GST may boost offshore deals
Tax and property experts believe more investors will do business through overseas firms to avoid paying proposed levy
The use of offshore companies by property investors to buy Hong Kong assets could surge should the proposed goods and services tax (GST) be introduced, according to tax experts and property consultants.
Such a move may help the buyer avoid paying stamp duty land tax and give the seller profits tax relief in accordance with Hong Kong's source-based tax system.
If the government introduces GST on commercial property transactions including retail shops and offices - an additional tax on top of stamp duty - it will encourage more people to use this channel to reduce investment costs, the experts say.
Even if the investment market is active, the government may not see a sharp increase in tax income from property transactions, they predict.
A property agent illustrated how offshore transactions were carried out. 'An investor, particularly a foreign investment fund, sets up a British Virgin Island offshore company to buy another offshore firm that owns the Hong Kong property the buyer wants to acquire,' he said.
'We arrange for both parties to sign the sale and purchase agreement for the shares outside Hong Kong, such as in Macau.'
Agents said in the past few years, many investors, particularly investment funds, had bought properties and transferred company shares through offshore firms to avoid paying tax. Such transactions would increase if a goods and services tax were imposed, they said.
The government is consulting the public on the imposition of such a tax. Under the proposal, commercial property transactions including retail shops and offices would be subject to the tax which is likely to be set at 5 per cent.
The tax would not be imposed on residential property transactions. But commissions earned by property agents from either commercial or residential properties would be subject to 5 per cent tax.
A maximum 3.75 per cent duty is payable on transfers of ownership of land and buildings in Hong Kong and on agreements for sale.
'If an offshore firm bought a property by way of a transfer of owner's shares, the buyer would only have to pay 0.2 per cent stamp duty,' said Paul Chan Mo-po, president of the Hong Kong Institute of Certified Public Accountants.
Compared with the stamp duty of 3.75 per cent for property transactions, buyers could save money in share transfer transactions.
PricewaterhouseCoopers tax partner Tim Lui Tim-leung said: 'If the British Virgin Islands firm is not managed or controlled in Hong Kong and its mother company is not registered here, it can argue that the transaction of shares [does not involve] a Hong Kong asset and can ask for exemption from profit tax.
'That's why many investors buy large-scale properties through offshore transactions.'
Mr Lui said offshore firms were likely to be exempt from goods and services tax, so more investors would consider buying properties through them if the government imposed the tax. 'However, I don't think the government would lose income from stamp duty,' he said.
He said most investors would not buy properties through offshore firms and offshore transactions because doing so 'might not justify the cost of setting up offshore companies'.
Accountant Simon Cheung Chun-kwok said: 'The buyer has to pay the licence fee and fees of the corresponding accountant and lawyer for an offshore transaction. As the company share transaction is more complicated than a property transaction, the buyer will take two or three months to investigate the offshore firm's debt before signing the sale and purchase agreement.
'Generally, a property transaction takes just one to two weeks. The buyer bears the investment risk but the costs will be justified for large property transactions.'
Knight Frank Petty executive director Alex Ng Siu-lam said: 'Some buyers prefer offshore transactions to avoid taxation and disclosure of their identities or shareholders. Offshore transactions also help buyers planning short-term investment to avoid profit tax.'