J & T Capital Watch... Transfer methods and advantages and disadvantages of construction in progress.

Published:

2021-12-28

In practice, it is often encountered that after the state-owned land use right holder obtains the land use right through the transfer method, it cannot be developed due to various reasons, and it is necessary to transfer the land use right and the above-ground buildings and attachments. This paper summarizes the common transfer methods in practice, and briefly analyzes the advantages and disadvantages of various methods, so as to formulate a more targeted plan. Transfer mode of 1. construction in progress The process of transfer of construction in progress is that the acquirer and the transferor transfer the construction in progress owned by the transferor and the land use rights attached to it to the acquirer by way of transfer of construction in progress. 1. Program advantages For the acquirer, after acquiring the ownership of the construction in progress, the acquirer entrusts the team to carry out project management, engineering construction, design and research and development, cost and cost, etc., which has a large margin, which is conducive to giving full play to the advantages of the acquirer's management and development experience, and also facilitates the acquirer to integrate its brand advantages into the construction in progress project, so that the acquisition target can appreciate after the transaction. 2. Key points of concern (1) Conditions of transfer According to the provisions of Article 39 of the the People's Republic of China Real Estate Administration Law, if the land use right is obtained by way of transfer, more than 25% of the total development investment shall be completed when the real estate is transferred. Therefore, the acquirer needs to intervene in the early stage, invest in the project in advance, and then trade when the project reaches 25% of the investment intensity. (2) State-owned enterprises enter the transaction. According to the provisions of the Measures for the Supervision and Administration of State-owned Assets Transactions of Enterprises, state-owned and state-controlled enterprises and state-owned actual control enterprises implement the external transfer of production equipment, real estate, construction in progress, land use rights, creditor's rights, intellectual property rights and other assets of a certain amount or more. After performing the corresponding decision-making procedures in accordance with the internal management system of the enterprise, it shall be publicly carried out in the property rights transaction institution. The Notice of the State-owned Assets Supervision and Administration Commission of Shandong Province on Further Regulating Matters Relating to the Transfer of Assets of Provincial Enterprises, issued on November 15, 2021, once again emphasizes that "the transfer of assets of each enterprise shall be carried out in an open manner, with strict control over the non-public agreement method. The transfer of assets with an original book value of more than 3 million yuan (including 3 million yuan) or a net book value of more than 1 million yuan (including 1 million yuan) shall, in principle, in principle, in a single or in the Shandong property rights, shall be carried out, in." Therefore, in the case of meeting the transfer conditions, the state-owned enterprises that meet the public transfer conditions should perform the procedures of entering the market for listing when transferring the construction in progress. (3) Tax issues The types of taxes involved in the transfer of land use rights include value-added tax and surcharges, land value-added tax, deed tax, stamp tax and income tax, which are heavier. (4) Risk of delisting failure In the absence of delisting of the transferee or other failure to reach cooperation, there is a risk that the cooperative development funds will be recognized as loans in the early cooperation process, resulting in the risk that the transferor will bear the return of funds and the payment of capital occupancy fees after the failure of the project cooperation. 2. equity transfer method The state-owned land use right holder (the transferor), by transferring the company's equity or increasing its capital, enables the acquirer to indirectly control the real estate resources in the name of the transferor by holding the transferor's equity and to obtain income from the business activities of such real estate resources through the acquisition of equity or capital increase. 1. Program advantages The transfer of land through equity transfer, some tax departments allow the temporary non-payment of land value-added tax and other taxes, can reduce the current land transfer costs. 2. Key points of concern (1) There is a risk that the equity transfer agreement will be deemed invalid. After searching the relevant cases, the Supreme People's Court (2014) Min Er Zhong Zi No. 264, the Supreme People's Court (2013) Min Yi Zhong Zi No. 138, and the Jiangsu Provincial Higher People's Court (2014) Su Shang Zai Zhong Zi No. 0006 The case shows that some court judgments believe that the transfer of company equity and the transfer of land use rights as company assets are two independent legal relationships, the current law does not have the effect of mandatory provisions prohibiting the transfer of land use rights or real estate projects in the form of equity transfer of real estate project companies. However, there is another judgment point of view in practice. Taking the Fuyang People's Court (2015) Hangfu Shang Chu Zi No. 3183 case as an example, the court held that: the behavior is fundamentally based on the equity transfer agreement. The essence is the sale of state-owned land use rights. This act is not a legal act and is a legal form to cover up the illegal purpose. Therefore, it is considered that the equity transfer agreement is a legal form to cover up the illegal purpose and should be deemed invalid. (2) There is a risk of land value-added tax being levied by the Inland Revenue Department. According to the Official Reply of the State Administration of Taxation on the Levy of Land Value-added Tax on the Transfer of Real Estate in the Name of Equity Transfer (Guoshuihan [2000] No. 687), in view of the fact that Shenzhen Energy Group Co., Ltd. and Shenzhen Energy Investment Co., Ltd. jointly transfer 100% of the equity of Shenzhen Energy (Qinzhou) Industrial Co., Ltd., and these assets in the form of equity are mainly land use rights, above-ground buildings and attachments, this should be taxed in accordance with the provisions of the land value-added tax. In practice, there are disputes between local tax authorities on whether to pay land value-added tax and deed tax through equity transfer. 3. to change the land to the subsidiary and develop the way This method refers to the parent company and the land management department to sign the "state-owned land use right transfer agreement", and pay the land transfer fee, obtain the state-owned land use right certificate and obtain the land transfer fee compliance bill into the account, and then plan to set up a wholly-owned subsidiary in the project location or the project company to develop the land. There are usually two ways to change the land and above-ground attachments to the name of the subsidiary: first, to invest in the newly established subsidiary by valuing the land and above-ground attachments. Second, according to the net value of free transfer to the name of the new subsidiary. (I) valuation investment equity method 1, still need to meet the conditions for the completion of the total development investment 25%. Article 3 of the Provisions on the Administration of Urban Real Estate Transfer stipulates that "the transfer of real estate referred to in these Provisions refers to the act of the real estate right holder transferring his real estate to another person through sale, gift or other legal means. The other legal means referred to in the preceding paragraph mainly include the following acts: (1) taking shares at the price of real estate, establishing an enterprise legal person with another person, and changing the ownership of the real estate......". Paragraph 5 of Article 2 of the Guiding Opinions of the General Office of the State Council on Improving the Secondary Market for the Transfer, Lease and Mortgage of the Right to the Use of Construction Land (No. 34 [2019] of the State Council), "Clarify the form of transfer of the right to the use of construction land. All kinds of acts leading to the transfer of the right to use construction land are regarded as the transfer of the right to use construction land, including the transfer of the right to use construction land in the form of sale, exchange, gift, capital contribution, judicial disposal, asset disposal, merger or division of legal persons or other organizations. Where the right to use construction land is transferred, the ownership of above-ground buildings and other attachments shall be transferred together. If the transfer of real estate is involved, the relevant procedures for the transfer of real estate shall be handled in accordance with the relevant laws and regulations on the transfer of real estate". Therefore, the land use right is regarded as the transfer of land use right. Therefore, in the process of making shares, the transferor still needs to complete the investment bottom line of 25% of the total development investment in accordance with the provisions of Article 39 of the the People's Republic of China Real Estate Management Law. 2. Heavy tax burden According to regulations such as the Regulations on the Pilot Program of Changing Business Tax to Value-Added Tax in Annex II of Caishui [2016] No. 36, investment in intangible assets such as land and real estate such as houses should be used as sales to pay value-added tax, and the amount of output tax can be calculated., Issue a special VAT invoice to the invested enterprise as a proof of deduction of input tax. Therefore, investments in non-monetary assets are subject to VAT as sales. Article 2 of the Circular of the Ministry of Finance and the State Administration of Taxation on the Enterprise income tax Policy for Investment in non-monetary assets (Finance and Taxation [2014] No. 116) stipulates: "when an enterprise invests abroad with non-monetary assets, it shall evaluate the non-monetary assets and calculate and confirm the income from the transfer of non-monetary assets according to the fair value after deducting the tax basis after the assessment." Therefore, the capital contribution at the price of land use rights shall be subject to enterprise income tax. (II) free transfer method 1, state-owned enterprises must meet the conditions for free transfer. According to Article 2 of the Interim Measures for the administration of the free transfer of state-owned property rights of enterprises, the term "free transfer of state-owned property rights of enterprises" refers to the free transfer of state-owned property rights of enterprises between government agencies, institutions, wholly state-owned enterprises and wholly state-owned companies." If the conditions for free transfer are met, the approval process shall be fulfilled. 2. Tax advantages Article 3 of the Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Treatment of Enterprise Income Tax on Promoting Enterprise Restructuring (Caishui [2014] No. 109) stipulates that the transfer of equity or assets between 100 per cent of resident enterprises directly controlled by the same or 100 per cent of resident enterprises directly controlled by the same or the same number of resident enterprises is based on the net book value, where there is a reasonable business purpose, the main purpose is not to reduce, exempt or postpone the payment of taxes, the equity or assets transfer does not change the original substantive business activities of the transferred equity or assets within 12 consecutive months, and the transfer-out enterprise and the transfer-in enterprise have not confirmed the profit or loss in accounting, the following provisions may be selected for special tax treatment, that is, the transfer-out enterprise and the transfer-in enterprise do not recognize the income, determined by the original net book value of the transferred equity or asset, no income tax may be paid; at the same time, the transfer is based on the original book value, no value-added, therefore, no value-added tax or land value-added tax is required. The second paragraph of Article 6 of the Notice of the Ministry of Finance and the State Administration of Taxation on Further Supporting the Restructuring and Reorganization of Enterprises and Institutions (No. 37 [2015] of the Ministry of Finance) stipulates: "The transfer of ownership of land and houses between enterprises belonging to the same investment entity includes between the parent company and its wholly-owned subsidiaries, and between wholly-owned subsidiaries of the same company, the transfer of land and house ownership between the same natural person and the sole proprietorship or one-person limited company established by the same natural person shall be exempted from deed tax." The free transfer of land use rights between parent and subsidiary companies is exempt from deed tax. In summary, the main factors affecting the company's decision to transfer land use rights to the outside world are: the company's own land development progress; tax costs; project plan completion time requirements; and other issues involving state-owned procedures. Therefore, in practice, each project company should consider the plan comprehensively and formulate a practical implementation plan for the company on the basis of legal compliance.

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