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The State Administration of Taxation
Notice the State Administration of Taxation on Imposing
Business Income Tax in Real Estate Development
Guo Shui Fa [2006] No.31
To states tax bureaus, local tax bureaus of all provinces, autonomous
region, municipalities under the Central
Government, cities specifically designated in the state plan:
In order to strengthen and standardize the administration on business
income tax in the enterprises concerning real estate
development, in accordance with Provisional Regulations of the People's
Republic of China on Enterprise Income Tax and its
enforcement regulations, laws and provisions related to Law of The
People's Republic of China concerning the Administration
of Tax Collection Order, as well as the operational characteristics of
the enterprises of real estate development,
business income tax concerning real estate development enterprises is
hereby given as follows:
I. Tax handling of uncompleted development products
Where such development products as residence developed and constructed
by development enterprises, commercial occupancy
as well as other buildings, attaching, supporting facilities and etc.
are sold by means of advance sale prior to its
completion, its presale income shall, in accordance with assessable
gross profit, work out quarterly( or monthly) gross
profit volume of the current period and subsequently the taxable income
after having deducted relevant period charge,
sales tax and adjunct account and then be adjusted after the assessable
cost of development products was calculated.
(i) The item of economically affordable housing shall comply with the
provisions such as Notice of the Ministry of
Construction, State Development and Reform Commission, Ministry of
Natural Resources, People's Bank of China on
Printing and Distributing Measures for Economic Affordable Houses (Jian
Zhu Fang (2004) No.77) and etc, the assessable
gross profit margin rate of the presale income shall be no less than 3%.
The real estate development shall, when applying
for initial tax returns filing, attach the certificate documents of the
related departments as well as other relevant
certificate document. For those who do not comply with the
provisions or fail to submit the certified documents of the
related departments as well as other related certificate
documents, they shall calculate the business income tax in
accordance with the provisions about sale of non-economic
affordable houses.
(ii) The estimated assessable gross profit margin rate of
non-economic affordable houses shall be determined in
accordance with the following provisions:
1. Where the development item is located in the urban and
suburban areas of provinces, autonomous regions, and cities
specifically designated in the state plan, its estimated
assessable gross profit margin rate shall be not less than
20%.
2. Where the development item is located in prefecture or its
suburban region, its estimated assessable gross profit margin
rate shall be not less than 15%.
3. Where the development item is located in other areas, its
estimated assessable gross profit margin rate shall be not
less than 10%.
II. Tax affairs treatment about completed development
products
(i) Those who comply with any of the following circumstances
shall be deemed as having completed the development product:
1. The certificate of project completion of the development
product or (cost objective) has been submitted to the
management department of real estate for record;
2. The development product or (cost objective) has obtained
the certificate of initial property right.
(ii) After the completion of development product, development
enterprises shall, in accordance with the nature and means of
production of its income and means of sale as well as the
principle of income confirmation, confirm rationally the
presale as real sale income, and simultaneously carry forward
the corresponding assessable cost and work out the gross
profit of the real sale income hereof. The difference between
gross profit margin of its real sale and the estimated gross
profit margin shall be calculated in the tax payable of the
project completion year. Where those completed development
products yet fail to calculate the assessable cost in the
project completion year in accordance with the related
provisions, or fail to adjust the taxpaying difference between
the real sale income of real sale and gross profit margin, the
tax authorities is entitled to confirm or verify its
assessable cost and thereby conduct taxpaying adjustment and
handle it in accordance with Law of The People's Republic of
China concerning The Administration of Tax Collection Order.
(iii) After the completion of product development,
development enterprises shall, prior to the annual taxpaying
declaration, submit the status quo of the project completion
to the taxation authorities in responsible. The development
enterprises shall, when declaring annual taxpaying, submit the
tax appraisal report issued by related departments concerning
adjustment of difference between gross profit margin of its
real sale and the presale gross profit margin as well as other
related documents required by the tax authorities.
The aforesaid tax appraisal report concerning difference
adjustment includes: geographical locations and survey of the
development item, floor space, development usage, initial
development time, completion time, salable areas and sold
areas, presale income and gross profit, real sale income and
gross profit margin, development cost and real sale cost and
etc.
(iv) The income of development product covers all the
purchase price in the process of product development,
including cash, cash equivalent as well as other economic
interest. Where various fund, expenses and adjunct account
charged by the development enterprise in the name of relevant
departments, units and enterprises are included in cost of
development product or invoice issued by development
enterprise, they shall be confirmed as sale income; otherwise,
they may be deemed funds to collect or remit for management.
(v) The sale income of development product shall be confirmed
in accordance with the following provisions:
1. Where the development products are sold by means of
one-off collection, the income shall be confirmed on the very
day when real payment or price certificate (right) are
fulfilled.
2. Where the development products are sold by means of
installment collection, the income shall be confirmed by means
of the settled price and cash day. Where the payer pays in
advance, the income shall be confirmed on the actual cash day.
3. Where development products are sold by means of bank
mortgage, the income volume shall be determined in accordance
with the settled price determined in sale contract or
agreement, its initial payment shall be confirmed on very day
when it is received, the remaining part shall be confirmed on
the very day when the account is transferred by means of bank
mortgage.
4. Where the development products are sold by means of
entrustment, they shall be realized in accordance with the
following principles:
(1) Where the development products are entrusted to be sold
by means of paying service charge, fund shall be confirmed on
the very day when the list of sold development products from
entrusted party is received in accordance with the settled sum
in sales contract or agreement.
(2) Where development products are entrusted to be sold by
means of buyout, and sales contract or agreement are signed by
the development enterprise or buyer, or jointly signed by the
development enterprise, the entrusted party and the buyer, if
the settled price in the sales contract or agreement is higher
than the buyout price, the fund calculated by the settled
price in the sales contract or agreement shall confirmed on
the very day when the list of the sold development products
from the entrusted party is received; where the settled price
in the sales contract or agreement in the former two occasions
is lower than the buyout price and the sales contract or
agreement is signed by the entrusted party and the buyer, the
fund calculated in accordance with buyout price shall be
confirmed on the very day when the list of sold products from
the entrusted party is received.
(3) Where the development products is entrusted to be sold by
means of base price (minimum price) and profit-sharing by the
two parties through excessive base price and sales contract or
agreement is signed by the development enterprise and the
buyer or jointly signed by development enterprise, the
entrusted party, the buyer, if the settled price in the sales
contract or agreement is higher than the base price, the fund
calculated in accordance with the settled price in the sales
contract or agreement shall be confirmed on the very day when
the bill of sold development products from the entrusted party
is received, and the sum paid by development enterprises to
the entrusted party shall not be deducted from sales income;
where the settled price in sales contract or agreement is
lower than the base price, the sum calculated by base price
shall be confirmed on the very day when the bill of sold
development products form the entrusted party is received.
Where the sales contract is directly signed by the entrusted
party and the buyer, the sum calculated by base price plus the
gained sum shall be confirmed on the very day when the list of
sold development products from the entrusted party is
received.
(4) Where the development products is entrusted to be sold by
means of exclusive sales, the sum in the exclusive sales term
may be confirmed in accordance with the related provisions of
exclusive contract and the aforesaid items from (1) to (3);
where the development products have not been sold after the
expiration of the exclusive sales term, the development
enterprise shall be confirmed in accordance with the price and
means of paying in sales contracts or agreement.
The list of sold development products shall include such
contents of the development products as name, geographical
location, serial number, amount, unit price, sum, service
charges and etc. are calculated on month or quarter basis
regularly, and taxpaying declaration and prepay tax shall be
submitted to tax authorities within the prescribed time limit.
Where those fail to conduct regular settlement, taxpaying
declaration and prepay tax, they should be punished in
accordance with Law of The People's Republic of China
concerning the Administration of Tax Collection Order.
5. Where the development enterprises rent and then sell the
development products, those who transform the development
products to fixed assets, the purchase price obtained in the
period of rent shall be confirmed through the amount of rent;
where those fail to transform development products to fixed
assets, the purchase price in the period of rent shall be
confirmed through rent and then through the income from sale
of development products in time of its sale.
III. Confirmation of order-rent income of development
products
Where the development enterprise sign forward contract with
leaseholder prior to completing newly built development
products or undertaking house property initial registration
and obtaining property certificate, the order-rent income
gained by the renter shall be confirmed through rent, and the
order-rent expense paid by the leaseholder shall undertake
pre-tax deduction in accordance with rent expense.
IV. Tax treatment about cooperation in the construction of
development products
Where the development enterprise relies mainly on itself and
cooperates with other enterprises, units, individuals or
through joint-venture to develop real estate item which has
not established independent incorporated company, it shall
carry it out in accordance with the following provisions:
(i) Where it is settled in the development contract or
agreement that development products will be distributed to all
of the investors and the item has calculated its assessable
cost in the first time for the development enterprise to
distribute its development products, the difference between
the assessable cost of the development products due to be
distributed to the investor ( i.e. its cooperation and joint
party, the same below) and its investment cost shall be
calculated in the tax payable income; where the assessable
cost is not calculated in, the investment cost shall be deemed
as presale income for related tax treatment.
(ii) The distribution of item profit settled in development
contract or agreement shall be handled in accordance with the
following provisions:
1. The development enterprise shall incorporate the operating
profit arisen from the item into the taxable income of the
current period and apply universally for business income tax
and shall not distribute profit of the item prior to tax.
Meanwhile, it shall not amortize in the cost because of the
acceptance of investment volume form the investor or deduct
the relevant interest payment prior to tax.
2. The operating profit gained by the investor shall be
deemed as equivalent to acquisition of dividend and bonus and
pay the overdue tax by holding the certificate issued by tax
authorities in responsible in accordance with the provisions.
V. Tax treatment about investment development item in the
land use right
(i) Where the enterprise or unit invests land use right in
real estate development item to exchange for development
products, it shall conduct it in accordance with the following
provisions:
1. Where the enterprise or unit initially acquires
development products, it shall divide it into transfer of land
use right and buying in development products to conduct income
tax, and estimate, on the basis of fair market value of the
acquired development products (including that in the first
time and that acquired later) the gain and loss due to the
transfer of land use right.
2. The developer who have obtained land use right shall, when
dividing it for the first time, divide it into two economic
businesses for treatment of income tax: the development
products needed to be divided (including the initial time and
the following ones), and buying-in of the land use right, and
calculate the value of land use right into the cost of this
item.
(ii) Where the enterprise or unit invests land use right in
real estate development item in the form of stock rights, it
shall conduct it in accordance with the following provisions:
1. The enterprise or unit shall, on occasion of investment
trade, divide it into sale of relevant non-cash asset and
investment for business income treatment and estimate loss and
gain from asset transfer.
Where the proportion of the income of aforesaid transfer of
land use right exceeds 5 % in the tax payable of the same
year, the enterprise or unit may, as of the commencement of
investment trade, share equally in the taxable income by five
tax years.
2. The developer who has accepted the land use right may, in
time of investment trade, calculate the aforesaid investment
trade volume to confirm the cost of land use right and
calculate it in the cost of development products.
VI. Tax treatment concerning deeming development products as
marketing
Such acts as the development enterprise transforms the
development products to fixed assets or uses them for donate,
sponsorship, welfare of staff and worker, rewarding and
overseas investment, or distributes them to stockholders or
investor, reclaims debt, or trades for non-cash assets of
other enterprises and institutions, shall be deemed as
marketing and the income (or profit) shall be confirmed on the
occasion when the ownership or right of use is transformed or
the actual interest and profits are gained. The means and
orders to confirm the realization of income (or profit) shall
be:
(i) confirmed in accordance with the marketing price of the
same kind of development products in the recent or the latest
month of the enterprise;
(ii) confirmed by the tax authority in responsible by
referring to the fair market value of the same kind of
development products;
(iii) confirmed in line with the cost-profit ratio of the
development product. The cost-profit ratio of the development
cost shall be no less than 15%， with the tax authority
responsible for the determination of its detailed ratio.
VII. Tax treatment concerning consigned project construction
(i) Where the term of consigned project and labor service
provided by the development enterprise is no more than 12
months, its receipt may be confirmed in accordance with the
settlement date agreed in the contract or on the date when the
project is completed; where the duration is more than 12
months, the receipt may be confirmed quarterly be means of
percentage of project completion. Percentage of project
completion means that receipt and expenses are confirmed in
accordance with the progress of contract. Its completion
progress may be determined in accordance with the proportion
of the actual accumulative contract cost in estimated contract
cost, the proportion of the completed contract workload in the
total contract workload as well as the completed contract
workload.
(ii) Where the material, leftovers, abandoned project or
scrap of the products and etc. spared by the development
project in the process of project construction, labor service
provisions are required to be owned by the development
project, the receipt shall be confirmed in accordance with the
fair market value closing cost
VIII. Deduction of development product cost and expense
The development enterprise shall, when conducting accounting
and deduction of development product cost and expenses,
differentiate period expense and development product expense,
accounting cost of development cost and the assessable cost
hereof, the assessable cost of the sold development products
and unsold development products.
(i) The development enterprise shall, when settle the
assessable cost, behave in accordance with the following
provisions:
1. Where all kinds of expenses in the process of development
products construction arise in the current period, they shall
be calculated in cost objective in accordance with the
principle of accrual system. Where the expenses have yet not
arisen and born by the current period, they shall not be
calculated in the cost objective of the current period except
that they are entitled to be calculated in the cost objective
of the current period in accordance with tax provisions.
2. The development products shall, in accordance with common
operation and accounting conventions, rationally divide cost
objective, meanwhile, divide all expenses into direct cost,
indirect cost and common cost.
3. The direct cost, indirect cost and common cost arisen
prior to the completion of development products shall, in
accordance with the Matching Principle, allocate them in all
cost objective, of which direct cost and indirect cost may
make a clear distinction between the cost incidence objectives
and shall be calculated in cost objectives; where common cost
and indirect cost cannot make a clear distinction between the
cost incidence objective due to the simultaneous development
or rolling development, the allocation shall be calculated in
accordance with floor space，building area, or project estimate
of every cost objective(project).
4. The expenses calculated in development products shall be
actual, except otherwise prescribed, all withdrawing (or
accrued expense) shall not be calculated in development
product cost.
5. The expense calculated in development product cost shall
comply with the provision of state tax. Otherwise, it shall be
adjusted in line with tax provisions.
6. The assessable cost shall be calculated within the
prescribed time limit after the completion of development
products, yet shall not advanced or put off. Should the
accounting cost be settled, its tax shall be adjusted in
accordance with revenue provisions.
(ii) The following items shall be deducted in accordance with
the following provisions:
1. The assessable income of sold development products. Such
cost of sold development product as is authorized to be
deducted shall be confirmed in accordance with the actual sale
and project cost of saleable area. The assessable cost of unit
project concerning saleable area and the sold development
shall be determined by the following formula:
unit project cost of saleable area= total cost of cost
objective÷ unit project cost of total area assessable cost of
sold development products= actual sale of saleable area× unit
project cost of saleable area
2. The expense due to calculated in development product cost
by the development enterprise, including construction cost in
the prior period, infrastructural construction cost, public
supporting facility expenses, land acquisition and removal
cost, building and installation project cost, development
overhead expense and etc, shall be allocated in accordance
with the following provisions:
(1) Such expenses as occur before the project completion
shall be calculated into cost objective in accordance with the
provisions concerning assessable cost and other relevant
provisions.
(2) Such expenses as occur after the project completion
shall, in accordance with provision concerning assessable
settlement as well as other provision, firstly be divided
between completed cost objective and the uncompleted cost
objective and then divide the expenses due to be shouldered by
the completed cost objective into the sold development
products and unsold development products.
3. Accrued expense. All kinds of accrued expense arisen from
development enterprises may be calculated in the assessable
income of development products on the strength of legal
certificate or be deducted before taxpaying, provided that
expense drawing is otherwise prescribed.
4. Maintenance costs. The actual expenses spent by the
development enterprise to undertake daily maintenance, upkeep,
repair and etc on unsold development product and the sold
development products (common part, common facilities and
equipments) in accordance with the relevant laws, rules or
contract provisions shall be deducted in the current period.
5. Maintenance expenses for common part and common
facilities. Where the maintenance expenses for common part and
common facilities calculated by the development enterprise is
transferred to relevant units and department, it shall be
deducted in time of its transfer. The collected and remitted
maintenance expenses and withholding maintenance shall not be
deducted.
6. Such facilities built by the development enterprise in the
development zone as chambers, parking lots, property
management place, electric plants, water works, physical and
cultural places, kindergarten and etc shall be handled in
accordance with the following provisions:
(1) Where these facilities are unprofitable or owned by all
the proprietors or donated to local governments or public
utilities, they may be deemed public supporting facilities,
the construction expenses shall be undertaken in accordance
with the provisions concerning supporting facilities.
(2) Where these facilities are profitable or owned by the
development enterprise or their ownership is not clearly
expressed or donated to other units except local governments
or public facilities, their cost shall be calculated
independently. Except that those facilities developed by the
enterprises for their own use shall be used for the
construction of fixed assets, others shall be used for the
construction of development products.
7. The postal and communication facilities, schools, medical
facilities built in the development zone by the development
enterprises shall have their cost calculated independently and
handled in accordance with the following provisions:
(1) Where these facilities are completed after their
investment and construction by development enterprises, they
shall be handled in accordance with the standard for
construction of development products, where they are rent,
they shall be handled in accordance with the standard for the
construction of fixed assets; where they are donated freely to
the relevant national departments and units, they shall be
handled in accordance with the standard for the construction
of public supporting facilities
(2) Where these facilities are constructed by the development
enterprises and relevant operation management departments and
units through joint venture and transferred with compensation,
the economic compensation given by relevant national service
management departments and units may directly offset the
construction cost of the project and the difference of offset
shall be calculated into the assessable income.
8. Where the house sale department (reception) and showcase
houses can be deemed as cost objective for calculation
independently, it may be handled in accordance with the
standard for self-built fixed assets, others shall be handled
in accordance with the criteria for the construction of
development products. The fitment expenses shall, regardless
its volume, shall be calculated in its construction cost.
9. Bail. Where the development enterprise sells development
products by means of bank mortgage, and the development
enterprise presents a guarantee for bank mortgage of the
buyer, the bail (caution money) shall neither be deducted from
its sales income, nor deducted as expenses from its current
period tax, yet the actual loss may be deducted faithfully.
10. The advertising cost, publicity expenses and business
reception expenses shall be handled in accordance with the
following provisions:
(1) The presale income acquired by the development enterprise
shall not be deemed as cardinal number for such three expenses
as advertising cost, publicity expenses and business reception
expenses until the presale income has been transferred to
actual sale income.
(2) The advertising cost, publicity expenses and business
reception expenses concerning the construction and sale of
development products arisen from the acquisition of the first
actual sale income of development products by the newly-built
enterprise may be carried forward and deducted in accordance
with the tax provisions with the maximum carry-forward period
no more than three tax years.
11. Interest shall be handled in accordance with the
following provisions:
(1)Where the borrowing cost arisen from the borrowed capital
from the development enterprises to construct development
enterprise in accordance with the tax provisions prior to the
completion of cost objective, it shall match the cost
objective; where it arises after the completion of cost
objective, it may be directly deducted as financial expenses.
(2) Where the development enterprise borrows fund from
financial institution universally and lends to the other
enterprises and units within its group, and the debit may
present the loan certificate gained from the financial
institution, its interest to be paid shall be deducted prior
to tax in accordance with the tax provisions.
(3) Where the development enterprise lends its own fund to
exclusively-invested enterprises (including its branches) and
other relevant enterprises and the fund borrowed by the
related-party is more than 50% of its registered capital, the
interest expenditure for the excessive part shall not be
deducted prior to taxpaying; the interest expenditure
otherwise is allowed deducted prior to tax in accordance with
the calculated amount calculated in line with benchmark ratio
of the same kind of the same period loan in the financial
institution.
12. Charge for idle land. Where the development enterprise
acquires the land use right for real estate development by
means of assignment, it shall assign the contracted use of
land in line with land use right and land development time
limit. Where the charge of idle land is handed over because of
exceeding the contracted date for commencement of
construction, it shall be calculated in the construction cost
of cost objective; loss arisen from the withdrawal of land use
right by the country may be deemed as property loss and
deducted prior to tax in accordance with tax provisions.
13. Loss for scrap and damage of the cost objective. Where
scrap and loss arisen from the cost objective of individual
item or unit project in the process of its construction, they
shall, after deducting net loss of scrap value and the
compensation from negligence-doer from insurance companies, be
calculated as project cost for continuous project
construction; where the cost objective is scrapped or damaged
totally, its net loss may be deemed as property loss and
deducted in accordance with tax collection provisions.
14. Depreciation. Where the development enterprise transfers
the development products to fixed assets, it may deduct the
depreciation expense; otherwise, it shall not deduct the
depreciation expenses.
IX. On collection management
(i) The development enterprise shall, when declaring annual
taxpaying, verify the deduction items prior to tax one by one
examined, approved or recorded by tax authorities. Where the
development enterprise fails to submit the relevant documents
for examination, approval or record in accordance with the
relevant provisions, or does not have complete documents, it
shall make up the relevant procedures and documents;
otherwise, it shall not be deduct the income prior to tax.
(ii) Where any of the following circumstances occurs, the tax
authorities are entitled to collect, manage and gradually
standardize the previous tax payable by means of verification
of collection, and to conduct in accordance with taxation laws
and provisions such as Law of The People's Republic of China
concerning the Administration of Tax Collection Order,
however, it shall not prescribe in advance that the income tax
of development enterprise should be collected and managed by
means of collection verification.
1. Account may be opened in accordance with laws and
administrative regulations;
2. Account should have been made in accordance with laws and
administrative regulations;
3. The account was destroyed the account without
authorization or data of tax payments fails to be presented.
4. The account, albeit opened, is in chaos or lack of compete
cost data, income revenue, expenses certificate so that
account cannot be checked;
5. Those who fails to handle the due tax payment declaration
within the prescribed time limit, or refuse to pay it albeit
ordered by the tax authority to pay it;
6. The standard for tax calculation declared by the taxpayer
is rather unwarrantably low.
X. On policies applicable to reduce or exempt tax.
In accordance with the characteristics of real estate
development, real estate developer and the enterprises mainly
relying on marketing (including agency factor) shall not enjoy
the tax preferential policies for the newly-built enterprises.
XI On Scope of application and enforcement time of the Notice
The Notice is applicable to domestic-funded real estate
development enterprises of all economic nature as well as
other domestic-funded enterprises engaged in real estate
development business. The state tax bureaus and local tax
bureaus of all provinces, all provinces, autonomous region,
municipalities under the central government, cities directly
under State planning shall formulate detailed enforcement
measures and apply for the record in the State Administration
of Taxation.
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