China REIT Update


After several years of speculation, it looks like China is at last in the process of implementing a real estate investment trust (REIT) regime. While property developers and investors, who have eagerly been awaiting the introduction of domestic REITs in the PRC, are hailing these recent pronouncements, many questions remain, including the timeframe for introduction and, more important, what the regulatory framework will look like. REIT regimes vary significantly among jurisdictions around the world.

In order for China to successfully implement a REIT regime it must address several structural impediments. First there is a lack of existing legal structure for REITs, as the legislation will have to make refinements to China’s existing trust, partnership and corporate codes to enable common REIT structures to be utilized. Uncertainties associated with land ownership and land use rights may need to be clarified to promote investor confidence, including title concerns and the procedures for renewing land use rights.

In addition, significant amendments to China’s tax system will be needed in order to make the creation and operation of REITs cost effective. Under the existing PRC tax regime, the operation and sale of real estate assets are subject to various taxes, including a 5% business tax, a 25% corporate tax, a 30% to 60% land value appreciation tax, a 3% to 5% deed tax, and a .05% Tax transparency at both the formation and asset acquisition stage and upon dividend payments is critical to creating a viable REIT market. tax.

The recent pronouncements by the Chinese government that a framework for REITs is under development are a welcome sign to real estate developers operating in the mainland and investors. As discussed herein, the government must address a number of significant issues in order to create a viable framework for domestic REITs.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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