Tax issues in inheritance of estate properties in China

Many foreigners are concerned with China estate taxes when they inherit estates in China.

As a matter of Law, China has not formally enacted estate tax laws despite rumor about it for many years. I personally don’t foresee this enactment any time soon. After all, without this law, Chinese rich people are already fleeing this country for various reasons. An estate tax law will definitely accelerate this flight and seriously undermine China national interests.

That said, when you inherit any estate in China, you are basically free from any taxation on the estate you are going to take back home.

However, in the case of inheritance of real estate such as land and houses in China, there are other tax issues to be taken into account, and a good tax planning may save you substantial money esp when the inheritance involves multiple heirs and real properties.

For this tax planning, we don’t just focus on the process of inheritance itself, but consider the future sale of the inherited properties at the same time.

A client of mine is to inherit five properties in Shanghai left by his late father with another two heirs being his mother and sibling. There was a valid will made by the deceased father bequeathing his estate to all these three heirs with each heir entitled to a portion of the estate. The heirs are in no dispute. Before consulting with any professionals, they just proceeded with the inheritance in accordance with the will, with the help of a local friend in Shanghai. It has proven to be a bumpy road in regard of the inheritance because they are asked to prepare documents which are found in conflict at the end. With a leaden heart, the client found me via this blog. Upon learning the situation, I immediately realized that there is a good room for tax planning that can save a lot of money for the client family.

Here are some tax implications which shall also consider China marriage laws. Sorry for not coming too clear about the full picture because, after all, this is something I will rely on to make a few bucks.

(1) Taxes in the course of inheritance by heirs:

Indeed, there are basically no taxes at all. The heirs receiving title in the estate properties don’t have to pay the deed tax that is usually charged upon any type of title transfer. In Shanghai, this deed tax is exempted from payment. Exemption of deed tax may not be available in other parts of China.

As this is an inheritance, not a normal sale, there is no business tax, nor income tax to be paid.

However, if the estate receiver is not an heir of next of kin but some non-blood-related acquaintance, then taxes will be different.

(2) Taxes when the inherited properties are to be sold

Sooner or later, the heirs receiving the estate may sell the properties. It is not always beneficial to hold properties in a foreign country. Indeed, majority of my clients of inheritance wish to sell the real estate in China because most people are seeing no big potential for value hike in China property market in the future.

If not properly planned and structured, the heirs may end up paying millions of RMB more individual income tax.

In regard of individual income tax, there are a few rules most relevant. For example, China tax authority has prescribed that property owners who obtain their properties by way of gift, inheritance from their immediate next of kin shall be subject to 20% of income tax rate based on the price of the property at the time of sale minus items of costs and expenses allowed to be deducted from the sale price. This is a big deal given that most properties in China has doubled or tripled or even quadrupled in value over the last decade.

However there are other rules to counter or avoid that big tax burden so long as the ownership of the properties are structured in a smart way before sale.

There will be also business taxes to be considered.

China Marriage law is also involved when the properties left by the deceased belong to the community property of the couple, which means only half of the property will be counted as estate of the deceased.

There is another technique that can be employed to phase out heavy taxes in China.

Jason Tian

Jason Tian, senior partner, specializes in foreign-related legal services ranging from foreign investment in China, banking and capital, real estate, M&A, corporate, international trade, estate planning, inheritance and divorce at his blog: http://www.sinoblawg.com.

11 Comments

  1. lilian   •  

    Hi Jason,

    My mother and I are both foreigners with no Chinese citizenship. She passed away a few years ago unexpectedly without leaving a will. I am being told that because she didn’t leave will and due to china’s law of legal line of succession, I am not the only one that has rights to inherit the real estate property she owns. But also my father (whom she legally divorced from in our country of residence), my grandparents and also her siblings ( my aunts and uncle)

    1.) I’m being told that my grandparents, aunts and uncles all have to have written proof that they give up rights to the real estate and are agreeing to allow me to solely inherit the property alone. is this true that they also have inheritance rights?

    2.) in the case of my father. they are divorced in our foreign country of residence, to which i have the paperwork to proof, will this be valid enough to void his rights to the property? I’m being told that it may be complicated because they never filed for divorce in china thus they are considered “legally” married still in china?

    3.) lastly, my mom has passed away a few years ago. Is there a time limit as to when i need to take care of the inheritance property in china? Will it cause any complications in the future if I wait a few more years to do it?

    thank you so much for any legal insight!
    yadi

    • Jason Tian   •     Author

      Yadi, you are still entitled to the estate. As for your father, it is important to know when the property was bought and when they divorced. Please send me an email detailing more about your situation. I will ask a few more questions to assess your conditions and complexity for inheriting your late mom’s estate in China.

  2. Jack   •  

    Hi Jason,

    Thanks for your blog and the insightful articles.

    I have a question concerning transferring money out of China. To my understanding Chinese citizens are only allowed $50K USD transfer out annually. Does this restriction apply to foreign citizens?

    Specifically, if I sell my inherited property in China and transfer the sales proceeds out to a foreign country. Would there be a dollar limit for such a transfer?

    Thanks,
    Jackie

    • Jason Tian   •     Author

      Hi Jackie, strictly speaking Chinese citizens’ annual quota of USD 50,000 means that Chinese citizen can freely purchase and convert foreign exchange. If Chinese citizens need more than USD 50,000, then can still get it so long as they provide supporting documents to prove the legitimate need of the fund.

      Foreign individuals are also allowed to convert up to USD 50,000 annually into RMB freely. However, foreign individuals don’t have the annual quota of purchasing foreign exchange.

      In your question, it is not about annual quota. It is something that has been in place for years. Foreigners are allowed to purchase foreign exchange equal to the RMB fund resulted from the sale of property. There won’t be any issue here for you.

  3. Janto   •  

    Hi Jason,

    I inherited a house in MeiZhou (now under my name) which I wish to gift to an uncle.

    I am told the best way to gift is via a sale. But, the tax which I need to pay is extremely high. I am told the tax is 40%*4000RMB*120 + 6%*(6000*120 + 1800*300) where 120 is the land and 300 is the bldg.

    As far as I know, transaction cost for a sale is 3% for deed tax and 0.1% for stamp duty. I believe the value of the house is < 500K.

    Would be kind to share the reason for the tax?

    Thanks.
    Janto.

    • Jason Tian   •     Author

      I don’t really understand the tax calculation. I believe your understanding of the tax is correct so far as the gifting process is concerned. Your uncle may be subject to a great tax when he sells the property but there won’t be much tax at the time of gifting.

  4. Amanda   •  

    Hello, Jason,

    I am a US citizen. If I inherent some shares and sold them, would there be any capital gains taxes on it? If there is, how the base is calculated?

    Thx

    Amanda

  5. Anna   •  

    Hi Jason,

    I am an American citizen and I have a question regarding inheritance of real estate in Fuzhou, China.

    My father passed away in 2008 and left me, my 2 siblings and my mother an apartment. My mother has dementia and is very sick in hospital in Fuzhou. About two years ago, my siblings asked me to send them an authenticated document giving up my share of my father’s apt. When I didn’t do that, they told me that I didn’t take care of my parents while they are sick and therefore am not entitled to the inheritance. I have always helped out financially with my parents including paying for the burial plot (all by myself) and medical expenses, etc. and I visited them regularly.

    My question is: Can my siblings go to court and lie that I didn’t take care of my parents and the court would believe them and give them everything? I have a job in the US and it is impossible for me to travel to China on a regular basis to fight them in court.

    Any advice would be greatly appreciated.

    Thank you.

    Anna

    • Jason Tian   •     Author

      Hi Anna, no, you won’t be deprived of your inheritance right. Is there any records or registration of your birth or existence in China official documents? If there is no trace of your existence, they might be claiming that your Dad has only two children, therefore leaving you out of the picture. If the interest is substantially, you should consider suing to court for inheriting your share of the estate. For such cases, once you grant a power of attorney to a lawyer in China, you don’t have to come back and forth to fight with them. can you send me the address of the estate property and how much is it worth roughly? Jason

  6. melina   •  

    hi jason,

    I have a question regarding inheritance of a real estate .

    I am an australian citizen, are there taxes or charges the chinese government will charge if I inherit real estate or money once my mother passes? She lives in china and is a chinese citizen.

    thankyou for your time.

    Melina

    • Jason Tian   •     Author

      for inheritance of real estate or money itself, there is no basically no taxes imposed on you. You will pay some normal taxes when your sell the inherited property in the future. China does not have estate tax so far.

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