How to save money: buying Hong Kong property through company shares offers profitable avenue for buyers and sellers
Using a company’s equity to buy a property may result in big savings
Davy Yun, tax partner, Deloitte China, leads the Hong Kong National Tax Technical Centre of Deloitte and has experience in tax accounting gained from working in Hong Kong and Singapore. Here, he advises on using company shares to buy real estate .
What are the benefits of buying or selling real estate through the transfer of shares of a limited company? What are the potential drawbacks?
The main benefit is on stamp duty savings. The stamp duty now for buying or selling shares in a Hong Kong company is 0.2 per cent of the higher of consideration and fair value of the shares being transferred, split 50/50 between the buyer and seller. If the company that holds the property is a non-Hong Kong company, such as an offshore company, stamp duty could even be zero. By comparison, buying the property directly could lead to extra taxes, such as the buyer’s stamp duty (BSD) and/or double stamp duty (DSD), if the buyer is a foreigner and/or a second home buyer. Very often, the stamp duty saved by transferring the shares of the property holding company from the subject property directly is shared between the buyer and the seller. The potential drawback mainly concerns the buyer. Firstly, the buyer must ensure that the company does not have any hidden claims of liabilities [tax or otherwise]. A thorough due diligence should be done prior to the transaction. Secondly, the buyer would have inherited the low tax base of the property. Let’s say the historical cost of the property to the company was HK$10 million. Since then, the fair value of the property has gone up to HK$18 million, which is the share price that the buyer now pays for the shares of the company. If in the future the value of the property goes up to, say, HK$22 million, and the company sells the property for HK$22 million, the company will make a gain of HK$12 million, which will be subject to profits tax if the Inland Revenue Department considers that as a trading gain. However, the profit that the company buyer actually has realised is HK$4 million (HK$22 million minus HK$18 million).
Given the BSD, does it make commercial sense to set up a company to buy a property?
No. Using a company to buy a property does not escape the BSD, which applies to foreign buyers and company buyers. A company is not regarded as a Hong Kong permanent resident, even if it is wholly owned by Hong Kong permanent resident individuals.
What are the procedures? What are the upfront and continuing costs, and other tax considerations?
The procedures for setting up a company are not complicated. People can acquire shares of a shelf company set up by accounting or company secretarial firms. A Hong Kong shelf company should cost from around HK$10,000 to HK$25,000. The annual costs, which include audited financial statements, for a company that holds one property should be around HK$10,000 to H$40,000. The costs differ for different service providers. For tax considerations, if the company derives rental income from holding the property, the net profit, after deducting expenses including interest expense and capital allowance of the property, would be subject to profits tax at 16.5 per cent, whereas if the rental property is directly held by the individual, it would be subject to property tax at an effective rate of 12 per cent based on gross rental income. If the property is acquired and to be held for the long term, it is advisable to document this long-term intention, so as to help argue in a future disposal that the gain is a non-taxable capital gain. The engagement of a tax adviser in this regard may help.
W hat other vehicles can I use to hold real estate assets, especially if I am thinking about passing on my assets to family members?
A trust may also be an alternative holding vehicle, and the tax implications would be similar to holding the property by an individual. The issue of using a trust could be finding a “reliable” trustee. Passing on real estate and other financial assets to family members requires careful estate planning. The use of an appropriate holding vehicle is just part of the estate planning.