Hong Kong property

Stamp duty loophole cost Hong Kong purse HK$9.4 billion in 8 years, study finds

Local property developers, mainland Chinese and firms registered in Bermuda or the British Virgin Islands are taking advantage of the system, Liber Research Community says

PUBLISHED : Tuesday, 10 July, 2018, 6:16pm
UPDATED : Wednesday, 11 July, 2018, 10:52am

A loophole in Hong Kong’s stamp duty system has cost the public purse at least HK$9.4 billion (US$1.2 billion) in the past eight years by allowing buyers to acquire properties almost tax-free via the purchase of companies, a study published on Tuesday has found.

Research by land concern group Liber Research Community identified at least 126 cases between November 2010 and May this year in which buyers were suspected of acquiring property-owning firms to avoid the levy.

The findings have reignited public discussion about the long-standing tax loophole, which critics say encourages market speculators.

About 60 per cent of the cases unearthed by Liber involved non-local buyers, mostly mainland Chinese. Other overseas buyers included companies registered in Bermuda or the British Virgin Islands, as well as new migrants to the city who had not been resident for the requisite seven years to secure permanent residency.

But some cases involved prominent local property developers, as well as managers of well-known companies on the mainland, popular entertainers and even members of the Chinese People’s Political Consultative Conference, the nation’s top political advisory body.

Hong Kong law requires local buyers who already own a property to pay 15 per cent stamp duty when buying a second one. Non-local or corporate buyers need to pay another 15 per cent on top. In addition, if a property owner sells a flat within three years of purchase, he or she must pay an extra stamp duty of up to 20 per cent, depending on how long they held the property.

Loophole lets home sellers evade stamp duty

However, acquiring a flat by buying the company that already holds it only incurs a share transfer tax of 0.2 per cent.

“The government says it wants to solve Hong Kong’s housing crisis by finding more land to build more flats. But at the same time, our housing resources are drained from this loophole for speculators,” Liber member Henry Chan Hin-yan said.

“We are also very worried this loophole will make Hong Kong an international tax avoidance haven and a hotspot for rich mainland Chinese to stash their money.”

The city has been consistently ranked the world’s least affordable property market in surveys.

The Liber researchers used news reports to first identify the cases in which buyers were suspected of escaping tax. They then looked up the addresses of those properties and found the holding companies using the city’s official Land Registry. If a firm’s directors or shareholders changed in Hong Kong’s Companies Registry at the time of the property sale, the researchers concluded the transaction had avoided stamp duty.

The Companies Registry also provides information on the identity cards and addresses of shareholders and directors, enabling the researchers to determine who was local.

But the registry does not show company ownership transfer costs, so information on the money involved in the transactions was compiled based on news reports and cross-checked with property agencies.

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Liber member Brian Wong Shiu-hung said the study was likely to have underestimated the scale of the problem because news reports tended to only focus on properties fetching high prices in the luxury market.

“It’s highly likely our findings are just the tip of the iceberg,” Wong said.

The properties in question were mostly in Yau Tsim Mong, Southern and Wan Chai, but were found in 13 of Hong Kong’s 18 districts.

In one case, two neighbouring properties near Happy Valley held by two firms registered in the British Virgin Islands were sold in 2016 through a company ownership transfer, and sold on again in the same manner less than a year later for a reported HK$1.2 billion. The deal implied a potential stamp duty payment of HK$540 million.

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A spokesman for Hong Kong’s Inland Revenue Department said the government had been reviewing cases in which owners were suspected of transferring companies where properties were the main assets. Those involved would be liable to profits tax if the details were confirmed, he said.

But the Liber study cited official figures showing the government recorded 2,300 such suspected cases in the 2016-17 and 2017-18 financial years, but only confirmed 30.

Chan urged officials to plug the loophole and follow overseas examples by applying a stamp duty to company ownership transfers. In Singapore, the levy applies to those who buy firms in which at least half of the assets are properties and who resell those properties in a short period.

However, Marcellus Wong Yui-keung, a former member of the government’s Working Group on Long-Term Fiscal Planning, said company ownership transfers could occur for various commercial reasons and not solely for the purpose of buying property.

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He even questioned the point of a stamp duty, saying it could distort the market and complicate Hong Kong’s simple tax system.

Wong said the government should consider increasing the supply of public-sector housing and limiting its resale to those qualified for it, so home ownership and investment could be separated into two different markets.