Heavy taxes deter investment in China

Unlike many private equity real estate funds, Phoenix Property Investors has a small investment portfolio on the mainland.

"Taxation is the major issue," said Samuel Chu Wai-tak, a co-founder of Phoenix, which has assets under management exceeding US$4.5 billion. "I believe the mainland has one of the highest taxes in Asia."

Phoenix has issued five funds since it was established in 2002, with investments in Hong Kong, Taiwan, Japan, South Korea, Indonesia and the Philippines.

The company has 16 property projects but just one on the mainland - Crystal Galleria, a retail shopping centre and commercial tower in Shanghai.

Chu is open to opportunities as the country's property market slows down. "If opportunities arise, we are interested."

The Ministry of Finance is responsible for formulating economic policy and developing tax legislation. The National People's Congress enacts income tax laws while the State Council promulgates supplementary and provisional regulations.

According to KPMG, developers catering to retail buyers have to endure a number of taxes, such as stamp duty, corporate income tax, which is generally 25 per cent on profits from development, and land appreciation tax, which is a business tax of 5 per cent.

"Add all these in, the effective tax for developers can be quite high," said Christopher Xing, a partner at KPMG's China tax division.

However, Xing said the taxes were not applicable to real estate funds invested in mainland property companies through offshore vehicles. "The investment exit is through the sale of the [offshore vehicle] company. These taxes do not arise in the sale of offshore company shares."

Comparing the taxes among major Asian countries, Christopher Abbiss, a global head of real estate tax at KPMG, said the tax difference depended on how the property was sold.

For a direct sale, the tax could be as high as 70 per cent but as low as 15 per cent in Australia, about 15 to 20 per cent in Japan and 10 to 22 per cent in Korea.

But in an offshore company sale, the tax differential is narrower because it is only 10 per cent in China, which compares favourably with the direct sales tax of 15 per cent in Australia, for instance.

Abbiss said the tax level was not the only factor that was taken into account. "What the fund looks at is the total return," he said, adding they also looked at the economic conditions in a country and outlook for that type of property.