PRC Real Estate Market for Foreigners the Legal Side

1. PRC Real Estate Market for Foreignersthe Legal Side Wang Jing & Co. Law Firm Zach Wortham February 24, 2009

2. Topics and Distinctions • Relevant Laws and Regulations • Individual/Enterprise • Relevant Laws and Regulations • Legal Restrictions • Tax Considerations • Legal Risks

3. I. Relevant Laws and Regulations • Land Administration Law • The Implementation Rules of the Land Administration Law • Administration on Urban Real Estate • The Interim Rules on Assignment and Transfer of State-owned Land Use Right in Urban Areas • Provisions on the Assignment of State-Owned Construction Land Use Right through Bid Invitation, Auction or Quotation • Notice for Administration on Foreign Exchange in the Real Estate Market (by SAFE and Ministry of Construction) • Rules for Lending Loans

4. II. Legal Restrictions • Individual Purchase • May only be purchased for “OWN USE”. If a foreign citizen wants to buy property for other purposes (lease, etc.), it may be deemed by the authorities as investing in the real estate market. A Real Estate company must be established for any such business to be legally conducted. • The individual must have worked or studied in the PRC for “NO LESS THAN 1 YEAR”. However, the regulation does not stipulate any requirement in regards to entries and therefore many foreign citizens with multiple entry visas have managed to be able to purchase properties. Also the enforcement of this regulation varies greatly between cities. • “ONE PROPERTY RULE” – one property per legal person. The “One Property Rule” does not specify a location such as; “only one property in the whole of mainland China” or “only one property in each city/district/province”. Neither does the rule set out any penalties towards those who own more than one property. Therefore many foreign citizens have successfully purchased property in more than one location. It should be noted that in the future the government could impose penalties or levy extra taxes on those owning multiple properties and in particular during the transfer/sale of such property. • Notes: • New and Second-hand property are equally restricted and eligible for purchase. • In some cities foreign citizens may not be able to buy properties in certain areas. It is important to check the availability of the property in interest with an agent or the relevant local authorities. • Local practice often varies to a great extent.

5. II. Legal Restrictions • Representative Office/Branch Office Purchase • The establishment of the Representative/Branch Office must have been approved by the relevant authorities. • The property purchased must have it’s official address located at the same place where the Representative/Branch Office is registered. • Must be for the Representative/Branch’s “own use”. The regulation does not explicitly stipulate that the Representative/Branch office can only purchase one property in China. However, since a Representative/Branch office can only be registered at one address, then the office may only be allowed to purchase the property at that address. • WFOE/JV Purchase • Officially established entity (a WFOE or a JV) or; • Acquired the equity in a PRC registered company. • Procedural Steps are as follows: Obtain the relevant approval from the authorities for the establishment of the WFOE/JV -> Obtain a business license -> Sign a Land Reservation Agreement with the local Land Bureau -> Bidding, auction, or quotation -> pay land fee -> Obtain the Land Use Right Certificate -> Build factory/offices • Notes: • Procedures are often negotiable with the local authorities and requirements and procedures will vary from one area to another (even within the same city). For example, some cities have “development zones” to promote foreign investment. In such zones the requirements and procedures for foreign investors to purchase property may be more strict than in the rest of the city.  

6. III. Tax Considerations • Tax Considerations During the Purchase of Property - Individuals • Deed Tax - varies depending on the size or the type of the property. Non-residence: 3% (e.g. retail shops, offices, etc) Residence: • Size of property < = 90m2 / first time purchase residence property / plot ratio < 1.0 = 1% tax rate • Size of property between 90m2 and 144 m2 and / or not first time purchase = 1.5% tax rate • Size of property > = 144 m2 = 3% tax rate • Stamp Tax: 0.05% (has been suspended since Oct 2008) • Tax Considerations During the Purchase of Property - Enterprises • Deed Tax – 3% • Stamp Tax: 0.05%

7. III. Tax Considerations • Tax Considerations During the Sale of Property - Individuals • Business Tax • If the property is sold within 2 years of purchase: 5% of total value of the property • If the property is sold 2 years after the purchase: • Size < 144 m2 + plot ratio<1.0 + price < 144% of average price of the properties on the same class of land – 0% • Size >= 144 m2 / plot ratio>=1.0 / price >= 144% of average price of the properties on the same class of land - 5% of the difference between the purchase and the sale price of the property • Income Tax: 20% of capital gain • Stamp Tax: 0.05% (suspended since Oct. 2008) • Income Tax is normally 20% of all capital gains but local practices can and do vary. In Guangzhou income tax can also be calculated as 1% of the total value of the property. • Tax policies change from time to time. It is important to double check the latest policies when transferring property. • Tax Considerations During the Sale of Property - Enterprises • Enterprise Income Tax – 25% of capital gain from transfer of the land / property • Business Tax – 5% of total value of the land/property sold • Stamp Tax – 0.05%

8. IV. Legal Risks • Legal Risks • Polices may change from time to time especially in respect to tax and foreign exchange. • Foreign citizens residing in the PRC are legally not allowed to lease or sub-lease property. • In some cases the developer will require that a down payment be made before making an application for a mortgage. In the event then that the mortgage application is not approved by the bank, it may take a relatively long time for the developer to return the down payment to the prospective buyer. • It should be noted that for any transaction involving the transfer of currencies into or out of the PRC approval from SAFE will be required. SAFE and FOREX policy in the PRC changes to meet the needs of the economy therefore they should be checked before the acquisition of a property to ensure that no significant hurdles will delay or keep the project from moving forward.

9. The End Thank You for your time Zach Wortham: zwortham@wjnco.com www.wjnco.com