Many buyers in Hong Kong property market generally using three ways to hold their properties 1) By individual; 2) Hong Kong Limited Company; and 3) Go offshore;
A growing number of buyers of luxury residential and commercial properties are making their purchases through companies to escape paying high stamp duties.
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.
However, while buying a property through a company will incur lower stamp duty, using this method would have to accept the investment risk of buying a whole company.
The potential risks of such a transaction could include the liabilities of the company that a property buyer takes over.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. But no matter how carefully the buyer examine the company he may not be 100 per cent sure it has no hidden debts. So by using this method a buyer must be prepared to accept a degree of investment risk. To minimize this risk, we would recommend to set up a new Hong Kong limited company rather than buying an existing one.
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.
The procedures for setting up a company are not complicated. People can acquire shares of a shelf company set up by a company secretarial firm. Jefferson Trust can assist you with company incorporation and company secretarial services (including shares transfer). Please contact our specialists for more details at info@jeffersontrust.hk.
A trust may also be an alternative holding vehicle, and the tax implications would be similar to holding the property by an individual. If you would like to explore Hong Kong Trusts in details – please find more information on our website www.jeffersontrust.hk/succession/.
Endnotes
- GOV HK: “Stamp duty on sale or transfer of immovable property in Hong Kong”, 2016, < http://www.gov. hk/en/residents/taxes/stamp/stamp_duty_rates.htm>;
- SCMP: “How to save money: buying Hong Kong property through company shares offers profitable avenue for buyers and sellers”, 2016, <http://www.scmp.com/specialreports/property/topics/weekend-property/article/2006056/ how-save-money-buying-hong-kong>;
- SCMP: “More using company share transfers to buy property and dodge duties”, 2016, <http://www.scmp.com/ property/hong-kong-china/article/1354424/more-using-company-share-transfers-buy-property-and-dodge>.
