When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain. This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.
Under Chinese law, all land in urban areas is inalienably owned by the State. However, in 1988 amendments to the Chinese constitution permit the State to grant the right to use land, for a limited time, to private persons. The term of such grants depends on the use of the land. Currently, land use rights are granted for 70 years for residential purposes, 50 years for industrial and mixed uses and 40 years for commercial use.
Within the term of the land use grant, the holder of the rights can use and develop the land within the term and for the purposes specified in the grant. However, the holder does not generally have the right to use or exploit underground resources in respect of the property; generally such rights remain with the State. Chinese law separately refer to “property ownership” or “building” rights, which are the rights to the structures built on the land.
Although land use and building rights are separate conceptually, they must be conveyed together and in some locations they are reflected on the same ownership certificate. The holder of the land use and building rights can sell, lease, mortgage or otherwise dispose of the property in accordance with law. The rights holder can also generally exclude other private persons from entering or using the property.
Property transactions must be registered with the appropriate authorities to be effective. The practice of granting land use rights to private persons in China is about 20 years old at this point, so there is some history and a track record with respect to private holding of land use rights. However, because the terms of the grants last for 40, 50, and 70 years, they have not yet started to expire and it is still too early to say with certainty what happens to land use rights upon expiration of the term of the grant.
With respect to residential property, the law says that the land use rights “automatically” renew. It does not state whether such “automatic” renewal will be free. For other types of land use rights, the holder of the rights must generally apply a year prior to their expiration for renewal and pay a fee, the law does not yet specify a fee amount.
FIEs are generally permitted to hold land use and building rights for use in their businesses. For example, a manufacturing FIE may generally acquire land on which to build a factory. However, foreign real estate investment for its own sake, in the form of new development or acquisitions for the purposes of leasing to other persons or future sales, is very highly regulated in the PRC.
Written for CSIC by Sophie Mao
China based lawyer at www.AsiaBridgeLaw.com