According to the land value-added tax (VAT) regulations, different tax rules apply to the sale of newly-built houses and the transfer of old houses; the sale of newly-built houses is subject to land value-added tax clearance, while the transfer of old houses is not subject to clearance, and there are differences between the two rules in terms of deduction items, filing procedures, and filing time. In large-scale real estate projects, it is often difficult to sell all the completed commercial houses at one time, and some of them need to be transferred to self-holding first, and the phenomenon of "using before selling" or "renting before selling" is becoming more and more common, and what kind of taxation rules are applicable to such self-built and self-used houses before transferring? The tax rules applicable to such self-constructed and self-utilized houses and then transferred houses have a direct impact on the land value-added tax payment obligations of real estate enterprises.

I. Criteria for differentiating between new and old properties for land value added tax purposes

(I) Provisions at the national level

Article 7 of the Circular of the Ministry of Finance and the State Administration of Taxation on the Provisions on Some Specific Issues of Land Value-added Tax (Cai Shui Zi [1995] No. 48) defines new houses and old houses: new houses refer to the properties that have not been utilized after completion. Any property that has been used for a certain period of time or has reached a certain degree of wear and tear is considered old. According to the provisions of the Circular, the distinction between new and old houses is based on two criteria, namely, time of use and degree of wear and tear, and the provincial tax authorities in each province may stipulate the specific criteria.

(II) Specific provisions of the provincial tax authorities defining "old houses"

In accordance with the authorization of the foregoing provisions, most places define old houses as properties that have been in use for more than one year (12 consecutive months), such as Shenzhen City and Liaoning Province. Individual places also adopt other criteria, as shown in the table below:

II. Determination of deduction items for transfer of old houses

Under the condition of direct liquidation, Article 6 of the Provisional Regulations on Land Value-added Tax specifies five deduction items, including land price, development costs, development expenses, relevant taxes and additional deductions. In the transfer of old houses, the determination of deduction items is significantly different from that of the clearing section, which mainly includes three parts, namely, land price, real estate appraisal price and related taxes. According to the current practice of tax collection and management, the deduction items of land value-added tax for the transfer of old houses and buildings should be determined in different situations:

(I) Land price

1、Transfer of real estate built for self-use by housing enterprises

According to the provisions of Cai Shui Zi [1995] No. 48, the deduction of the amount paid when obtaining the land use right shall be provided with legal and valid certificates, and the deduction shall not be allowed if the land price is not paid when obtaining the land use right or the certificates of the land price paid cannot be provided. In other words, as long as the taxpayer paid the land price when acquiring the land use right, and can provide the land price paid documents, it is allowed to deduct the amount paid for acquiring the land use right. It should be noted that the "amount paid for the acquisition of land use rights" must be the actual cost of the land paid, not the appraised value. Therefore, real estate development enterprises to transfer their own self-construction and self-use of real estate, to meet the conditions, allowed to deduct the amount paid for the acquisition of land use rights.

2、Enterprise or individual transfer of purchased real estate

For taxpayers to purchase real estate and then transfer, because there is no payment of the cost of acquiring land use rights, so do not allow a separate deduction for the land price.

(II) Real estate appraisal price

1、Able to obtain the appraisal price

In accordance with the provisions of the Cai Shui Zi [1995] No. 48, the amount of deductions should be in accordance with the appraisal price of houses and buildings, the acquisition of land-use rights to pay the land premiums and fees paid in accordance with the relevant provisions of the State and the transfer of taxes to be determined. The value-added amount is calculated by subtracting the amount of deductions from the transaction price of the house transfer, and the land value-added tax is paid.

It should be noted that, on the one hand, the price after multiplying the replacement cost price by the discount rate of newness assessed by the real estate appraisal institution approved by the government as the appraisal price of old houses and buildings should be confirmed by the local tax authorities. On the other hand, the appraisal expenses incurred by a taxpayer who chooses to calculate the land value-added tax on the basis of the real estate appraisal price for the purpose of concealing or misrepresenting the real estate transaction price shall not be allowed to be deducted when calculating the land value-added tax.

2、Can not obtain the appraisal price, but can provide the purchase invoice

According to the Announcement on Certain Provisions on the Levy and Administration of Land Value-added Tax after the Camp Reform and Increase (State Administration of Taxation Announcement No. 70 of 2016) and the Circular of the State Administration of Taxation on the Issues Relating to Land Value-added Tax Clearance (Guo Shui Han [2010] No. 220), the invoice for purchase of a house is confirmed by the local tax authorities that the "amount paid for acquiring the land use right "and "costs and expenses of new construction and ancillary facilities" can be calculated by adding 5% per year from the year of purchase to the year of transfer according to the amount contained in the invoice. The starting and ending date of "each year" is based on the date of the invoice, and each full 12 months will be counted as one year; if it exceeds one year, if it is less than 12 months but more than 6 months, it can be regarded as one year.

3、Neither the assessed price nor the purchase invoice can be provided

According to the Circular of the Ministry of Finance and the State Administration of Taxation on Certain Issues of Land Value-added Tax (Cai Shui [2006] No. 21), for the transfer of old houses and buildings, which have neither assessed prices nor can provide purchase invoices, the tax authorities can implement the approved levy in accordance with the provisions of Article 35 of the Law on Administration of Taxation Collection. Meanwhile, in response to the requirement of applying approved levy in a strict manner in the Circular of the State Administration of Taxation on Strengthening the Levy and Administration of Land Value-added Tax (Guo Shui Fa [2010] No. 53), each province is required to determine the approved levy rate in accordance with the standard of not less than 5% in a strict and high manner. Even if the taxpayer applies the approved levy, it may not be able to reduce the land value-added tax liability.

(III) Related taxes

The transfer of old houses and buildings allows taxpayers to deduct taxes related to the transfer of real estate. Whether the deduction is calculated on the basis of the assessed price or the purchase invoice, the urban maintenance and construction tax, stamp duty and education surcharge and local education surcharge paid on the transfer of real estate are deductible. For the deed tax paid when the taxpayer purchased the real estate, if the taxpayer can provide the deed tax completion certificate, it is allowed to be deducted as the "Taxes related to the transfer of real estate", but not as the basis for adding 5%; if the deed tax paid at the time of purchase is already taken into account in the appraisal price of the old house and building, it will not be deducted separately as the "Taxes related to the transfer of real estate". If the deed tax paid at the time of purchase is taken into account in the valuation of old houses and buildings, it will not be deducted as a separate deduction for "taxes related to the transfer of real estate".

III. Reasonableness Analysis of Determining Deduction Items for Transferring Real Estate Built for Self-use by Housing Development Enterprises on the Basis of Transferring Old Houses

According to the Circular of the State Administration of Taxation on Relevant Issues Concerning the Administration of Land Value-added Tax Clearance for Real Estate Development Enterprises (Guo Shui Fa [2006] No. 187), if the real estate is built for self-use and the property right has not been transferred, no land value-added tax shall be levied, and the income shall not be listed in tax clearance without deduction of the corresponding costs and expenses. However, if the property is transferred after a period of self-use, the land value-added tax will be calculated on the basis of the transfer of the old property. This rule may have the following effects:

(I) Different standards for defining new and old houses may affect tax equity

Cai Shui Zi [1995] No. 48 initially demarcated new houses and old houses, and specific rules have been formulated in various places on the criteria of the period of use and degree of wear and tear, and even other rules have been derived. There is a lack of uniform understanding of the definition of new and old houses in different regions, some of which consider old houses to be old if they have been used for more than one year, while some consider old houses to be old if they have gone through the property rights registration, and the deductions allowed for new and old houses in the calculation of land value-added tax (LVAT) are also different, which has a significant impact on the rights and interests of the taxpayers and leads to endless disputes on the standards of new and old houses in practice.

The varying standards for defining new and old houses may cause taxpayers carrying out real estate development and operation business in different places to calculate the land value-added tax, with some declaring on the basis of new house clearing and some calculating and paying on the basis of old houses, resulting in an imbalance of the taxpayers' land value-added tax liability and violating the principle of fairness in taxation.

(II) After the completion of real estate, self-use, rental or sale does not change the cost incurred

As mentioned earlier, the scope of deductions for the transfer of old houses has been significantly reduced compared to the calculation of deductions under the liquidation rules. For example, the amount paid for acquiring land use rights and development costs cannot enjoy the deduction of plus 20%, and real estate development costs cannot be calculated at 5% or 10%. Moreover, the deduction calculated on the basis of appraisal price or deduction calculated on the basis of purchase invoice may also have the consequence that the deduction items cannot cover the construction cost, resulting in the enterprises paying more land value-added tax in the transferring process.

On the one hand, the competent tax authorities are responsible for the daily tax management of real estate development projects, and the tax management runs through the whole process of real estate development of the taxpayers from the establishment of the project to the completion and acceptance of the project, and then to the liquidation of the project. Therefore, after the completion of the real estate, the costs and expenses arising from the development of the project can be reasonably pooled according to the liquidation requirements in different phases, different liquidation units and different real estate types. Regardless of whether the real estate development enterprises will be completed real estate for sale, self-use or leased to other entities, will not have an impact on the deductions already incurred.

On the other hand, the real estate enterprises "use and then sell" or "rent and then sell", although the name of the transfer of old houses, but in essence the relevant properties are the first time to enter the circulation, the first time to change the property rights, the transfer of the previous links have not been declared and paid land value-added tax, the income and the deduction items can be reasonably pooled. Under the circumstance that income and deductions can be accurately accounted for, allowing taxpayers to calculate the value-added amount in accordance with the liquidation rules can restore the deductions and avoid overpayment of land value-added tax.

(III) Allowing deduction according to liquidation rules is in line with the spirit of the Propaganda Outline on Land Value-added Tax.

The legislation on land value-added tax aims to regulate the order of land and real estate market transactions, reasonably regulate the land value-added gains and safeguard the rights and interests of the State. According to the existing rules of defining new and old houses and the calculation method of land value-added tax for transferring old houses, the costs and expenses actually incurred by the taxpayers, which can be accurately accounted for and reasonably summarized, cannot be deducted in full, resulting in overpayment of land value-added tax by the taxpayers, and affecting the recovery of the reasonable return on the taxpayers' investment in real estate. Allowing taxpayers to deduct all kinds of costs and expenses in accordance with the liquidation rules is in line with the spirit of the Propaganda Outline on Land Value-added Tax, which states that "the reasonable returns on investment in real estate development should be protected so that they can receive certain returns to promote the normal development of the real estate industry".

IV. Summary

For real estate development enterprises, if the real estate is built for self-use or rental, subsequent transfers shall be subject to land value-added tax (LVAT) calculated on the basis of the transfer of the old house. In order to avoid overpayment of land value-added tax due to the reduction of deductible items when transferring, taxpayers should comprehensively and properly keep all kinds of vouchers of costs and expenses during the development process of the project, so that the deductible items in compliance with the provisions of the tax law should be deducted as much as possible. It is also possible to differentiate the treatment according to the actual situation based on the strategic plan of the enterprise's subsequent operation, business development, etc.: Combined with the geographic location of the real estate, changes in market development and relevant policy trends, when the enterprise expects that the house price will go down, it is appropriate to transfer the completed house to the affiliated enterprise for its own use, and it is more conducive to saving tax by completing the land value-added tax clearing first. When house prices are expected to rise in the future, the deduction calculated on the basis of the assessed price can significantly reduce the amount of land value-added tax payable by the enterprise, which can be left until the time when the house is no longer for self-use or rental, applying the rules for the transfer of old houses. In addition, the real estate industry also suffers from the contradiction between rapid economic development and relatively lagging tax practice. For costs and expenses that the tax law has not yet clarified whether or not they are deductible items, taxpayers should carefully interpret the tax law and policies and actively communicate with the tax authorities in order to strive for the application of favorable deduction methods.