Land value appreciation tax must go

Property developers in China are panicking. A controversial tax on land value appreciation was reintroduced in February 2007, after a hiatus of more than 10 years, in hopes of curbing the property market bubble. Many developers are now being forced to sell their properties at lower prices to reduce their tax burden (land value appreciation tax (LVAT) is calculated progressively, so the higher the property value, the more tax the developer must pay - see below for more details).

China's real estate road has been bumpy in the past two years: property prices had surged but have been in decline for several months. Unless the government responds to the falling market and abolishes LVAT, the outlook for property developers could get worse in 2009.

Yongjun Peter Ni, partner of White & Case in Shanghai, predicts the tax will eventually be eliminated by combining it with regular income tax. “This will happen sooner if the Chinese property market continues to go south,” he says.