Utilizing Tax Incentives across the Senior Care Industry Michael Qu

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

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

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

For example in Shanghai Types of tax Tax revenue shared by government bodies at different levels Central Government Local Government Retained at Municipal level Retained at District level Final retained rate at District level Corporate Income Tax 60% 40% 50% 20.00% Value Added tax 75%25%35%65%16.25% Business Tax 0%100%35%65%65.00% Individual Income Tax 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 Investors Project Co. Land &Properties Project Development &Operation Senior Residential Houses For Sale: Table 1Table 1 For Lease: Table 2 Table 2 Senior Care Institutions Rehab Center/ Hospital Table 3 Home Healthcare Agency Table 4

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 typeTax payerRateTax basis Business taxSeller 5%+local levis Sales price Corporate income tax Seller25%Profit Land appreciation tax Seller30%~60%Appreciation value Stamp duty Seller and Purchaser Each 0.05% Sales price Deed taxPurchaser3%-5%Sales price Table 1

Taxes regarding property leasing Tax typeTax payerRateTax basis Business TaxLessor 5%+local levies Rental Corporate income tax Lessor25%Profit Real estate taxLessor12%Rental basis Tax=Rental*12% Land use taxLessor RMB 0.6~30 Per square meter per year Stamp duty Lessor and lessee 0.1%Rental Table 2

Taxes at the operation stage (Operation Co.) Tax typeRateTax basis Business tax5%+local levis exempted 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 tax1.2% 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 typeRateTax basis Business tax 5%+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

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

b. Preferential policies for nonprofit senior care facilities 1. Exempt from MOST of the taxes 2. Preferential policies on land price 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 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 fees

d. Pros and Cons of for-profit senior care facilities ProsCons Corporate structure and governanceFewer preferential tax policies could be enjoyed More freedom on setting up the priceFewer 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

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?

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 State Treasury Central: 60 Yuan Central: 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

（ 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)

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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