China Clarifies Tax Treatment for Real Estate Companies before De-registration

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Jan. 30 – In a recent announcement, the State Administration of Taxation clarified issues regarding the refund of overpaid corporate income tax (CIT) to property developers prior to the developers’ deregistration. This CIT overpayment primarily comes from the prepayment of land appreciation tax (LAT).

Issued on December 24, 2010, the “Announcement on CIT Treatment for Property Developers before Deregistration (State Administration of Taxation Announcement [2010] No. 29)” allows real estate companies in a taxable loss position to apply for a CIT refund during their tax deregistration process.

The enterprises calculate their CIT overpayment by spreading the total LAT amount paid for the whole real estate project over the years of project duration, based on the ratio of annual sales divided by the total sales of the whole project.

The calculation formula is as follow:

  • LAT allocated each year = Total LAT payment×(sales of the year÷total sales of the project)

The aforesaid sales income includes most property sales income, but not the income of ordinary residential property sales with appreciation against deductible items less than 20 percent.

Enterprises shall calculate the deductible LAT of the year according to the formula below:

  • Deductible LAT for current year = LAT allocated for current year – LAT payment for current year

Enterprises shall adjust their taxable income by subtracting the deductible LAT and apply for a CIT refund of the year. If enterprises in a taxable loss position become profitable after the aforesaid LAT adjustment, they need to pay back the underpaid CIT for the respective years and the total amount of the CIT refund shall not exceed the total CIT payment of each year. Enterprises shall provide paperwork stating the detailed calculation of the CIT refund to related tax authorities.

Enterprises in either of the following two situations cannot apply for the tax refund mentioned in Announcement 29:

  • The enterprise is in a loss position in the annual CIT filling during tax de-registration but was profitable during the year when the LAT clearance was carried out
  • The enterprise’s accumulated losses were already utilized before the tax-deregistration even though it was in a loss position during the year when the LAT clearance was carried out

The announcement came into force on January 1, 2010.