Tax and Related Aspects of the Recent Chinese Government Measures to Regulate Foreign Investment in the Real Estate Sect

1. Tax and Related Aspects of the Recent Chinese Government Measures to Regulate Foreign Investment in the Real Estate Sector By Edward Shum Partner PricewaterhouseCoopers Beijing August 2006

2. Tax and Related Aspects of the Recent Chinese Government Measures to Regulate Foreign Investment in the Real Estate Sector • Overview of Foreign Investment in the PRC Real Estate Sector • Overview of the Recent Measures • Tax Aspects Discussions • Future Prospect of Investing in PRC Real Estate

3. Overview of Foreign Investment in the PRC Real Estate Sector • GDP grew 10.9% in the 1st half of 2006 • Real estate investment rose 24.2% in the 1st half of 2006 • Foreign investment in real estate sector rose 27.9% in the 1st half of 2006 • Rise of property price in major cities in China for the first half of 2006 • Beijing: 14.8% • Shanghai: - 5.2% • Guangzhou: 17.6% • Shenzhen: 23.5%

4. Overview of Foreign Investment in the PRC Real Estate Sector Change in the average purchase price of residential real estate in the 1st half of 2006 compared with the same period in 2005 Unit: RMB/ M2 PRC real estate sector was considered by Central Government as dangerously overheated

5. Restriction on Foreign Investment in the PRC Real Estate Sector Recent cooling down measures promulgated by the Central Government in 2006:

6. Restriction on Foreign Investment in the PRC Real Estate Sector Summary of Central Government policy directives aiming at cooling the heated real estate market:- • Requiring new housing projects to allocate at least 70% of the units which is smaller than 90m2 for low and middle income housing; • Applying business tax (5.5% of the gross sales proceed) on second hand home sales to five instead of two years from the time of purchase; • Prohibiting commercial banks to lend money to developers with less than a 35% deposit of the project capital; • Abolishing developers‘ land-use rights if they fail to begin construction within two years of the scheduled date; and, • Raising the minimum mortgage down payment for apartments larger than 90 m2from 20 to 30% of the mortgage.

7. Restriction on Foreign Investment in the PRC Real Estate Sector Summary of policy measures contained in Circular 171 imposing specific restrictions on foreign investment in real estate sector in China. The highlights of the restrictions are:- • RequiringForeign Investors (“FI”) to establish and register Foreign Investment Enterprises (“FIEs”) to invest in property projects in China; • Minimum registered capital should amount to at least 50% of the total investment for real estate FIEs of total investment exceeding USD10 million; • Imposing restriction on property investment for branch and representative offices (“ROs”) of non-resident companies and foreign individuals. Non-resident companies without any presence in China are prohibited from purchasing real property in China. Only foreign individuals who are resident in China for over 1 year and either working and studying is allowed to purchase real property; • Concessionary treatment for residents of Hong Kong, Macao and Taiwan or overseas Chinese who have real needs may buy real property of a prescribed size for self-use.

8. Tax Aspects of the Recent Measures • Before the promulgation of the recent measures, enforcement of tax collection on real property speculation activities in China was relatively lax. This is now tightened across cities in China and effective 1 August 2006, all disposals of property by individuals would be subject to a strict tax clearance procedure. • IIT payable on gain arising from property transfer arecomputed as follows:- Taxable Income = Sales proceeds of property – Cost – Reasonable expenses IIT payable = Taxable Income x 20% • Sales proceeds= the transfer consideration. • Cost = consideration paid for purchase of property , including relevant taxes and expenses. • Reasonable expenses = furnishing and renovating expenses, mortgage loan interest paid in relation to the residential property, handing fee, notary fee, etc.

9. Tax Aspects of the Recent Measures Changes in investment holding strategy under the new measures: Before After PRC Rental income

10. Before Major PRC Tax Exposures Rental income – Offshore Special Purpose Vehicle (“SPV”) Business Tax (“BT”) = 5% on gross rental income Withholding Income Tax (“WIT”) = 10% on the net rental income less BT paid Major PRC tax costs = 5% (BT) + 9.5% (WIT) = 14.5% of gross rental income Notes: 1. Ignoring other miscellaneous PRC taxes exposures, e.g. urban real estate tax (“URET”), stamp tax, etc. 2. Assuming that foreign investor is not deemed to have a Permanent Establishment (“PE”) in China. After Major PRC Tax Exposures Rental income - FIE BT = 5% on gross rental income Foreign Enterprise Income Tax (“FEIT”) = 33% on net profit Net profit = rental income – BT paid FEIT Payable = 33% x (1-BT payment of 5%) = 31.3% Major Tax costs = 5% (BT) + 31.3% (FEIT) = 36.3% of gross rental income Note: Ignoring depreciation and assuming no significant operating expenses Tax Aspects of the Recent Measures 14.5% vs36.3%

11. Before Major PRC Tax Exposures 2. Disposal of Property - SPV BT = 5% on gain on transfer of property WIT = 10% on the disposal gain on transfer of property Land Appreciation Tax (“LAT”) = 30% ~ 60% of land appreciation value After Major PRC Tax Exposures 2. Disposal of Property - FIE BT = 5% on gain on transfer of property FEIT = 33% on net profit of FIE Net profit = gross sales proceed – original costs of property – other expenses of FIE LAT = 30% ~ 60% of land appreciation value Tax Aspects of the Recent Measures

12. Future Prospect of Investing in PRC Real Estate Sector

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