Whether the government expropriates buildings without property rights and gives compensation is taxable

Example: Company A built a house on the land of its parent company, and the house and the land in the name of the parent company were recently expropriated by the government. Is it taxable for the government to expropriate buildings without property rights in accordance with the law and give compensation to Company A's houses?

First of all, a property without title is not necessarily an illegal building. Article 24 of the Regulations on the Expropriation and Compensation of Houses on State-owned Land stipulates that the people's governments at the municipal and county levels and their relevant departments shall strengthen the supervision and management of construction activities in accordance with the law, and deal with those who carry out construction in violation of urban and rural planning in accordance with the law. Before the people's government at the municipal and county levels makes a decision on housing expropriation, it shall organize relevant departments to investigate, identify and deal with unregistered buildings within the scope of expropriation in accordance with the law. Compensation shall be given to those identified as legal buildings and temporary structures that have not exceeded the approved period; No compensation shall be given to those identified as illegal constructions and temporary constructions that exceed the approved period. Illegal construction refers to the construction of new buildings, expansions and reconstructions in the urban planning area without obtaining a construction project planning permit or in violation of the provisions of the construction project planning permit, or by fraudulent means to obtain approval. Illegal buildings mainly include: (1) buildings built without applying or obtaining approval, and without obtaining a planning permit for construction land and a planning permit for construction projects; (2) Buildings built without authorization by changing the provisions of the planning permit for construction projects; (3) Buildings built without authorization that have changed the nature of use; (4) Buildings that have not been demolished to become permanent buildings after the construction of temporary buildings beyond the validity period; (5) A building that was built by fraudulently obtaining a permit from the competent authority by forging relevant materials. Therefore, it can be seen that illegal construction mainly refers to houses that have been constructed without obtaining the corresponding permits. But unlicensed construction is not the same as illegal construction. In addition, the identification of illegal buildings is mainly based on the Town and Country Planning Law, which came into effect on January 1, 2008, and in accordance with the principle of "the law does not apply retroactively", for buildings built before 2008, the current law cannot be used to regulate the previous behavior, so houses built before 2008 cannot be identified as illegal buildings regardless of the circumstances.

Secondly, the compensation income of houses without property rights that are levied by the government in accordance with the law involves value-added tax, land value-added tax, and enterprise income tax, and whether or not to collect them should be differentiated:

1. Value-added tax. Notice of the Ministry of Finance and the State Administration of Taxation on Comprehensively Promoting the Pilot Program of Replacing Business Tax with Value-Added Tax (CS [2016] No. 36): "Notes on Sales of Services, Intangible Assets and Immovable Property" "The sale of immovable property refers to the business activities of transferring the ownership of immovable property. Immovable property refers to property that cannot be moved or that will cause a change in nature or shape after being moved, including buildings and structures. Buildings, including residential, commercial premises, office buildings, and other buildings that can be used to live, work, or carry out other activities. Structures, including roads, bridges, tunnels, dams, and other structures. Where the limited property rights or permanent use rights of buildings are transferred, the ownership of buildings or structures under construction is transferred, and the use rights of the land occupied by the buildings or structures are transferred at the same time as the transfer of the buildings or structures, VAT shall be paid according to the sale of immovable property. Therefore, building compensation falls within the taxable scope of VAT on "sale of immovable property".

The announcement of the Ministry of Finance and the State Administration of Taxation on clarifying the value-added tax policy on the free transfer of stocks and other value-added tax (Announcement No. 40 of 2020 of the Ministry of Finance and the State Administration of Taxation) stipulates that the act of the landowner expropriating the land in accordance with the law and paying the compensation fee for the land and its related tangible movable and immovable property to the land user belongs to the situation where the land user returns the land use right to the landowner as stipulated in Article 1 (37) of the Provisions on the Transitional Policy of the Pilot Program of Replacing Business Tax with Value-Added Tax (Cai Shui [2016] No. 36). Therefore, the compensation for the land given to the parent company for the resumption of the land use right, as well as the compensation paid to Company A for the relevant tangible movable and immovable properties on the land, are exempt from VAT.

Note: When taxpayers enjoy the VAT exemption policy, they need to issue an official document of the resumption of land use rights by the local people's government at or above the county level, including the document on the resumption of land use rights issued by the local people's government at or above the county level (inclusive) and the document on the resumption of land use rights issued by the land management department after the consent of the local people's government at or above the county level. Therefore, although Company A does not own the land, it also needs to provide relevant documents that the land of its parent company has been recovered by the government in accordance with the law.

2. Land Appreciation Tax. Article 2 of the Provisional Regulations on Land Appreciation Tax stipulates that entities and individuals who transfer the use rights of state-owned land, buildings on the ground and their attachments (hereinafter referred to as the transfer of real estate) and obtain income are taxpayers of Land Appreciation Tax (hereinafter referred to as taxpayers) and shall pay Land Appreciation Tax in accordance with these Regulations. Article 4 of the Provisional Regulations on Land Appreciation Tax stipulates that the above-ground buildings mentioned in Article 2 of the Regulations refer to all buildings built on land, including all kinds of ancillary facilities above and below ground. The term "attachment" as used in Article 2 of the Regulations refers to articles attached to the land that cannot be moved and are damaged once moved. According to the above provisions, if Company A simply transfers the building, it is also required to calculate and pay LAT calculation.

Article 8 of the Provisional Regulations on Land Appreciation Tax stipulates that any of the following circumstances shall be exempted from Land Appreciation Tax: (2) Real estate that needs to be requisitioned or recovered in accordance with law due to national construction. The term "real estate requisitioned or recovered in accordance with the law due to the needs of national construction" refers to the real estate that has been approved by the government for expropriation or the resumption of land use rights due to the needs of urban implementation planning and national construction. According to the Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning Land Appreciation Tax (CS [2006] No. 21), it is further clarified that relocation due to "urban implementation planning" refers to the relocation determined by the government or relevant government departments in accordance with the approved urban planning due to the renovation of the old city or due to pollution and disturbance of the people by enterprises (referring to the production of excessive waste gas, waste water, waste residue and noise, which causes certain harm to the lives of urban residents); Relocation due to "the needs of national construction" refers to the relocation due to the implementation of construction projects approved by the State Council, provincial-level people's governments, and relevant ministries and commissions of the State Council.

3. Enterprise income tax. <企业政策性搬迁所得税管理办法>Article 3 of the Announcement of the State Administration of Taxation on Issuance (Announcement No. 40 of 2012 of the State Administration of Taxation) stipulates that the policy-based relocation of an enterprise refers to the overall or partial relocation of an enterprise under the leadership of the government due to the needs of social and public interests. If an enterprise provides relevant documents to prove its premises due to one of the following needs, it is a policy relocation: (1) the needs of national defense and foreign affairs; (2) The needs of energy, transportation, water conservancy and other infrastructure organized and implemented by government organizations; (3) The needs of public undertakings such as science and technology, education, culture, health, sports, environmental and resource protection, disaster prevention and mitigation, protection of cultural relics, social welfare, and municipal public utilities organized and implemented by the government; (4) The need for the construction of affordable housing projects organized and implemented by the government; (E) by the government in accordance with the relevant provisions of the People's Republic of China urban and rural planning law to organize the implementation of dilapidated housing concentration, infrastructure and other areas of the need for the reconstruction of old urban areas; (6) Other public interest needs as provided for by laws and administrative regulations. Article 5 stipulates that the relocation income of an enterprise includes the relocation compensation income obtained from outside the enterprise (including the government or other units) in the process of relocation, as well as the income from the disposal of the relocation assets of the enterprise. Article 8 stipulates that the relocation expenses of an enterprise include the expenses for relocation and the expenses for the disposal of enterprise assets incurred as a result of the relocation. Article 15 stipulates that the relocation income and relocation expenses incurred by the enterprise during the relocation period may not be included in the taxable income of the current period for the time being, and the relocation income and expenditure shall be consolidated and liquidated in the year in which the relocation is completed.

According to the above provisions, the balance of the policy-based relocation income after deducting the relocation expenses in accordance with the above provisions shall be the income of the relocation of the enterprise. If an enterprise conducts relocation accounting and submits relocation-related materials in accordance with the regulations, the relocation income obtained by it shall not be included in the taxable income of the current period for the time being, and shall be liquidated in the year in which the relocation is completed in accordance with the regulations, and shall be included in the taxable income of the enterprise in the current year for calculation and taxation. It should be noted that the expenses incurred by the enterprise for the purchase of assets shall not be deducted from the relocation income. If it does not comply with the relevant provisions of policy-based relocation, it shall be included in the taxable income in the year in which the compensation is received.

When the land use right is recovered by the government, the compensation for the land acquired and the attachments on the ground is exempt from VAT for whatever reason. However, LAT can only be exempted if certain conditions are met. In terms of enterprise income tax, if the compensation is obtained from the policy relocation, the compensation income is only suspended during the compensation period, and the relocation income needs to be declared and paid according to law after the relocation is completed.

Author: Ji Hongkui Source: Zhonghui Wuhan Tax Agent Office Shiyan Office