Is VAT payable on the purchase of real estate and if so, can it be recovered?
China has gone through tax reform to replace Business Tax with VAT and it has applied to Real Estate industry and construction industry starting from 1 May, 2016.
After the aforementioned tax reform, sales of real estate should be subject to VAT at 11% 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 aforesaid real estate properties were acquired by the seller 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 chooses for such simplified method, the purchaserʼs VAT costs will be reduced to 5% on the purchase price, but such 5% VAT will not be deductible against the purchaserʼs output VAT on its business income.