Shenzhen moves to beat tax cheats

PUBLISHED : Wednesday, 15 June, 2011, 12:00am
UPDATED : Wednesday, 15 June, 2011, 12:00am


Transaction costs on sales of flats in Shenzhen could rise next month when the municipal government begins levying an alternative tax aimed at tackling sellers evading taxes on gains from their flat sales.

From July 11, the city government will impose a transaction tax on home sales in the secondary market based on a reference price determined by market conditions, the city's taxation administration said.

'The new rule is aimed at solving the yin-yang contracts practice, which is popular in Shenzhen,' said Samuel Wong, a director at Midland China's Shenzhen branch.

The term refers to the practice whereby sellers and buyers sign both a 'public' and a 'private' contract on the same second-hand property in order to evade taxes on gains from the sale.

The contract with the actual sales price paid for the property is signed under the table and kept by both the buyer and the seller. They then submit a fake document that states a much lower transaction value to the land bureau.

The resale of second-hand properties is subject to personal income tax, which is levied at a rate of 20 per cent of the gain. But sellers seldom pay tax because of the practice, described as yin yang after the Chinese philosophy explaining the opposing forces of darkness and light.

But from next month the Shenzhen government will have its own valuation of each flat in Shenzhen and says the transaction cost of sales will be based on this assessment. The tax rate will be 1 per cent of the assessed value for mass housing and 1.5 per cent for upmarket flats.

'But final details have not yet been announced. It is not yet clear if sellers may have an option to pay income tax or the rate based on the government's valuation,' said Andy Lee Yiu-chi, head of Centaline Property Agency's Shenzhen branch.

It is also not known at this stage if the valuation by the government reflects market values.

Since the new rule was announced, more buyers had tried to complete their transactions before it takes effect, said Lee, who expects transactions will now drop by 20 to 30 per cent, though prices are so far stable.

Many owners had three or more flats, he said, and they preferred not to sell as they were not allowed to buy a replacement flat under restrictions announced earlier this year.

DTZ said 35 major cities including Shenzhen had taken the central government's lead and moved to stop people buying more than two flats.