Under Circular 36, from May 1, 2016, general VAT payers can deduct input VAT on real estate and construction in progress from their output VAT in a two-year period. Announcement [2016]  No. 15 on Provisional Measures on Input  VAT Deduction  by Installments on Real Estate (“Announcement 15”) further clarifies the policy and practical issues.

Highlights of Announcement 15:

  1. General rules on input VAT deduction by installments
    1. General VAT payers can deduct input VAT on real estate purchased and accounted for after May 1, 2016, and on construction in progress after May 1, 2016, from their output VAT in the next two years: 60% in the first year and 40% in the second year.

This policy does not apply to self-developed real estate projects by real estate companies, finance leased real estate or temporary structures built on construction sites.

  1. For construction in progress, general VAT payers can deduct input VAT by installments on goods, design services and construction services obtained after May 1, 2016, from their output VAT when the goods and services are used to (i) build new real estate or (ii) refurbish, extend, renovate or decorate existing real estate, resulting in a 50% increase in its original value.

“Goods” in this context refer to materials and equipment that physically constitute real estate, including construction and decoration materials, water supply and drainage, heating, sanitation, ventilation, lighting, communication, gas, fire control, central air conditioning, elevator, electricity and intelligent building equipment and facilities.

  1. “60% in the first year and 40% in the second year” means 60% should be deducted in the same month input VAT invoices are obtained and 40% should be deducted in the 13th month from the month when input VAT invoices were obtained.

Where goods, design and construction services are purchased for other uses and, consequently, are fully deducted in the month of their purchase and are later diverted to construction in progress, the 40% of to-be-deducted input VAT should be subtracted from the current period’s creditable input VAT and deduction deferred to the 13th month.

  1. When taxpayers transfer real estate and construction in progress, any un-deducted input VAT can be fully deducted from output VAT of the month when the transfer takes place.
  1. Circular 36 provides that, when real estate suffers abnormal loss or, due to change, of purpose is solely used for projects calculated using the VAT simplified method, VAT exemption projects, employee welfare or personal consumption, a portion of its input VAT cannot be deducted from the taxpayer’s output VAT.

The non-deductible input VAT on real estate should be calculated using the following formula:

Non-deductible input VAT = (deducted input VAT + to-be-deducted input VAT) x real estate net value rate

Real estate net value rate = (real estate net value / original real estate value) x 100%

When the construction in progress suffers abnormal loss, all the input VAT on the goods, design and construction services purchased for the construction is not deductible.

  1. As mentioned above, when the real estate project do not allow input VAT to be deducted, but due to the change of purpose, the real estate is diverted to be used in input VAT deductible projects, taxpayers should use the following formula to calculate deductible input VAT on the real estate:

Deductible input VAT = total input VAT on the real estate x real estate net value rate

Under the deduction by installments rule, 60% should be deducted from the output VAT in the month following the change of purpose, and 40% should be deducted in the 13th month.

Date of issue: March 31, 2016. Date of effectiveness: May 1, 2015