China: Acquiring Investment Real Estate in China

Last Updated: 1 April 2010

Acquiring investment real estate in China

This is the second in an occasional series of articles about real estate law in the People's Republic of China (PRC).

The first article 'Ownership of Land in China' focused on a general overview of real estate law in the PRC and a brief outline of the bid process for acquiring land use rights. As that article demonstrated, the process of acquiring land use rights for development is not particularly easy for foreign investors. A more expedient way for a foreign investor to enter the PRC real estate market may be through acquiring property that has already been developed. This approach, however, also raises problems, especially since reforms were introduced in the PRC to cool the overheated real estate market in 2006/2007.

This article sets out the major issues a foreign investor may face when considering purchasing investment property in the PRC.


The PRC real estate investment market was very popular with foreign investors between the years 2000-2006. Prior to the introduction by various PRC governmental agencies in July 2006 of circular Jian Zhu Fang [2006] No. 171 (Circular 171), foreign investors were able to acquire and directly hold property via an offshore special purpose vehicle (SPV).

In this structure, the foreign investor did not need to observe the minimum registered capital and other regulatory requirements which apply to a PRC incorporated entity.

It also meant that once applicable income taxes had been paid on revenue from the property, that the remaining cash surplus generated from the property could generally be easily remitted out of China.

Transferring the ownership of the property could be relatively easily effected (at least to another foreign investor) by way of a share sale of the offshore SPV.

Circular 171 and other measures

Circular 171 changed the position in several respects.

One of the key changes introduced was that a foreign investor is no longer able to acquire property in the PRC directly for any non-self-use purposes. Under the "business presence" principle set forth under Circular 171, foreign investors now have to establish a foreign invested real estate enterprise (FIRE) in the form of Sino-foreign joint venture company or wholly foreign-owned enterprise to acquire any real estate in the PRC for investment purposes.

Circular 171 also restricted the maximum debt to equity ratio of a FIRE to 1:1 where the total investment exceeds US$10 million. The FIRE is also prevented from taking on indebtedness until:

(i) its registered capital has been fully paid up;
(ii) the land use rights certificate has been obtained; and
(iii) at least 35% of the project's total investment has been paid in.

If the foreign investor enters into a joint venture with a Chinese party, Circular 171 also prohibits any investor being guaranteed fixed returns in the joint venture contract or any other documents.

Further circulars followed in 2007, which tightened up the procedure for registering FIRE's (requiring a time consuming and potentially unsuccessful filing with the central Ministry of Commerce - Circular 50) and also prohibited such companies approved on or after 1 June 2007 from being able to register foreign debt with the State Administration of Foreign Exchange, essentially making it impossible for foreign debt to be used (Circular 130).

Effect of increased barriers to entry

The combined effect of these Circulars saw a dramatic slump in foreign investment in the PRC real estate market as the approval process for setting up a FIRE can be prolonged, and requires a substantial up-front equity capital injection.

Assuming the investor has the equity to meet the strict debt to equity ratios, the ability to take on foreign debt to fund the development/operation of the onshore project has been removed.

Whilst debt from PRC banks can be obtained, it is often practically difficult for foreign investors to obtain this, though if they do, we understand it may be possible to exceed the 1:1 debt equity ratio depending on the attitude of the local bank.

'Trapped cash' is also a major issue due to these reforms. PRC companies (including foreign invested ones) are bound to make certain statutory contributions to reserve funds and employee funds which deplete distributable profits. Distributable profits may also be reduced by non-cash expenses such as depreciation.

As foreign debt (including shareholder loans) is now prohibited, FIRE's lost an effective option to remit cash to its foreign shareholders (although they are still entitled to pay dividends after taxation and other deductions). The FIRE may ultimately withdraw its equity investment in any voluntary liquidation of the company or on a registered capital reduction (for which it is difficult to obtain approval).

Aside from the direct effect on the investor of these measures, the extra time and uncertainty involved means foreign investors are at a disadvantage when bidding in time critical sales. The dearth of foreign buyers has also reduced the liquidity of the commercial market (the market is already fairly illiquid due to a lack of local institutional money and relatively low market transparency), a situation which may further discourage foreign investors concerned about exiting the market in the future.

Restrictions on foreign investment in certain real estate projects

The PRC government approach towards foreign investment in different sectors is documented in the Foreign Investment Industrial Guidance Catalogue (Catalogue), which is updated by the Ministry of Commerce from time to time. The latest version was issued in 2007.

The Catalogue identifies three categories of foreign investment encouraged, restricted and prohibited.

Investments in the encouraged category are subject to relatively little government interference, however, investments in the restricted category are subject to various controls and investments in the prohibited category are not allowed. Certain kinds of real estate investments (for example, the construction and/or operation of luxury hotels, villas, high-end offices and international convention centres) are in the restricted category.

In addition, the Catalogue also specifies that certain types of properties may only be developed or invested in by a joint venture between the foreign investor and a Chinese party.

When looking at categories of property for acquisition, the foreign investor should be aware of these restrictions and the possibility that full ownership in the project/property may not be possible.

Asset or share acquisition

As in most other jurisdictions, buying real estate in the PRC can be structured by way of a share acquisition of the project company (which owns the land use rights or the project) or by taking an asset transfer of the property or project under development.

There are of course differing advantages and disadvantages in structuring any deal as a share or asset acquisition. Despite these issues, it is rare in China for acquisitions to be structured other than as a share acquisition. In an asset acquisition of real estate in the PRC, the tax costs are much higher than on a share sale.

Typically, the seller would be subject to income tax on the capital gains, business tax (of between 3-5% on the appreciation in value), land value appreciation tax (a further tax on the taxable gain on a sliding scale), deed tax (ranging from 3-5% on the total transfer value, payable by the buyer only) and stamp duty (ranging from 0.05% - 0.1% of the consideration).

By contrast, an equity acquisition is generally only subject to income tax on the capital gains and stamp duty.

When acquiring the investment property by way of asset acquisition, the foreign investor will be required to incorporate a FIRE. If the foreign investor intends to undertake a share acquisition of a domestic project company, it will have to take account of the specific provisions of the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (the M&A Rules) which apply to such takeovers, and specialist advice should be sought on the impact of these rules.

The M&A Rules set forth certain specific requirements in respect of the acquisition of a domestic enterprise, including, that the transaction price must be based on a valuation conducted by a qualified assets valuation institution in China and that the total amount of the transaction price must be paid within a stipulated timeframe up to one year after the onshore project company has obtained its updated business licence.

The ideal way to achieve a relatively straightforward transaction is for the new foreign investor to purchase an offshore SPV from an existing foreign investor which holds the property via a subsidiary FIRE. Such an approach will of course only work in the situation where the target project company is the only subsidiary of the offshore SPV.

Light on the horizon?

During the midst of the financial crisis, there was a great deal of speculation in the PRC that the rules restricting foreign investment in real estate would be eased in an effort to revive the depressed market.

In June 2008, the Ministry of Commerce issued Circular 23 under which the Ministry of Commerce allocated its power of reviewing the filing application under Circular 50 (see above) to its branches at the provincial level in order to expedite the filing process.

Some local authorities (notably in Tianjin) have offered some incentives locally in an attempt to attract foreign investors, but these do not circumvent the main problems listed above.

The effect of the PRC government stimulus package has been to re-inflate the property market, and as such substantive reforms of the restrictions now seem unlikely in the near future.

With this background, whilst the rewards and obvious potential can be extremely enticing, investment in the PRC real estate market requires a long term approach, sufficient capital and a good understanding and acceptance of the inherent risks involved.

Norton Rose's Beijing and Shanghai offices are available to assist in advising on these risks and the processes to be complied with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions