How to beat the new property tax?
The higher-ups set out policy and the rest of the population then proceed to circumvent the new policy. That’s exactly what’s happening in Hong Kong right now.
Remember the saying? “Man proposes - God disposes.” China has a variation on that. Basically it says that higher-ups set out policy and the rest of the population then proceed to circumvent the new policy. That’s exactly what’s happening in Hong Kong right now.
With the introduction of the additional 15 per cent stamp duty for non-Hong Kong permanent residents (PRs) and corporate buyers – described as a rare “anti-foreigner tax” in Hong Kong by some international media – many non-local home buyers are working with property agents and lawyers to find out how to legally avoid the new tax.
In the past 48 hours, the property market has generated counter-measures, including the following options, which property professionals say may or may not work – and should not be treated as a ‘one-size-fits-all’ solution.
Option one: Don’t buy the property – acquire the company instead
Some agents have noted property developers and potential buyers are chewing over this option, and local media reported that at least one transaction has successfully gone through.
For example, if you want to buy two or three luxury properties, which may be worth more than HK$100 million in total, and you don’t want to pay HK$15 million for the new buyer’s stamp duty, you may want to see if you can work with the developer to purchase a company that owns the properties you want to buy rather than to buy the properties directly.
Hong Kong Economic Journal reported on Wednesday that one deal had been made for some properties in Marinella, the well-known new luxury property project in Aberdeen, on the southern part of Hong Kong Island.
Agents say such a counter-measure is mostly aimed for those “big clients” whose transactions can easily add up to tens of millions – or even hundreds of millions – of Hong Kong dollars. For “small clients” who just want to buy a normal flat in which to live and plan to seek a mortgage because they don’t have the cash, this method isn’t really the most practical option.
This option also depends on when and how the company that controls the properties is set up. The government has said it will closely monitor so-called “empty shell” companies, which some property investors may want to use to legally avoid tax.
Option two: Appoint a PR to be a non-PR’s representative
The new buyer’s stamp duty is for non-permanent residents (non-PRs) in Hong Kong not PRs, so it’s simple enough for a non-PR to ask PRs to buy properties on their behalf. This is not unique in Hong Kong. It’s also a well-known ploy for foreign investors to buy properties in Singapore where a similar stamp duty is in force for non-PRs.
The key point of this option is to make sure your PR representative can legally represent you without attracting official attention or sparking a messy wrangle with tax authorities.
Some say that the PR representative can buy a property first, after which you (a non-PR in this case) sign an agreement separately with the PR buyer to claim that you are the real owner of the property. Of course, the details of this separate agreement between the non-PR and the PR are very important. Some say the agreement could hinge on the PR owing the non-PR money, allowing the non-PR to become a creditor of the PR who owns the property.
Again, this option also involves legal risk. Lawyers say that if someday the PR and non-PR fall out and end up in court, it could get messy. After all, this business revolves around money and greed is just human nature.
Option three: Get married!
This is probably the most hilarious option I have so far heard of. The old saying ‘marry in haste – repent at leisure’ still applies. According to lawyers, if a property is bought in the joint names of a PR and a non-PR and the non-PR is a close relative of the PR, then the new buyer’s stamp duty can be simply and legally avoided.
And how do you define “close relative”? It could be husband and wife, parents, children, brothers or sisters. That is to say that if a non-PR is married to a PR, then you save the cost of your property purchase. Some agents say they’re already hearing of people discuss avoiding the tax through “fake marriages”. Be warned: if the marriage is fake, then the person involved is crossing the law and may be setting himself or herself for significant legal problems.
In fact, property laws often influence marriage decisions. In China, there are lots of stories about husbands and wives deciding to divorce because they want to buy more properties.
In many cities such as Shanghai and Beijing where local governments restrict households from applying for mortgages to buy a second or third home, some households opt for a “fake divorce”. What do I mean by “fake”? The couple still consider themselves married – they just sought a divorce to enable them to buy more properties in their own names, neatly sidestepping the restrictions.
Some years later, perhaps when the restrictions on household property purchases are lifted, they can get married again. And this time it will be a case of “two hearts that beat as one” with two or maybe three properties legally acquired.
So, what have you heard about the new measures?
George Chen is the financial services editor at the South China Morning Post. The opinions expressed in the column Mr. Shangkong are all his own. Follow him on twitter.com/george_chen or weibo.com/georgeschen
Disclaimer: The author is a property owner in Hong Kong and Shanghai. The author doesn’t own stocks of any listed property companies.