SMHLLAW

by Eric van Naerssen 

Investment for Residential Use

Residential real estate prices in China experienced meteoric growth in recent years, particularly in cities along the eastern seaboard.  In response, China’s central government created regulation to place limits on the market that distinguish speculative buying from purchases for individual residential use.  This article describes rules on the purchase of realty by foreign individuals and foreign entities for their own residential use.  It is useful for foreign individuals in China, or for companies formed outside of China that already have a representative or branch office in China seeking to secure housing.

The term “foreign entity” or “foreign enterprise” is commonly misunderstood to refer any business in China owned by a foreign individual or legal person.  A “foreign entity” or “foreign enterprise” is simply a business registered in some territory outside China with a branch office or representative office inside China.  In contrast, a wholly-foreign owned enterprise (WFOE) is a Foreign Invested Enterprises (FIE) and is an entity formed under Chinese law within China even though it is owned in whole or in part by non-Chinese individuals or other legal persons.

The most important thing for a non-Chinese person to know about investing in real estate in China is that investment by foreigners is still permitted under Chinese law; however, it must now be conducted through a WFOE, joint venture (JV) or by buying stocks in a Chinese real estate development company.   Purchase of housing for strictly residential use is also permitted and is the subject of the rest of this article.

When the newly enacted Property Law (物权法) enters into force October 1, 2007, natural and legal persons will have clear ownership rights in property in China (these rights already exist, but the new law clarifies and consolidates previous regulations).   An individual or legal person can own buildings and fixtures on the land outright, and possess nearly exclusive use rights in the land that last 40 years (for recreational purposes), 50 years (industrial) and 70 years (residential).  Residential land-use rights are renewed at the end of their term.  Ultimate title to the land remains in the state.

Foreign entities (branch offices and representative offices) operating in China can purchase residential housing if they have a genuine need, for example, to accommodate foreign staff.  In accordance with the State Administration of Foreign Exchange & Construction Department’s Notice In Regards to Certain Issues in the Regulation of Real Estate Market’s Foreign Exchange Management (国家外汇管理局、建设部关于规范房地产市场外汇管理有关问题的通知), foreign capital used to purchase such housing requires approval from a branch of the Bank of China.  The applicant must bring to the bank the housing sale contract or presale contract, effective approval and registration documents obtained to establish the branch or representative office,  documentation from the local real estate authority,  and a written pledge that the purchase is for self-use only.  Foreign currency used to make the purchase is then transferred directly by the bank to the account of the real estate developer in RMB. Representative offices may not use their current accounts to buy housing in China.

Foreign individuals who have worked or studied in China for over one year can purchase housing for their own use.  The procedures for foreign individuals purchasing housing with foreign exchange are the same as for foreign entities, but instead of the approval and registration documents required for foreign entities, the individual will need to bring their passport and either a contract of employment for a term greater than one year or their school registration documents.  If the purchase falls through for either an individual or a foreign entity, there are procedures in place to recover the foreign currency through the original settlement bank.

On the resale or transfer of the home, the RMB obtained can be used to repurchase foreign currency by taking the following documents to the local State Administration of Foreign Exchange (SAFE):  (1) Foreign exchange purchase application, (2) housing transfer contract, and (3) documents certifying that tax on the transfer of rights in the housing is fully paid.

Foreign entities and individuals specifically are not permitted to invest in real estate through the purchase of equity in a real estate enterprise.  Foreign entities or individuals that use equity transfers or other methods to merge with or acquire a domestic real estate enterprise, or purchase the Chinese equity in a joint venture, are not permitted to use their own disposable capital to fund the transfer, and SAFE shall not register foreign capital or foreign currency received from such transfer.  These measures were designed to limit speculation, especially by individuals, and to direct real estate investment activities through foreign invested enterprises and other vehicles.

Registration determines ownership rights, so it is vital to register all purchase transactions with the local real estate administration offices.  There is a host of taxes imposed on real estate transactions, some designed to further curb speculation.  Payment of these taxes and adherence to the registration requirements is critical in order to be able to remit the proceeds abroad.