25 Feb 2016
China Cuts Deed and Business Taxes for Home Purchases
The Ministry of Finance, State Administration of Taxation and Ministry of Housing and Urban-Rural Development jointly issued a circular on 19 February on the lowering of deed tax rate for individuals buying property with a floor area of less than 90 square metres. The circular also reduces the time limit for business tax exemption on such transactions to two years. In other words, the relevant taxes and fees will basically ease to the pre-2009 levels, much the same as the mortgage leverage.
This was the third substantive stimulus for the property market announced by the regulatory authorities in less than a month. Earlier the central bank cut the minimum required mortgage down payment in areas without purchase restrictions before the Spring Festival, followed by raising the deposit interest rate for the housing provident fund after the Spring Festival.
As in the case of the lowering of minimum required mortgage down payment, the new policies regarding taxes and fees do not apply to first-tier cities. Business insiders attribute this to "regional differentiation". The property market has ushered in a period of favourable policies under the current backdrop of loose monetary policy and ample liquidity although there may be obvious differences in market performance between different regions.
The new policies mainly concern the adjustment of deed and business taxes. For deed tax, the upper limit of the deed tax rate for first-time home buyers will be lowered from 3% to 1.5%. The deed tax will be 1% for homes smaller than 90 square metres and 1.5% for larger homes.
The deed tax adjustment is bigger for second-home purchases. The tax rate will be 1% for homes under 90 square metres and 2% for larger ones. Previously the rate was 3% regardless of size.
According to this document, "second homes are homes purchased by families that already have their first house to improve their living conditions".
As for business tax, "the full amount of business tax shall be paid for the sale of a residential property by an individual within less than two years from the date of purchase, whereas a sale after two or more years of purchase shall be exempt from business tax." No more distinction will be made between ordinary and non-ordinary housing and differential business tax will no longer be levied on the sale of large, luxury homes and villas.
Analysts reckon the new policies will affect the sale of second-hand homes more than new ones because tax is payable immediately after second-hand housing transactions while new homes are mostly delivered on a future date and deed tax will not be levied until after that date. However, the new rules for second homes do not apply to first-tier cities like Beijing, Shanghai, Guangzhou and Shenzhen. Serious regional differentiation of the property market is the underlying reason for this phenomenon.