Official Reply on the Issue of the Income Tax Treatment of Sale-leaseback Transactions by Foreign-invested Enterprises that Engage in Real Property Development

(Issued by the State Administration of Taxation on May 31 2007.)

Guo Shui Han [2007] No.603

Hunan Provincial Office of the State Administration of Taxation:

Your Request for Instructions Concerning the Issue of Enterprise Income Tax on the Sale-leaseback Transactions of Real Property Developers (Xiang Guo Shui Fa [2006] No.106) has been received. We give our official reply as follows:

1. A foreign-invested enterprise engaging in real property development that transfers by way of a sale the premises, building or other such immovable property that it produced and developed and leases back such assets from the buyer by way of a lease, shall, regardless of the lease method adopted, separate the sale-leaseback transaction into its separate sale and lease transactions for tax treatment purposes. The difference between the income derived by the enterprise from the sale or transfer of ownership of the relevant immovable property and the costs and expenses relating to the ownership thereof shall be treated as a gain or loss for the period during which the transaction occurred and be included in the enterprise's taxable income for the period in question.

2. If an enterprise assigns one or more of the following interests in, or risks attaching to, an asset through a sale-leaseback transaction, it shall be deemed to have transferred all or part of the ownership of the immovable property, regardless of whether it carried out the procedures for the change of legal title thereto (e.g. procedures for title registration or change of ownership):

(1) the right to obtain the returns from the increase in value of the asset;

(2) bearing the losses arising from various types of damage (including physical damage and decrease in value);

(3) the right to possess the asset;

(4) the right to use the asset during the remaining period of its life; and/or

(5) the right to dispose of the asset.

3. If an enterprise conducts an immovable property sale-leaseback transaction with an affiliate, tax administration provisions relating to business transactions between affiliated enterprises shall apply, in addition to this Official Reply.

4. If tax treatment carried out in accordance herewith involves the payment of previously unpaid taxes or a tax refund, matters shall be handled in accordance with the relevant provisions of the PRC Law on the Administration of the Levy and Collection of Taxes and the Implementing Rules therefor.