When Pan Sutong, the billionaire chairman of Hong Kong investment conglomerate Goldin Group, splashed out a reported HK$2.5 billion (US$318 million) for a home in the exclusive enclave of Deep Water Bay last year, he saved himself a cool HK$370 million in tax.
How did he do it? The three-storey mansion with swimming pool was held via a shell company, meaning the purchase incurred only 0.2 per cent in stamp duty.
Assuming Pan, a permanent Hong Kong resident, already owns property there, he would have paid a 15 per cent levy in a regular transaction.
In Hong Kong, that is a perfectly legal route wealthy people are increasingly using.
When a property is held by a company, its sale is considered a share transfer and taxed at 0.2 per cent – the same levy that applies to everyday stock trades.
As the government raised property stamp duties in a so far fruitless effort to tame runaway prices, the loophole has become more popular at the top end of the market, particularly for deep-pocketed mainland Chinese buyers.
The trend is somewhat jarring in a city plagued by a yawning rich-poor divide – one increasingly defined by who can and who cannot afford a home.
According to Hong Kong’s Companies Registry, the company holding the Deep Water Bay property had a change in directors in August last year.
Pan, who according to Bloomberg calculations is worth about US$2 billion, and an offshore firm were listed as the only directors in the entity.
The purchase price was reported in September by several local newspapers, which cited anonymous sources.
A spokesman for Goldin Financial Holding said Pan was not immediately available for comment.
The proportion of property transactions made via company share transfers on The Peak, the area of high-value residential land, and the south side of Hong Kong Island – where prices can easily run into the hundreds of millions of dollars – has jumped to 27 per cent this year from 13 per cent in 2013, according to the estate agency Midland Realty.
That was the year after the government introduced the Buyer’s Stamp Duty levied on companies and non-Hong Kong permanent residents buying properties.
About HK$14.5 billion of luxury homes sold in the two districts have involved the method since the beginning of 2017, Midland Realty’s data shows.
“Many buyers say they will only look at properties through special purpose vehicles,” said Koh Keng-shing, the CEO of Landscope Realty, a member of Christie’s International Real Estate.
Non-permanent residents can save even more through this route because they pay 30 per cent stamp duty.
Also, if the shell company is registered offshore, then the stamp duty can be as little as zero.
While the method helps rich buyers avoid multimillion-dollar tax bills, it deprives Hong Kong of revenue.
Research by land concern group Liber Research Community found that between November 2010 and May this year, the government lost out on at least HK$9.4 billion of taxes because of the method.
“The stamp duties are made ineffective because there’s a back door to avoid paying these,” Liber Research Community’s researcher Henry Chan said.
The land concern group has urged the government to make it mandatory for companies owning residential properties to declare changes in fine beneficial ownership.
It is also a back door that is pretty much reserved exclusively for the ultra-rich.
That is because buyers using a shell-company structure generally are not permitted to take out a mortgage to finance the purchase.
In a city where housing survey data company Demographia estimates that it takes 19.4 years of income for the average person to buy a home, that is a non-starter for regular earners.
People cannot just set up a new company for the purposes of evading tax, however.
A few years ago, Hong Kong’s government cracked down on the creation of new shell companies to buy property, which are taxed at 15 per cent now.
Still, the pre-existing shell companies pay only 0.2 per cent.
For those who can afford it, it might seem the perfect way to save a lot of money, but there are some risks.
Purchasers may not be aware of liens, or debts owed on a property that must first be discharged before a sale can take place, or other hidden liabilities that can come with shell companies.
“While special-purpose vehicles can lower stamp duty tax obligations, the due diligence process can be quite time consuming,” Denis Ma, JLL’s head of research for Hong Kong, said.
“That can add to the overall transaction costs.”