There is a big difference between ordinary standard residential houses and high-end villas and other residential houses with relatively high value in terms of sales revenue and construction cost, etc. In order to control the selling price of ordinary standard residential houses, promote and ensure their healthy development, and protect the basic investment return of real estate enterprises, the State has introduced a preferential land value-added tax policy for ordinary standard residential houses. In order to control the selling price of ordinary standard residence and to promote and ensure its healthy development, and to protect the basic investment return of real estate development enterprises, the State has introduced preferential land value-added tax policies for ordinary standard residence.

I. Case Introduction

(I) Facts of the case

Since its establishment in March 2008, J Company has been mainly engaged in real estate development.

On April 14, 2008, J Company acquired land parcels A and B for the development and construction of M Project. The project was fully completed and ready for delivery.

On July 13, 2014, Company J commissioned a tax attorney firm to carry out liquidation appraisal for Project M. It confirmed that Project M had the conditions for land value-added tax ("LVAT") liquidation, of which RMB3.61 million of LVAT was payable on residential properties and RMB3.58 million of LVAT was payable on commercial properties.

On July 22, 2014, the Second Taxation Sub-bureau of the former H Local Taxation Bureau made a Notice of Conclusion of Land VAT Clearance to J, confirming that J had paid land value-added tax of RMB4.11 million and that the land value-added tax payable was RMB3.09 million.

On September 23, 2014, J Company paid all the tax into the treasury.

On May 28, 2019, Tax Branch D commenced an inspection of Company J's tax involvement for the period from January 1, 2014 to December 31, 2017. On June 16 of the same year, Company J submitted the "Application Report on Application for Land Value-added Tax Refund" to Tax Bureau H, applying for a refund of RMB4.73 million of the land value-added tax overpaid on "ordinary residential houses".

On September 5, 2019, Tax Sub-bureau D issued a Notice on Tax Matters, denying the refund of the land value-added tax of RMB362 (value-added rate of 5.47%) payable by Company J on "Ordinary Residential House".

Company J was dissatisfied and filed an application for administrative reconsideration with Tax Bureau H on September 27, 2019. on December 6, 2019, Tax Bureau H made a Decision on Tax Administrative Reconsideration and upheld the Notice on Tax Matters issued by Tax Bureau D. Company J was still dissatisfied and filed an administrative litigation with Huaian Qingjiangpu District People's Court. The first instance judgment rejected the litigation request of Company J. Company J was still not satisfied and appealed to Huai'an Intermediate People's Court of Jiangsu Province.

(II) Focus of Dispute

Whether the residences developed by Company J were ordinary standard residences and should be exempted from land value-added tax?

(III) Views of the Parties

Company J argued that the residences developed by Company J met the conditions for ordinary standard residences and should be subject to land value-added tax exemption.

The tax authorities argued that Project M belonged to the category of "ordinary residential houses" rather than "ordinary standard residential houses", and thus was excluded from the tax exemption.

The Court held that the Implementing Rules of the Provisional Regulations on Land Value-added Tax had authorized the provincial governments to set specific criteria for the determination of ordinary standard residential houses. Although after 2005, the State made certain relaxation to the ordinary standard residence, it was not a standard for the whole country to implement, and still gave the provincial government the authority to implement the standard according to the local situation. According to Suzhou Land Tax Issuance (1995) No. 103, Project M did not comply with the recognition standard of ordinary standard residence, therefore, Company J's request for exemption and refund of land value-added tax had no legal basis.

(IV) Court Decision

The appeal was rejected and the original judgment was upheld.  

II. How is "ordinary standard residence" recognized?

(I) "Ordinary Standard Residence" meeting the statutory conditions is exempted from land value-added tax.

Article 8 of the Provisional Regulations on Land Value-added Tax specifies two circumstances under which land value-added tax is exempted, including the case where a taxpayer builds an ordinary standard residence for sale and the value-added amount does not exceed 20% of the amount of the deductible items. It can be seen that there are two legal conditions for the tax exemption of "ordinary standard residence", one is to meet the recognition standard of "ordinary standard residence", and the other is that the value-added rate does not exceed 20%. In order to regulate the income of different real estate development, differentiate between ordinary and non-ordinary residences with different values, and separate the scope of land value-added tax levy and exemption, the Circular of the State Administration of Taxation on the Issues Relating to the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises (Guoshuifa 〔2006〕 No. 187) further requires that the value-added amount be calculated separately in the case that the development project contains both ordinary and non-ordinary residences.

(II) Criteria for the determination of "ordinary standard residential house"

Article 11 of the Rules for the Implementation of the Provisional Regulations on Land Value-added Tax adopts a "definition + reverse enumeration" approach to the definition of ordinary standard residential houses, specifying that ordinary standard residential houses are residential houses constructed in accordance with the standard of general residential houses in the locality, but excluding high-value-added real estate types such as high-class condominiums, villas, resorts, etc., and authorizing the provincial-level people's governments to stipulate the difference between ordinary standard residential houses and other residential houses. The People's Government at the provincial level is also authorized to stipulate the specific boundaries for the division of ordinary standard residences from other residences.

1. Recognition Standards at the National Level

On May 9, 2005, the General Office of the State Council issued the Circular of the General Office of the State Council Transmitting the Opinions of the Ministry of Construction and Other Departments on Doing a Good Job of Stabilizing Housing Prices (Guo Ban Fa 〔2005〕 No. 26), which made it clear that: in order to reasonably guide housing construction and consumption, and to vigorously develop land-saving type of housing, the Government will give preferential policy support to small- and medium-sized, medium- and low-priced ordinary housing in the aspects of planning and approval, land supply, as well as credit and tax. Preferential policy support. In principle, the housing that enjoys preferential policies should meet the following conditions at the same time: the building plot ratio of residential areas is above 1.0, the floor area of a single unit is below 120 square meters, and the actual transaction price is less than 1.2 times the average transaction price of housing on the same level of land. Provinces, autonomous regions and municipalities directly under the Central Government shall, in accordance with the actual situation, formulate specific standards for ordinary housing in their regions to enjoy preferential policies. It is allowed to float the standard of single set of floor area and price appropriately, but the proportion of upward fluctuation shall not exceed 20% of the above standard.

Subsequently, the Ministry of Finance and the State Administration of Taxation issued the Circular on Certain Issues Concerning Land Value-added Tax (Cai Shui [2006] No. 21), proposing that the determination of "ordinary standard housing" shall be determined by the people's governments of the provinces, autonomous regions and municipalities directly under the central government in accordance with the Circular of the General Office of the State Council Transmitting Opinions of the Ministry of Construction and Other Departments on Stabilizing Housing Prices (Guo Ban Fa Fa Zhou). Notice of the General Office of the State Council Transmitting the Opinions of the Ministry of Construction and Other Departments on Doing a Good Job in Stabilizing Housing Prices" (Guo Ban Fa [2005] No. 26) and announced to the public the "small and medium-sized, medium and low-priced ordinary housing" standard implementation. Therefore, after the release of Cai Shui [2006] No. 21, tax authorities around the world do not have the right to specify the standard of ordinary housing, and should be based on the local government according to the State Council [2005] No. 26 authorization of the ordinary housing as the land value-added tax as the ordinary standard housing.

2. Determination standard for local implementation

According to the requirements of the Circular of the Ministry of Finance and the State Administration of Taxation on the Policies on Ordinary Standard Dwellings for Land Value-added Tax (Cai Shui [2006] No. 141), the provincial governments shall strictly control the specific local standards within the scope of the "Ordinary Dwellings Standard" set by the State Council of China under the authorization of Guo Ban Fa [2005] No. 26. In terms of the types of standards, most areas adopted two or three of the standards for building volume ratio, single-unit floor area and actual transaction price, and some also made requirements for decorative standards, such as in Guizhou Province. From the standard value point of view, the building volume rate basically follows the 1.0 standard stipulated by the State Council [2005] No. 26, the single set of floor area and the actual price of the transaction there is a certain amount of upward fluctuation, some provinces have also identified different areas to determine the standard.

(III) "Ordinary Standard Residence" Recognition Time

For the development project that has been put into construction, its building volume ratio and single set of floor area have been determined before development, but due to the differences in the specific conditions of each province and city, there are certain differences in the price division standards between ordinary standard residential units and other types of real estate in each place, and due to the realities of inflation, fluctuations in housing prices and macro-control policies, the governments of each place will adjust the price division standards between ordinary standard residential units and other types of real estate in accordance with the actual conditions, and some provinces have also established standards for different regions separately. Due to the actual situation such as inflation, price fluctuation and macro-control policies, local governments may also adjust the price classification standards for ordinary standard residential properties and other real estate properties according to the actual situation. Therefore, whether housing enterprises can enjoy the tax exemption benefits for ordinary standard residential houses is also closely related to when the type of real estate is recognized.

In practice, some enterprises use the point of time when the development project is liquidated as the basis for judging whether the actual transaction price meets the conditions of ordinary standard residential property. The tax authorities will, on the basis of the provisions of the Tax Law, combine the sales contract signed by the real estate development enterprise to transfer the real estate and the time of its registration in the real estate registration and management department as the time of the corresponding property transfer tax obligations, and at the same time, also take this point as a key node in determining whether the relevant property is in line with the price standard of the ordinary standard residential property. As long as the sale is established, the actual transaction price of the property sold and the average transaction price of housing on the same level of land can be specifically determined, therefore, the tax authorities tend to recognize the ordinary standard residential property in accordance with the time of the sale of the "segments". If the enterprise liquidation refers to the wrong price standard or applies the wrong policy, it cannot enjoy the corresponding tax exemption benefits.

III. Whether Local Tax Authorities Have the Right to Interpret "Ordinary Standard Residence" on Their Own

(I) Analysis of the applicability of Su Di Shui Fa (1995) No. 103 issued by Jiangsu Provincial Local Taxation Bureau

Article 2 of the Notice on the Issuance of the Provisional Regulations of the People's Republic of China on Land Value-added Tax issued by the Jiangsu Provincial Department of Finance, the Jiangsu Provincial State Taxation Bureau, and the Jiangsu Provincial Local Taxation Bureau (Su Di Shui Fa (1995) No. 103) stipulates that, "The ordinary standard residential houses as referred to in Article 11 of the Rules shall be provisionally deemed to be constructed in accordance with the provisions of the local governmental departments and the architectural standards, and shall be implemented in accordance with the requirements for the management of residential prices of commercial properties. The requirements of the price management of commercial residential housing to implement the national pricing or price limit, in order to arrange for the housing difficulties of households, solve the housing of people with low and middle class income and build affordable housing, micro-profit housing, relieving the hardship and danger, demolition and resettlement of housing, and the implementation of the private reform of housing, etc.". That is, the Su land tax issued (1995) No. 103 of the ordinary standard residential restrictions beyond the local ordinary housing, in addition to meeting the ordinary housing standards, but also to meet the implementation of the national pricing or price limits and other conditions.

State Office [2005] No. 26 was issued, the General Office of the Jiangsu Provincial Government issued "on the forwarding of the Provincial Department of Construction and other departments on the effective stabilization of housing prices to promote the healthy development of the real estate industry views of the notice" (Su Zhengban Fa [2005] No. 55), clear enjoyment of preferential policies for the housing in principle, should meet the following conditions at the same time: residential community construction volume rate of 1.0 or more, a single set of construction area of 120 square meters or less, and the actual transaction price is within 1.2 times of the average transaction price of housing on the same level of land. The standard of single-unit construction area and price can be appropriately fluctuated, but the proportion of upward fluctuation shall not exceed 20% of the above standard. However, Su Di Shui Fa (1995) No. 103 has not been repealed, and the tax authorities of Jiangsu Province have not issued any new documents for the determination of ordinary standard residential houses according to Su Zheng Ban Fa [2005] No. 55, resulting in the tax system of Jiangsu Province, Su Di Shui Fa (1995) No. 103 is still effective.

According to the provisions of Cai Shui [2006] No. 141, "ordinary standard residence" should be implemented in accordance with the "ordinary housing standards", that is, essentially recognized the connotation of the two concepts are consistent. Although the Su land tax issued (1995) No. 103 is still valid, but its determination of the ordinary standard residential beyond the Su Zhengban Fa [2005] No. 55 to determine the standard of ordinary housing, there is a violation of the supreme law.

(II) Do "ordinary standard residence" and "ordinary residence" belong to the same concept?

Since the Provisional Regulations on Land Value-added Tax and its Implementing Rules provide for the concept of "ordinary standard residence" in a more general manner and authorize the specific standards to be stipulated by the people's governments of the provinces, autonomous regions and municipalities directly under the central government, the standard for determining "ordinary standard residence" varies from place to place. The criteria for determining "ordinary standard residence" vary from place to place. Some equate "ordinary residence" with "ordinary standard residence", such as Hainan Province and Tianjin City. Some limit "ordinary standard residential property" to a category of residential property that is included in "ordinary residential property", such as Jiangsu Province. As mentioned above, around the "ordinary standard residential" "ordinary residential" differentiated from other types of real estate standards are usually "residential plot ratio above a certain value", "the floor area of a single unit is lower than a certain value" and "the actual transaction price is lower than a certain value", so as to be able to exclude the high value of a type of residential property from the tax exemption benefits. As a matter of fact, in the past, due to the mixed use of similar concepts such as "ordinary residence", "ordinary housing" and "ordinary standard residence", there were some misunderstandings and miscalculations among the enterprises, which could easily lead to the tax risk of incorrectly applying the tax exemption policy. The mixing of similar concepts such as "general housing", "ordinary housing" and "ordinary standard housing" makes enterprises have some misunderstanding and misjudgment, which is very easy to cause the tax risk of wrong application of tax exemption policy. As mentioned above, Cai Shui [2006] No. 141 has essentially made the same understanding of "ordinary standard residence" and "ordinary residence", regardless of the fact that it is expressed as "ordinary standard residence", "ordinary residence" and "ordinary residence" in the specific regulations of provincial tax authorities. Whether it is expressed as "ordinary standard residence", "ordinary residence" or "ordinary housing" in the specific regulations of provincial tax authorities, it does not affect the application of tax incentives.

IV. Summary

The land value-added tax rules have a large number of authorized local legislations, and the regulations of provinces, autonomous regions and municipalities directly under the central government inevitably have lags and other omissions. In order to reduce costs, housing enterprises often take the preferential policies for ordinary standard residential units as an important aspect of tax management.

Under the current policy conditions, enterprises in order to avoid tax-related risks, first of all, should fully understand the local policy provisions, actively communicate with the tax authorities to clarify the caliber of the local tax authorities to determine the ordinary standard residential, including the determination of the standard, determination of time, the actual transaction price standard determination of a single set of building accounting or the project as a whole to confirm the liquidation of the situation in order to make decisions on the content of tax compliance.

Secondly, under the condition, enterprises should follow the documents issued by local tax authorities as far as possible, and differentiate the accounting according to the "dichotomous method" or "trichotomous method", so as to correctly apply the preferential policies.

Finally, if the tax authorities do not agree to apply the preferential tax exemption or do not refund the overpaid tax, the enterprise can file an administrative reconsideration, administrative litigation and other remedies. If necessary, it can also apply for a review of the normative documents on which the tax authorities based their decisions.