At the end of the year 2008, to boost the stagnant property market, Chinese governments, central and local, have stepped up a flurry of tax incentives to stimulate residential property transactions, which are offered to individuals selling or buying residential properties, not to property developers. Among them are:

(1)    On October 22, 2008, the State Administration of Taxation issued a circular in which deed tax for purchasing ordinary house of not more than 90 square meters is lowered to 1% of the purchase price, provided that the buyer is for the first time to buy a house.

Also, in that circular, stamp duty for dealing in residential properties is exempted in full. Furthermore, land appreciation tax is also exempted for deals involved residential properties.

Such three (3) incentives are effectuated from November 1, 2008 with no specific end. It remains to be seen whether there will be any change therein.

(2)    On the same date of October 22, 2008, the Shanghai government issued its own circular setting out a package of incentives to stimulate property market. In addition to the three (3) incentives outlined above, Shanghai further provided that individuals who sell their house (ordinary or not) which is the only one (1) house of the family and has been used for more than two (2) years, are exempted from personal income tax.

However, according to that circular, this favorable treatment will expire on December 31 of 2009.

(3)    On December 20, 2008, the State Council of China provided that business tax for selling ordinary houses which have been owned for more than two (2) (inclusive) years shall be exempted in full, and if the ordinary houses have been owned not up to two (2) years, the base for calculating the business tax shall be the difference of the sale price and the purchase price originally paid by the seller for the property, instead of the full sale value. For non-ordinary houses, if the holding of the property is more than two (2) years, the base for calculating business tax shall be the difference of the sale price and the purchase price and otherwise, the base for that tax shall be the full sale value.

Prior to December 20, 2008, the rule regarding business tax is as follows: if the sold houses (ordinary or not) are held not up to five (5) years, business tax will be levied based on the full sale value; if the holding is more than five (5) (inclusive) years, business tax for ordinary houses will be exempted in full and that for non-ordinary houses will be based on the difference of the sale price and the purchase price.

As to the standard for classifying ordinary houses and non-ordinary houses, you need to look at criteria published in the city where the houses are located.

Please note, the business tax incentive is also going to expire on December 31, 2009.