China’s VAT Reform and Its Impact on Real Estate and Construction Sectors


Changes to China’s value-added tax (VAT) policy are expected to be complete by the first half of 2016, ending industry’s dual tax system. One of the systems is business tax, which refers to a levy on the gross revenue of a business. Meanwhile, VAT refers to a tax levied on the difference between a commodity’s price before taxes and its cost of production.

Manufacturing entities have been subject to VAT since 1994, while other businesses continued to pay the business tax until a pilot scheme on business tax-to-VAT was launched in 2012 in Shanghai. The pilot scheme was found to be successful and the policy was rolled out across the country by August 2013. However, four service industries — construction, real estate, finance and consumer services — are still subject to business tax.

Starting from May 1 this year, the replacement of business tax with VAT was extended to the fields of construction, real estate, finance and consumer services — the lion’s share of the source of business tax and the most difficult part of the VAT reform. One main objective of VAT reform is to alleviate the corporate tax burden for enterprises. An across-the-board replacement with the VAT will lower tax burdens on all industries, streamline tax-paying processes and benefit small businesses in particular, encouraging more investment, entrepreneurship and innovation in the economy. From 2012 to the first half of 2015, the measure has resulted in tax savings of over 484.8 billion yuan (US$75 billion), accounting for 0.2 percent of GDP in the period. When all service players shift to VAT, the overall tax saving will be more than 900 billion yuan, or 0.4 percent of GDP.
Under the BT system, real estate and construction were the biggest sources of China’s tax income and the most economically sensitive to the reform, primarily because of the proportionately greater change in rates between BT and VAT. In order to ensure the smooth transition to the VAT system, the government has introduced a number of transitional policies, which we highlight below.

Transitional policies
Entities who fall into any of the following criteria may enjoy the simple taxation method of five percent:

  • General taxpayers developing a real estate enterprise.
  • Selling self-developed construction projects with a starting date before April 30, 2016.
  • General taxpayers renting real estate acquired before April 30, 2016.

This policy, which prevents a sudden jump to the 11 percent VAT, allows older projects to continue to enjoy the same rate as the previous BT. New properties (those sold after May 1) are subject to 11 percent VAT. However, this policy does not apply to the sale of private properties.

VAT input credit for land use rights purchase
Developers looking to sell real estate are able to deduct proceeds of land use rights purchased from the local government from their VAT liability. This policy only applies to entities which pay the 11 percent VAT rate, and not those who have enjoyed the above simplified taxation method. It ensures that the tax is only levied on the value added by the developer.

VAT exemption for sales of occupied or residential investment properties owned for less than two years
Sales of residential properties owned by an individual are subject to the five percent simple VAT taxation method if sold within two years of purchase. If sold after two years of purchase, they are VAT exempt. (Note – this does not apply to high end properties located in Beijing, Shanghai, Guangzhou or Shenzhen, where the five percent simplified VAT taxation method applies to the net gain after two years). This policy offers the same rate as under the BT scheme, encouraging longer term holdings of real estate.

Staged input VAT credit for property purchases levied at 11 percent
VAT credit may normally be claimed by a general taxpayer in a VAT return on real estate purchased after May 1, 2016 and is subject to 11 percent VAT. However, a special policy exists which allows the input VAT credit to be spread over the two-year period after the purchase. 60 percent of the input VAT credit is claimable within the first year, with the remaining 40 percent claimable in the second year.

VAT paid under simplified tax method creditable where recipient is a general VAT taxpayer
China’s VAT reform law indicates that suppliers who are already general VAT taxpayers might be able to issue special VAT invoices by themselves, or must obtain authorization of a tax authority to issue a special VAT invoice on their behalf. However, it is not clear as to whether it will only apply to sales of real estate, or also to leases.

For further information, please contact Phoebe Luo in our Shanghai office at







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