On January 21, 2021, local authorities of Shanghai jointly issued the Opinions on Promoting the Stable and Healthy Development of the Real Estate Market (Hereinafter referred to as “Opinions”) focusing on cracking down on the “fake-divorce purchase” and “Newly-built Property Hot” and tightening the purchase restriction policy. One of the most significant items is the adjustment of VAT exemption preferential. As it can be the most important tax in the second-hand property transaction, the adjustment has a greater impact.


1. Details of VAT adjustment

1.1  Adjustment

Adjust the VAT exemption period for ordinary residences from two to five years, and the period on variable levy for non-ordinary residences from two to five years. To facilitate understanding, the difference is as follows:

Previous Policy Opinions
Ordinary residences Non-ordinary residences Ordinary residences Non-ordinary residences
<2 yearsFull Levy/1.05* Rate <2 yearsFull Levy/1.05* Rate <5 yearsFull Levy/1.05* Rate <5 yearsFull Levy/1.05* Rate
≥ 2 yearsExemption ≥ 2 yearsVariable Levy/1.05* Rate ≥ 5 yearsExemption ≥ 5 yearsVariable Levy/1.05* Rate


1.2  Important timings

Effective time of the Opinions: Opinions comes into effect on January 22, 2021. However, a property transaction involves many procedures, such as intermediation, signing letter of intent, signing online formal contract, transfer of ownership and so on. What time point should the Opinions be subject to? Although the Opinions is not clearly specified, referring to the previous policies and reply of the real estate center, it should be based on the time when the formal sales contract is signed online through Shanghai real estate system. Specifically, those signed before January 22, 2021, the Opinions shall apply. While those signed online after January 22, 2021, will be subject to the previous policy.

Numbering starts on full five years: The five-year period refers to five years since the date of purchase of the property. Readers could check the issuing date of the title deed. If it is more than five years from the date, the Opinions regarding the VAT exemption will apply.


1.3 Recognition standard of ordinary residence

According to the Notice on Adjusting the Standards of Ordinary residence of Shanghai issued by the Municipal Housing Administration in 2014, ordinary residences must meet the following standards:

Type requirements: Multi-story property with five floors or more, and old-style apartments and lanes with less than five floors.

Area requirements: The building area of a single set is less than 140 square meters.

Actual transaction price requirements

  • Less than RMB 4.5 million per set within the inner
  • less than 3.1 million per set between the inner and the outer.
  • Less than 2.3 million yuan per set outside the outer


1.4  Calculation method of VAT

Exemption: Applicable to ordinary residences purchased by individuals for 5 years or more.

Full levy: Applicable to the residences purchased by individuals for less than 5 years (regardless of the ordinary or non-ordinary), the payable VAT= Purchase price / (1+5%) * 5.3% (including urban construction and additional education fees)

Variable Levy: Applicable to non-ordinary residence purchased by individuals for 5 years or more. VAT payable = (Purchase price – Original purchase price of the property or the price at the time of acquiring) / (1+5%) * 5.3% (including urban construction and additional education fees).


2. Redistribution of undertakers after VAT adjustment

In 2006, Shanghai Higher Court issued the Answers to questions on the disputes of the property sales after macro-control (hereinafter referred to as the “Answers“), in which article 1 stipulates that according to the principle of “agreement priority and legal supplement”, the parties where there is a clear agreement on the payment of taxes, the agreement shall be abided by; if the parties have no agreement or unclear agreement on taxes, the taxpayer shall be determined in accordance with national tax regulations.

According to the above-mentioned “Answers“, it can be known that for the part of the taxes that the parties did not agree on, unless the parties reached an agreement, they should be borne by the statutory taxpayers. In Article 2 of the Interim Regulations of China on Land Value Added Tax, it is determined that the unit or individual who transfers the ownership of property and obtains income (i.e., the seller) is the taxpayer. Therefore, after the Opinions is published, we can infer that the excess VAT should be borne by the seller.

However, for both buyer and seller, the additional VAT is a large sum that cannot be anticipated in advance. On January 1, 2021, the Civil Code officially came into effect. Article 533 of the Civil Code stipulates that after the establishment of the contract, the basic conditions of the contract have undergone major changes that were not foreseeable by the parties at the time the contract was concluded and are not a commercial risk, if it is obviously unfair for one party to continue to perform the contract, the adversely affected parties can negotiate with the other party; if the negotiation fails within a reasonable period, the parties can request the court or arbitration to change or terminate the contract. After the Opinions was issued, due to the change of circumstances, the cost of performing the sale contract naturally increased significantly due to the additional VAT that may be incurred. Therefore, requiring any party to bear the cost will lead to injustice to that party. Under the background of the coming into force of the Civil Code, when the court encounters relevant cases, it is also likely to confirm that both parties jointly bear the excess VAT by changing the contract. Even if the relevant provisions of the Civil Code are applied, the court is given more discretion to determine the proportion of the two parties.


3. Summary

The introduction of the Opinions has not cooled the second-hand property market. On the contrary, the price has continued to rise in the short term. There have been some cases such as price jump, contract termination and two sales of one property. For the buyers, they must be vigilant to prevent their interests from being damaged.



Post time: Mar-12-2021