Utilizing Tax Incentives across the Senior Care Industry

Michael Qu

23/4/18

Firstly, build up the connection

GovernmentInvestors/Operators

Demographic changes forges a historical social burden for

nursing beds Construction subsidies

Urbanization and government wants to sell more land

Tax revenue from private and foreign investment

Preferential land price

Tax preferential treatment

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A. Overview of the China’s tax system

B. Tax exposure at different stages of project development

C. Tax differences between for-profit and nonprofit

D. Planning favorable taxes for a for-profit business

A. Overview of China’s Tax System a. Introduction of main types of tax

— Business Tax (BT): levied based on the business revenues from providing services, transfer of intangible assets or the sale of immovable properties within the territory of the PRC. — Value Added Tax (VAT): levied upon sales of good, provision of labor services or importing of goods. — Corporate Income Tax (CIT): levied based on the income earned by enterprises and organizations located within PRC. — Real Property Tax: target to real property and is collected from the owner of houses.

— Land Use Tax: paid by the entity or individual that uses land in an urban or township area. — Land Appreciation Tax: calculated according to the earning of a transaction of land use right or real property. — Deed Tax: levied upon the transfer of the ownership of immovable property.

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b. Tax sharing mechanism: --state tax: retained by the central government (e.g. tariff)

--local tax: retained by the local government (e.g. business tax)

--shared tax: distributed among the central and every level of local government with the proportion as defined by different types of tax.

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For example in Shanghai

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Types of tax

Tax revenue shared by government bodies at different levels

Central Government

LocalGovernment

Retained at Municipal level

Retained at District level

Final retained rate at District level

Corporate Income Tax

60% 40%

50% 50% 20.00%

Value Added tax

75% 25% 35% 65% 16.25%

BusinessTax

0% 100% 35% 65% 65.00%

IndividualIncomeTax

60% 40% 45% 55% 22.00%

B. Tax exposure at different stages of Senior Living Project* Take the development a CCRC-type project for example

Land Acquisition

Land Acquisition

InvestorsProject Co.Land &Properties

Project Development &Operation

Senior Residential

Houses

For Sale: Table 1

For Lease: Table 2

Senior Care Institutions

Rehab Center/ Hospital

Table 3

Home Healthcare

Agency Table 4

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Notice: Every type of products/services model might need to form different legal entities, therefore subject to different tax exposure

Taxes regarding sales of strata title (Project Co.)

Tax type Tax payer Rate Tax basis

Business tax Seller5%+local levis

Sales price

Corporate income tax

Seller 25% Profit

Land appreciation

taxSeller

30%~60%

Appreciation value

Stamp dutySeller and Purchaser

Each 0.05%

Sales price

Deed tax Purchaser 3%-5% Sales price

Table 1

Taxes regarding property leasing

Tax type Tax payer Rate Tax basis

Business Tax Lessor5%+local levies

Rental

Corporate income tax

Lessor 25% Profit

Real estate tax Lessor 12% Rental basisTax=Rental*12%

Land use tax LessorRMB 0.6~30

Per square meter per year

Stamp dutyLessor and lessee

0.1% Rental

Table 2

Taxes at the operation stage (Operation Co.)

Tax type Rate Tax basis

Business tax 5%+local levisexempted for care service charge in senior care facilities, or medical care in hospitals; others not

Value-Added Tax13% or 17% for general taxpayer

Sales price of medical devices/equipment or drug

Real estate tax 1.2%Cost basis (different from Rental basis)Tax=original property value*（ 1-10%~30%） *1.2%

Corporate income tax (for-profit

business)

25% Profit

Withholding income tax

10% or subject to Tax Treaties

Dividend to shareholders

VAT + withholding tax 6% + 10%

Royalties and management fees paid to overseas licensor

Table 3

Taxes for home care agency

Tax type Rate Tax basis

Business tax5%+local levis

Service price

Corporate income tax

25% Profit

Value-Added Tax

13% or 17% for general taxpayer

Sales price of medical devices/equipment

Table 4

C. Tax benefits differ between for-profit and nonprofit

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a. Definition of “nonprofit institution” in China

Founding member of nonprofit institution do not have equity ownership,

meaning:

-- founder only owns its investment capital or assets;

-- profit cannot be enjoyed by founder (expect certain award, subject to

local policy);

--transfer of the institution is subject to certain limitation and approval;

-- upon liquidation, profit and assets appreciation shall be donated for the

development of social welfare business;

-- uneasy to acquire capital under the nonprofit structure;

-- pricing and financial auditing could face more supervisory.

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b. Preferential policies for nonprofit senior care facilities

1. Exempt from MOST of the taxes

2. Preferential policies on land price

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Corporate Income Tax, Land Use Tax, Real Property Tax, Tax for Purchasing Vehicles,etc.

1. Can obtain land use right through allocation (no land premium); 2. Grant of state-owned land use right can be at a lower price ；3. No charge for repurposing of existing property;4. No charge for new construction of senior care facility in residential community

3. Other subsidies and rewards

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1 Exempt from urban infrastructure construction fees

2 Construction subsidies per bed

3 Monthly operation subsidies per resident 4 Subsidies to caregiver training

5 Awards to facilities with certified grades, etc.

c Preferential policies for profitable senior care facilities

Only Business Tax is explicitly exempted

Tax rewards according to tax revenue retained by district government

Get portion of the one-time construction fund subsidies (versus nonprofit

facilities)

Get whole or portion of the operation subsidy per bed (versus nonprofit

facilities)

Enjoy half exemption of urban infrastructure construction fees23/4/18

d. Pros and Cons of for-profit senior care facilities

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Pros Cons

Corporate structure and governance Fewer preferential tax policies could be enjoyed

More freedom on setting up the price

Fewer government subsidies are granted

Options for financing through the ways such as property mortgage, equity transfer, capital market, etc.

More investment in land acquisition

D Planning the biggest tax benefits for a for-profit business

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a. Utilize the preferential policies for nonprofit business

Is nonprofit senior care facility possible for foreign investors?

How to enjoy the profit?

— Outsource services

— Operational management agreement

— Utilize local policies. E.g. Awards to investors

Exit ways

— Restructure? Sell? Liquidation?

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Take the Corporate income tax of Shanghai’s enterprise as an example[ Assume taxpayer “A” should pay 100RMB for enterprise income tax]

Take the Corporate income tax of Shanghai’s enterprise as an example[ Assume taxpayer “A” should pay 100RMB for enterprise income tax]

Paid-in Corporate income tax: 100

Yuan

Paid-in Corporate income tax: 100

Yuan

State Treasury

Central:60 YuanCentral:60 Yuan

Local:40

Yuan

The Central Finance

Shared at Shanghai Municipal level

District:20 Yuan District:20 Yuan

The Municipal Finance

b. Tax planning at the beginning— tax refund/subsidies is legal

Shared at District level District:

5 Yuan District:5 Yuan

Subdistrict:

15 Yuan

Subdistrict:

15 Yuan

The District Finance

Shared at Subdistrict level

Subdistrict:15-x Yuan

Subdistrict:15-x Yuan

Corporate:

X Yuan

Corporate:

X Yuan

The Subdistrict Finance

Refund to Taxpayer (usually)

Small Enterprises

:6 Yuan

Small Enterprises

:6 Yuan

Large Enterprises:

10 Yuan

Large Enterprises:

10 Yuan

c. Special benefits for MNC’s Regional Headquarter

（ 1 ） Types of Headquarter: investment headquarter (over 30 million USD registered capital); management headquarter (over 2 million USD registered capital). Certain requirement to meet: assets scale from home country and total investment volume in China, varied in different cities

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（ 2 ） Benefits for headquarter

1. Subsidies on setting up new headquarter

2. Subsidies on office rent

3. Special rewards according to the headquarter revenue

4. More tax refund (to be negotiated)

5.Individual income tax benefit for senior management staff(s)

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What else the industry expects?

Lower tax for asset transfer

More tax benefit enjoyed by for-profit business

Introduction of REITs

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Thank you!

Contact Michael Qu

quqin@lawviewer.com

23/4/18