those considering buying, the Shanghai tax authorities have recently issued two more circulars – Hu Di Shui Di [1998] No. 46 and Hu Di Shui Er [1998] No. 30 – which further endorse and clarify this personal tax incentive.

The salient points of the above tax incentive are:
-purchase price including payments of principal and interest on mortgage loans made by individuals acquiring residential properties are deductible for IIT purposes during the period from June 1, 1998 to May 31, 2003, upon approval from the tax bureau;

-the tax incentive applies to both local individuals and expatriates (including residents of Hong Kong, Macau, and Taiwan) who file IIT returns in Shanghai and who acquire residential properties in Shanghai within the five-year period from June 1, 1998 to May 31, 2003;

-an individual who acquires residential property should register with the designated tax bureau and apply for a registration card within the six months of the acquisition. Some of the documents required are the purchase contract, invoice, ownership certificate, mortgage con-tract (if any), and identity card or passport;

-an individual who sells residential property should de-register with the designated tax bureau within three months after the sale. The seller will cease enjoying the tax incentive effective from the date of ownership transfer;

-the tax incentive is effected on a ?pay first, refund later basis;

-applications for tax refunds for a given year will be processed during April, the following year;

-to apply for the tax refund, a separate tax completion receipt is required;

-effective November 2, 1998, the designated tax bureau will accept registrations for refunds on the acquisition of the residential properties.

Taking advantage
Here's a simple example to illustrate how this tax refund scheme works. Let's assume an expatriate living in Shanghai with a monthly income of, say, Yn54,000 buys an apartment for Yn2,000,000. For an example of what the calculation might look like.

In this example, the tax savings due to the acquisition of the apartment amounts to 23.25 percent of the total purchase price.

And, as a further sweetener, the Shanghai Municipal Government also grants individu als acquiring residential properties before the year 2000 a 50 percent subsidy on the deed tax owed. As a result, the effective deed tax rate is reduced from the original three percent to 1.5 percent.

Given these favourable tax incentives, what should you do? If you're an individual intending to purchase residential property in Shanghai – or if you have recently acquired some since June 1, 1998 – you should certainly look into taking advantages of these tax refunds and subsidies.

If you're a property developer or real estate agent, you should definitely make these tax incentives clear to potential customers to arouse their interest to buy residential property in light of the tax benefits.

If you're an employer, you may want to seriously consider the possibility of introducing tax efficient home purchasing schemes for your employees in Shanghai.

Written by Matthew Wong, Tax Partner, and Raymond Louie, Senior Tax Manager, PricewaterhouseCoopers in Shanghai. The above information is not intended to be comprehensive or final. Professional tax advice is strongly recommended before entering into any tax planning arrangements based on the announced incentives.