Sunday, 9 November 2008
The legal landscape for foreign property investors
With returns on investment exceeding 15% in recent years, China’s real estate market has been a hotbed of foreign investment. As offshore capital flooded into the country’s property market, however, prices soared, prompting Beijing to intervene. For would-be investors today, the legal landscape of property investment can be difficult to navigate.
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The legal landscape for foreign property investors
China Economic Review
8 November 2008
With returns on investment exceeding 15% in recent years, China’s real estate market has been a hotbed of foreign investment. As offshore capital flooded into the country’s property market, however, prices soared, prompting Beijing to intervene. For would-be investors today, the legal landscape of property investment can be difficult to navigate.
Two pieces of legislation have had the largest impact on foreigners looking to invest. In July 2006, six ministries and commissions, including the Ministry of Commerce, jointly published “Opinions Concerning Regulating the Access to and Administration of Foreign Investment in the Real Estate Markets.” Additionally, on January 29, 2007, Beijing published “Notice Concerning Regulating the Purchase of Residential Property by Foreign Institutions and Foreign Individuals.”
One person, one property
Most importantly, these laws require “owner-occupation,” status of the property purchaser. In other words, an individual buyer can purchase only one apartment for personal use and cannot own property where he or she is not registered to live. A foreign institutional buyer, meanwhile, can only buy an apartment for its business in the city where its branch or representative office is located.
There are ways around this limitation. For example, policies provide that a foreigner can buy one apartment only, but his or her spouse or other relatives may buy another residential property. Also, foreigners or foreign institutions who fail to meet the new requirements are still permitted to share ownership with a Chinese partner under the protection of the China Civil Law through a special agreement.
Another important feature of the new restrictions is that a foreign buyer must now submit a certificate that he or she has studied or worked in China for at least one year. Besides preventing speculation, the reasoning for this is that foreign individuals who have worked here for more than one year are effectively contributing to China’s economic growth.
Yet even if you are looking to buy your first China property and have lived in country at least one year, financing the purchase is another challenge. Since payment must be made from a local bank account, transferring funds from an overseas bank account is subject to increased taxation. Relevant property laws also impose taxes on the transaction itself. It is usually very difficult for foreigners to secure a loan from local banks, but it may be possible through a local branch of one’s overseas bank.
Power to purchase
Only those who adhere to the principle of “owner-occupation” can be approved to go through the formalities relating to foreign exchange. Foreign institutions and individuals who remit capital from foreign countries or pay for the real estate property directly from a domestic foreign currency account shall be examined and must be ratified by the appointed bank. Only then may they transfer payment to the developer’s renminbi account. They must not transfer the foreign currency to the foreign currency account of the developer directly.
If payment for the property is aborted for some reason and the renminbi needs to be exchanged back into foreign currency and remitted outside China, this also requires examination and approval by the appointed bank.
When the time comes, selling one’s property and exchanging the proceeds back into one’s home currency is also contingent on the bank’s approval. Such renminbi capital can be settled into foreign currency and remitted outside China after being confirmed by the department of foreign exchange for the area where the real estate is located.
In addition, when foreign institutions or individuals want to sell their property, they must sign a government-issued sales agreement with the purchaser first. After this is signed, they can go back to the local real property transaction office with the purchaser to transfer the title of the property. After paying off all relevant taxes, including value-added property income tax, they can wire the received money back to their overseas account.
(Allen X. Jiang is principal of Shanghai-based law firm Allen & John, which has 12 years of Chinese legal experience. All lawyers are licensed locally and with overseas legal education background. The main focus of Allen & John is to support and protect the interests of overseas investors in China in areas of business laws, intellectual property laws, real estate laws and related litigations.)
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