A question of ownership
The publication of Circular 171 in July 2006 set out the Central Government¡¯s position in relation to foreign ownership of property in the People¡¯s Republic of China. Anecdotal evidence suggests these controls have done little to slow down investment from the large multi-national funds and operators. It has had a more marked effect on private sales and purchases, which have slowed significantly. However, there is a new aspect of this law which has not yet been addressed and has presented itself for the first time. This involves the rights of foreign owners to lease property, specifically offices, to companies for the purposes of establishing new enterprises in China.
Last month a lease entered into by a foreign company for the purposes of establishing its Wholly Foreign Owned Enterprise (WFOE) in China, was rejected by the district level government, because it was contracted with an office held by an overseas company. The implication being, foreign owned real estate no longer carried equal rights of licensing, with that held by China domiciled entities.
The key points of Circular 171 dealing with foreign investment in China¡¯s real estate sector, considers who may own properties and how purchases may be financed. Broadly speaking the three different types of foreign ownership options which existed prior to Circular 171 still exist. They are as follows: (i) Offshore institutions (ii) Onshore institutions (iii) Individuals. However, the scope and circumstances of ownership for each have now been limited or changed.
Offshore institutions used to be able to own property either for their own use or investment purposes. The new regulations state offshore institutions may purchase and hold title to property in China for ¡°self use¡± if they have been duly approved to set up branches or Representative Offices in China. Offshore institutions may not hold title to China property for non-use investment purposes. This will effect tax structures used by foreign investors holding Chinese property assets. However, the ruling will not effect those companies purchasing and using property for their own use.
For foreign enterprises wishing to invest in China property, they must now establish a legal entity in China (i.e. a Wholly Foreign Owned Enterprise ¡°WFOE¡± or Foreign Invested Enterprise ¡°FIE¡±). The legal title to the property will then be registered with this onshore enterprise. Such an enterprise must have a registered capital representing no less than 50% of its total investment amount, if the total investment amount is US$10 million or more. The main issue here, is the significant rise in the amount of equity which has to be invested in property acquisitions (many investors would use gearing of 70-80%).
Concerning foreign individuals, they may now only purchase residential property for ¡®self use¡¯ providing they have been working or studying in China for more than one year. While it is not clearly stated, it is assumed Hong Kong, Macau and Taiwan residents are exempted from the above residency requirement. They are however, also restricted to the purchase of property of a ¡®certain floor area¡¯ for ¡®self use¡¯. While the drafting is not entirely clear, the meaning is. The Central Government is aiming to restrict the number of residential properties which may be owned by foreign individuals. For non-Chinese origin persons, it seems the provisions are less ambiguous than for those of Chinese nationality or origin.
