Meaning
Regulatory thresholds classify an offshore company as a real property holding entity if its value derives primarily from Chinese land. The real property holding entity rule is used to identify transactions that are essentially the sale of Chinese real estate. If this rule applies, the deal is taxed according to the specific regulations for immovable property rather than general equity transfer rules.
Threshold Calculation
Assets are evaluated to determine if land and buildings make up more than fifty percent of the total value. Under the real property holding entity rule, this calculation is based on the fair market value of the assets at any time within the three years prior to the transfer. This prevents parties from temporarily inflating other asset values to avoid the classification.
Asset Composition
Inventory and equipment are excluded from the property portion of the test. To apply the real property holding entity rule, the tax bureau looks at the balance sheet of the Chinese subsidiary and any lower-tier holdings. The goal is to isolate the value of the land-use rights held within the corporate structure.
Property Classification
Classification as such an entity removes the possibility of using certain safe harbors under notice 7. When the real property holding entity rule is triggered, the gain from the offshore sale is fully taxable in China. This ensures that profits from the appreciation of local land are captured by the domestic tax system.
