Changing the Collectively-Owned Construction Landscape

The Legislative Background

Article 43 of the Land Administration Law, which stipulates that "all entities and individuals that need land for construction purposes shall use state-owned land", has not been retained in the New Land Administration Law. Instead, Article 63 of the New Administration Law sets out new provisions to allow collectively-owned for-profit construction land to be used by entities and individuals outside the collective, through methods including grant and lease. In addition, land users outside the collective may assign, swap, make capital contributions to, give as a gift or mortgage the collectively-owned for-profit construction land after they have acquired the applicable land use right.

The primary land market for collectively-owned for-profit construction land in the form of grant and lease, etc., must (as prerequisites) conform to the overall planning of the use of land and be backed by registration of title.

On the other hand, no additional criteria are set for the secondary market of collectively-owned for-profit construction land in the form of capital contribution, assignment, swaps, gifts, and so on. These activities shall be conducted with reference to existing regulations on the secondary market for state-owned land.

The Outlook for Market Entry

The New Land Administration Law simply outlines the principles regarding the conditions and procedures for the market entry of collectively-owned for-profit construction land，which  refers to relevant provisions on state-owned construction land, and some specific implementing rules are yet to be published by the Ministry of Natural Resources. It is therefore worthwhile examining how actual operations are carried out by looking at the corresponding rules applicable to state-owned construction land, the New Land Administration Law and previous pilot policies for collectively-owned for-profit construction land, and the decision-making rules of collectives.

China is in the process of introducing a holistic land planning regime…

i .      Conditions on entry

The New Land Administration Law stipulates that "collectively-owned for-profit construction land specified in the overall land use planning or urban and rural planning for industrial, commercial and other for-profit uses, if lawfully registered, may be granted, leased or otherwise delivered by land owners to entities or individuals for use, and a written contract shall be executed therefor, specifying the boundaries and area of the land, time limit on the commencement of construction, term of use, purpose of the land, planning conditions and other rights and obligations of both parties concerned."

China is in the process of introducing a holistic land planning regime and the integration of multiple planning schemes, and has moved away from the integrated planning of urban and rural land. Under the holistic planning regime, allocation of collectively-owned construction land aimed at for-profit uses (such as industrial and commercial purposes) will become a primary precondition for land grant or lease. Before the holistic planning regime takes effect, however, overall land use planning and urban/rural planning approved in accordance with the law will continue to be carried out.

…the ownership of a significant amount of collectively-owned land in China has not been confirmed by official registration…

On a side note, the ownership of a significant amount of collectively-owned land in China has not been confirmed by official registration, and therefore in many cases initial registration must be completed, as a procedure for confirmation of rights, before such land may be put into the market for trading.

Although collectives are entitled to decide whether to allow the land in question to enter the market, the eligibility of that land for entry will be reviewed and approved by the competent land administration authorities.

ii .      Market entry procedures

The market entry procedure for state-owned construction land generally consists of the local people's government, at or above the county level, passing an examination and approval procedure. Collectively-owned construction land, on the other hand, has different subjects of ownership and thus applicable state laws regarding the decision-making process of a collective organization must be taken into consideration. As the land asset is of the utmost importance for a collective economic organization, decisions will be made in accordance with the PRC Law on the Organization of Villagers' Committees (中华人民共和国村民委员会组织法) as well as the New Land Administration Law, which provides that "consent of at least two thirds of the members of the villagers' assembly or at least two thirds of the villager's representatives of the respective collective economic organization shall be obtained".

In most cases, due to the special nature of the villagers' organization, when a villagers' assembly is convened, local township governments will assign representatives to the meeting, and require the village collective to engage either a lawyer (as a witness to proceedings) or a public notary (to notarize the proceedings and outcomes) in order to ensure that the decision-making process is conducted in compliance with the law.

…issues are likely to arise such as exactly how to detail the decision-making process regarding a land grant by village collectives or villagers' groups, or whether the consent of at least two-thirds of the representatives of the village collective is necessary in the case of land owned by a villagers' group

In addition, according to the land registration rules and the New Land Administration Law, land ownership may be registered under the name of the villagers' group (a division of the village collective economic organization) or the village collective. Depending on the customs and historical factors of each particular place, the actual control over the land may also be held by the villagers' group or the village collective. In practice, issues are likely to arise such as exactly how to detail the decision-making process regarding a land grant by village collectives or villagers' groups, or whether the consent of at least two-thirds of the representatives of the village collective is necessary in the case of land owned by a villagers' group.

Some places, such as the Baoan, Longgang and Longhua districts in Shenzhen, have developed two types of collective organizations performing different administrative duties during the course of urbanization, namely the residents' committee and the collectively-owned shareholding cooperative enterprise. The collectively-owned shareholding cooperative enterprise actually holds the collectively-owned land, and thus the decision-making procedures of such land will be carried out following those of a company shareholders' resolution instead of that of a village collective organization.

iii .      Market entry and trading platforms

As a basic rule, the market entry and trading platforms for collectively-owned land are principally the same as those of state-owned land, which is the county land trading center. In normal practice, transactions such as grant and lease of the primary market and assignment of the secondary market should be carried out in the county land trading center.

In addition, as the trading party of capital contributions and swaps is usually a definite and exclusive one, such transactions are normally not required to be carried out in a trading center.

The main issue which will arise from land reform is likely to be the sharing of profits from collectively-owned for-profit construction land after its entry on to the market

iv .      Sharing of and taxes on the revenue and profits of land property

The main issue which will arise from land reform is likely to be the sharing of profits from collectively-owned for-profit construction land after its entry on to the market. If the profits are all given to the government, this will run counter to the ultimate goal of the reform, which is to "increase the property income of collective organizations and villagers". However, if the government does not take the profits, it will lose an important fiscal source. This issue, considering the minor differences between transactions of state-owned land and collectively-owned land (both on the primary market and the secondary market) combined with the government's dominant role in deciding whether to expropriate or grant land, if profit sharing is handled inappropriately, will likely cause substantial setbacks to the process of entry into the market for collectively-owned for-profit construction land.

In tackling this problem, the Ministry of Finance and Ministry of Land and Resources (now known as the Ministry of Natural Resources) issued the Tentative Measures for the Administration of the Collection and Use of Land Value-added Income Adjustment Fees of Rural Collectively-owned For-Profit Construction Land (农村集体经营性建设用地土地增值收益调节金征收使用管理暂行办法) (Cai Shui [2016] No.41) in 2016, with its term of effect extended until December 31, 2020. These measures provide that, in principle, the county-level government is entitled to land value-added income adjustment fees equal to 20% to 50% of the land value-added income generated from trading on both the primary market and the secondary market.

According to the current applicable law, when granting state-owned land, income from the primary market constitutes a portion in the fiscal income of the respective local government and higher-level governments but there is no tax income. On the secondary market, although the government is not entitled to any sharing of the transaction profits, there is a 30% to 60% land value-added tax added to other applicable taxes such as income tax and deed tax. Clear regulations are yet to be issued in relation to the land transaction tax or fee which will be applicable to the primary market of collectively-owned land. If there is no extra tax apart from the income adjustment fee, it can be said that the land value-added income will be distributed equally between the government and the collective organization. On the secondary market, however, taxes on land assignment should be applicable to secondary market land transactions. If an adjustment fee is additionally imposed, the majority of the income from the secondary market will be collected by the government in the form of taxation and adjustment fee, leaving almost no added-value income for the holder of the land.

How income from trading collectively-owned land on the primary market is to be shared will therefore be the conclusive factor predicting whether this reform will ultimately be successful.

In the secondary market for state-owned construction land, there are more restrictions on for-profit construction land, especially industrial land

v .      Secondary market

The New Land Administration Law provides that collectively-owned for-profit construction land may enter the secondary market through, among other things, assignment, capital contribution and exchange.

In the secondary market for state-owned construction land, there are more restrictions on for-profit construction land, especially industrial land, with the aim of suppressing speculation in this kind of land. These restrictions include: requiring assignment of land in its entirety; conditional segmentation of land for assignment; the government's sharing of land value-added income from assignment; and percentage requirements on self-use and lease of land. The diversity of policies regarding industrial land in different locations makes it difficult for the authorities to adopt a uniform policy for secondary market trading of state-owned for-profit construction land. This means that local secondary market policy for collectively-owned for-profit land will need to be determined and appropriately adjusted by referring to the local government industrial policy.

Conclusion

In conclusion, the grant of collectively-owned for-profit construction land will change the economic landscapes in China – in urban and rural areas as a whole. This will also increase the property income of collective organizations and farmers. Although the pilot project has been going on for more than four years, more detailed rules are needed in relation to grantors, grant conditions, trading system, arrangements for taxes and fees, and profit sharing. Before those rules are issued, early stage users of collectively-owned for-profit construction land must expect to encounter a number of uncertainties for some time to come.