REALWorld Law

Do buyers usually carry out due diligence?

Land ownership in the PRC is split into two categories: State-owned land and collectively-owned land. State-owned land is owned by the State and administered by the State Council. Collectively-owned land refers to land owned by collective economic organizations, which are generally committees of local villagers. Only State-owned land can be managed and developed by individuals and legal persons through the holding of land use rights.

Although ownership of land is not possible for private individuals or entities, it is possible to obtain the right to use land for a fixed period of time and such rights are usually known as land use rights. State-owned land and collectively-owned land can be managed and developed by individuals and legal persons through the holding of land use rights.

In addition to the granting of land use rights over State-owned land and collectively-owned land, the PRC government allocates for free land use rights for the construction of public interest projects.

Other categories of property right include leases and licences.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Foreign entities that do not have any subsidiaries or representative offices in the PRC, or foreign individuals who do not satisfy prescribed conditions are not allowed to purchase any real property in the PRC directly.

If foreign entities or individuals intend to invest in real estate in the PRC, they can either:

• set up a real estate project company (either a joint venture or a wholly foreign owned entity, 'WFOE') in China and then acquire the target property through this project company, or
• acquire an interest in a real estate company.

Foreign entities or individuals are also subject to stringent requirements with regard to obtaining offshore finance. Debt funding to purchase land use or building ownership rights may not come from overseas. 

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Certain pre-emption rights exist under the PRC law when real estate assets are sold:

• a co-owner who shares ownership of the property shall have the right to transfer his own share while the other co-owners shall have the pre-emption right to purchase under equal conditions, and
• the tenant has the pre-emption right to purchase the leased premises on the same terms when the landlord intends to sell the leased premises during the lease term.

However, the abovementioned pre-emption rights may be waived by the party holding such pre-emption rights.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

The transfer of properties is mainly governed by the following:

• · the Civil Code (民法典);
• the Law of the PRC on Land Administration (中华人民共和国土地管理法) and the Implementing Regulations for the Law of the PRC on Land Administration (土地管理法实施条例)
• Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas中华人民共和国城镇国有土地使用权出让和转让暂行条例
• the Law of the PRC on the Administration of Urban Real Estate (中华人民共和国城市房地产管理法); and
• Regulations of the PRC for the Administration of the Development and Operation of Urban Real Estate (城市房地产开发经营管理条例)

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

No, the laws governing the transfer of real estate do not differentiate between different types of real estate.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Under Article 16 of the Administrative Measures for the Sale of Commodity Houses (2001), sales of commodity houses (being all real estate that is available on the open market) must be in written form and include the following terms:

• Title or name and domicile of the parties
• Basic conditions
• Sales pattern for the commodity houses
• Method of fixing the price, total price, manner and date of payment
• Conditions and date of delivery for use
• Decoration and facility standards requirements
• Requirements for the delivery of supplementary essential facilities, such as the supply of water, electricity, heating, gas, communication, roads and gardening, and of public facilities, as well as relevant rights, interests and obligations
• Ownership of property rights in relation to public ancillary constructions, such as hospitals and community centres built in accordance with state or local government requirements
• The method for dealing with any discrepancy between the floor area stipulated in the contract and the area actually delivered
• Relevant matters concerning the land use right registration
• Methods of dispute resolution
• Liabilities for breach of contract, and
• Other items agreed upon by both parties.

Article 12 of the Contract Law of the PRC sets out the requirement that contracts include key terms, including the designation of the parties, the quality and quantity of goods, time, place and manner of performance, liability for breach of contract and means of dispute resolution.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Seller's warranties for commodity housing (being all real estate that is available on the open market) are set out in the Administrative Measures for the Sale of Commodity Houses (2001).

Under Article 32, the real estate development company must offer the buyer a (rather comprehensive) set of warranties in a Warranty of Residential Building and a Manual for House Use.

Under Article 33, the real estate development company must guarantee the repair of the house sold to the buyer. The parties must agree in the contract on the scope, period (subject to statutory minimums) and responsibility for the guarantee and so on. The period of guarantee is to be calculated from the day of delivery. The real estate development company must keep the house in good repair and be liable for losses resulting if such quality problems occur within the guarantee period and fall within the guarantee scope.

In addition, the Administrative Regulations on the Quality Management of Construction Engineering set out a regime for ensuring developers and construction contractors meet their warranty obligations.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Purchasers of commodity houses may bring claims under the warranties and guarantees provided for by statute (see Seller's warranties). The purchaser may claim damages (subject to contractual provisions) if the property fails to meet the standard which is specified in the contract by the seller's representation.

Specifically, under Article 35 of the Administrative Measures for the Sale of Commodity Houses (2001), where a purchaser claims that the main structure of the commodity house is in poor quality after its delivery, it may have the property re-inspected (commodity housing is all real estate that is available on the open market). If the house is indeed in a poor state of repair, the purchaser may return the house, and the real estate development company will be liable for the buyer's resulting losses. 

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Buyers considering purchasing properties in suburban areas should ensure that the land on which the property is located is not collective land. Collective land refers to land owned by rural collective economic organizations, which are generally committees of local villagers. The management and development of collective land is tightly regulated under PRC law. Generally, collective land may only be used for the establishment of rural or township enterprises or, subject to the approval of government authorities, for the construction of residential housing or public facilities. In order to develop collective land for profit seeking enterprises, such as real estate development, the land must first be converted into state-owned land. Moreover, the sale of properties on collective land is illegal without further state approval.

Planning, construction and environmental laws may all apply. Buyers should also consider fire safety regulations and health and safety rules.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

PRC Environmental laws have generally adopted a ‘polluter pays’ approach to liability. The Administrative Measures for the Soil Environment around Polluted Land (for Trial Implementation) (污染地块土壤环境管理办法（试行）) issued by Ministry of Environmental Protection on December 31, 2016 and becoming effective from 1 July 2017, provides that entities or individuals causing soil pollution shall undertake the primary liability for its treatment and restoration.

Where an enterprise that caused contamination has been altered due to merger, acquisition or divestment of a business unit, the succeeding enterprise must take responsibility for the remediation.

In the case of the transfer of the land use right, the transferee or the third party agreed between the transferor and the transferee, shall be responsible for soil pollution or contamination of such land.

In any case, the liable entities or individuals shall take responsibility for the soil pollution treatment and restoration without time limit.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

A buyer can ascertain the permitted uses of a parcel of real estate through inspecting the relevant land grant contract and reviewing the relevant town planning scheme and relevant planning instruments.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

All developers enter into specific development agreements with public authorities through the land use right grant process, under which the local Land Administration Bureau will enter into a land grant agreement with a developer, in which in return for the payment of a substantial land grant premium, the Land Administration Bureau will grant the land user land use rights for a fixed period of time. The land grant contract will specify various construction requirements and time frames, with which the developer must comply.

Developers may enter into further framework agreements with local authorities to facilitate development projects. 

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

Expropriation is possible in the PRC and is often used. Regulations on the expropriation of and compensation for houses on state-owned land, issued by the State Council in 2011 provide that properties may no longer be expropriated without due process and fair compensation. Violence, coercion and cutting off utilities cannot be used to force homeowners to relocate.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

The following taxes will be incurred in asset deals:

• Value-Added Tax – China has gone through tax reform to replace Business Tax with Value-added Tax (VAT) and it has applied to real estate industry and construction industry starting from 1 May, 2016. After such tax reform, sales of real estate should be subject to VAT at 9% under the general rules. Such VAT costs will be added on top of the purchase price and finally borne by the purchaser of such real estate property. The purchaser may use such input VAT (supported by valid VAT invoices) to offset its output VAT payable on its income generated from business operations. The tax reform program also offers transitional rules, under which the seller of real estate properties may opt for a simplified tax method if the real estate property was acquired before 30 April 2016, ie apply a reduced VAT rate of 5% on sale of real properties without claiming input VAT credit. If the seller of the real estate properties choose for such simplified method, the purchaser’s VAT costs will be reduced to 5% on the purchase price, but such 5% VAT will not be deductible against the purchaser’s output VAT on its business income.
• Deed Tax – Deed Tax is levied and payable by the buyer of real property on the transfer of real property or land use rights. The rate ranges from 3 to 5% (depending on the location) of the total purchase price of the property or land use rights.
• Land Value Appreciation Tax – Potentially, the most expensive tax is Land Value Appreciation Tax (LVAT), which is imposed on the seller on taxable gains derived from the transfer of real property. The rate of LVAT is set on a progressive scale ranging from 30% to 60% depending on the amount by which the sale proceeds exceed certain prescribed deductions. These prescribed deductions include, the cost of acquiring land use rights, developing the land and construction, as well as the value of any existing buildings and any taxes paid in relation to the land or property.
• Stamp Duty –Stamp Duty (SD) is levied on certain dutiable documents executed or used in China, including property transfer documents. SD is calculated at a fixed rate according to the contract amounts. For transfers of property, SD is 0.05% of the contract value, and is levied on both the buyer and the seller.
• Enterprise Income Tax – The rate is 25% of net profit (consolidated with the enterprise’s annual profit) payable by the seller of the real estate. Foreign enterprises not maintaining establishments in China are taxable on their income and gain on a gross withholding basis at the rate of 10%.

Last modified 22 Mar 2024

Do buyers usually carry out due diligence?

The following taxes will be incurred in share deals:

• Stamp Duty – Stamp Duty (SD) is levied on certain dutiable documents executed or used in China, including share sale and purchase agreements. SD is calculated at a fixed rate according to the contract amounts. For transfers of equity interests, SD is 0.05% of the contract value, and is levied on both the buyer and the seller.
• Enterprise Income Tax – The rate is 25% of net profit (consolidated with the enterprise’s annual profit) payable by the seller. Foreign enterprises not maintaining establishments in China are taxable on their income and gain on a gross withholding basis at the rate of 10%.
• Withholding Tax – Where an overseas company sells a property holding company, withholding tax will be payable.

Last modified 22 Mar 2024