A. Introduction
Buying a real property is a momentous incident for many end-users or property investors in Hong Kong. Yet, you should better be familiar with the current Stamp Duty provisions under the Stamp Duty Ordinance (Cap. 117) (“the Ordinance”) or you might end up shocked by what you have to pay for a new property in this city – already some of the world’s most expensive and unaffordable real properties. This article will give an overview of (1) the current Stamp Duty provisions in relation to property transactions in Hong Kong – the Ad Valorem Stamp Duty, the Buyer's Stamp Duty and the Special Stamp Duty and (2) the sale and purchase of the entire issued shares of corporation holding landed property for the purpose of avoiding the payment of higher rates of Stamp Duty.
B. Stamp Duty for Property Transactions
(1) Residential Property
(i) Ad Valorem Stamp Duty (“AVD”)
In order to cool down the residential property market in Hong Kong, with effect from November 2016, the Hong Kong Government increased the AVD rates for all residential property transactions to a flat rate of 15% of purchase price (“New AVD”), irrespective of the amount or value of the consideration of the residential property, unless an exception applies.
However, if you are a Hong Kong Permanent Resident (“HKPR”) acquiring a residential property on your own behalf and do not own any other residential property in Hong Kong at the time of acquisition, you may apply for exemption of the new AVD and then be entitled to pay Stamp Duty at a lower rate (Scale 2). A person will not be acting on his own behalf if, for example, he enters into a sale and purchase agreement as a trustee for another person. The relevant rates of Stamp Duty chargeable under Scale 2 are as follows:-
|
Purchase Price/Value of consideration (HK$) |
Stamp Duty (HK$) |
|
$2,000,000 or below $100 |
$100 |
|
$2,000,001 to $2,351,760 |
$100 + 10% of the amount exceeds $2,000,000 |
|
$2,351,761 to $3,000,000 |
1.5% |
|
$3,000,001 to $3,290,320 |
$45,000 + 10% of the amount exceeds $3,000,000 |
|
$3,290,321 to $4,000,000 |
2.25% |
|
$4,000,001 to $4,428,570 |
$90,000 + 10% of the amount exceeds $4,000,000 |
|
$4,428,571 to $6,000,000 |
3% |
|
$6,000,001 to $6,720,000 |
$180,000 + 10% of the amount exceeds $6,000,000 |
|
$6,720,001 to $20,000,000 |
3.75% |
|
$20,000,001 to $21,739,120 |
$750,000 + 10% of the amount exceeds $20,000,000 |
|
$21,739,121 or above |
4.25% |
Subject to the Ordinance, the followings are the other major exceptions to the New AVD: -
- joint acquisition of a residential property by a HKPR with one or more non-HKPR close relative(s) (近親) (i.e. spouse, parents, children, brothers and sisters) each acting on his/her own behalf and none of them own any other residential property in Hong Kong at the time of acquisition;
- acquisition or transfer of residential properties between close relatives, whether or not they are HKPRs and beneficial owners of other residential property in Hong Kong at the time of acquisition or transfer;
- acquisition or transfer of a property by or pursuant to a court order, e.g. divorce;
- inheritance of a property by the beneficiary of an estate under a will or the law of intestacy; and
- replacement of other property if your original property is either acquired by Urban Renewal Authority or resumed by the Government or under order made by the Lands Tribunal under the Land (Compulsory Sale for Redevelopment) Ordinance (Cap. 545).
It should also be noted that the acquisition of more than one residential property under one single instrument (i.e. 一約多伙) is subject to New AVD even if the buyer is a HKPR and does not hold any other residential property at the time of acquisition with the exception that a unit which can became a single unit following the demolition of the walls or the floor separating two units with plan approved of Building Authority or plan signed by an authorised person after completion of the demolition.
(ii) Buyer's Stamp Duty (“BSD”)
For acquisition of residential property, you are also required to pay, in addition to AVD of 15%, a BSD at a flat rate of 15% of the transaction consideration or the value as assessed by the Rating and Valuation Department, except: -
- The purchaser or each other purchasers are HKPR; or
- The vendor and the purchaser are close relatives and the purchaser is acting on his own.
That means, a corporation or non-HKPR buying a residential property will be subject to payment of Stamp Duty at the total of 30% of the transaction consideration or the value as assessed by the Rating and Valuation Department.
For application of charging AVD rates under Scale 2 and for exemption of BSD, you are required to make a statutory declaration under the Oaths and Declarations Ordinance (Cap. 11) and to produce supportive documentary evidence.
(iii) Special Stamp Duty (“SSD”)
While AVD and BSD are targeted at the acquisition of a property, SSD is targeted at the disposition of a property within a certain period of time. Residential properties acquired by an individual or a company on or after 27 October 2012 and resold within 36 months will be subject to the SSD, unless an exception applies. The applicable SSD rates on a property will depend on the date of acquisition of the property and the holding period of the property by the seller. Below is the relevant rate of SSD chargeable: -
|
Holding Period |
SSD rates |
|
6 months or less |
20% |
|
More than 6 months but for 12 months or less |
15% |
|
More than 12 months but for 36 months or less |
10% |
Like BSD, the sale or transfer of a residential property to one or more close relative(s) is exempted from SSD.
(iv) Refund of Stamp Duty
1. Cancellation
If Stamp Duty or penalty in respect of an agreement for sale and purchase has been paid, but the agreement is cancelled, annulled or rescinded or is otherwise not performed, the Collector must refund the monies paid.
It should be noted that no Stamp Duty paid shall be refunded, unless the application for refund has been made within 2 years after the agreement has been cancelled, annulled or rescinded, as the case may be.
2. Change of Residential Property
Besides, if a HKPR is acquiring a new residential property with the intention to dispose of his existing residential property, he/she will still be subject to the New AVD. However, the Ordinance introduced a refund mechanism to the effect that Scale 2 Rates would be levied on the second residential property acquired by HKPR(s) who have sold the original residential property, thereby only temporarily owning two residential properties. If he can prove that the existing residential property has been disposed of within 12 months from the date of acquisition of the new property, then he/she may seek a refund of the difference between payments made according to the Scale 1 Rates and the Scale 2 Rates on the second residential property.
In this case, it is also notable that the application for refund of Stamp Duty must be made not later than 2 years after the date of the instrument under which New AVD Rate was charged, or not later than 2 months after the date of the conveyance on sale (assignment) under which the original property is transferred or divested, whichever is the later.
(2) Non-residential Property
In February 2013, the Hong Kong Government increased the AVD for all non-residential property transactions by doubling up the then applicable rates of stamp duty (Part 2 of Scale 2) for non-residential property which was generally referred to as “Double Stamp Duty” (Part 2 of Scale 1).
The then applicable rates of stamp duty (Part 2 of Scale 2) for non-residential property were the same as the Scale 3 rates for residential property.
The “Double Stamp Duty” imposed on non-residential property transactions would be abolished. The Government announced that the Ordinance would be amended to revert the AVD rates on certain instruments dealing with non-residential property from those under Part 2 of Scale 1 to those under Part 2 of Scale 2. Subject to the enactment of the relevant amendment bill by the Legislative Council, any instrument executed on or after 26 November 2020 for the sale and purchase or transfer of non-residential properties will be subject to AVD at the rates under Part 2 of Scale 2.
C. Sale and purchase of the entire issued shares of corporation holding landed property
(i) Advantages
After the aforesaid introduction of the new Stamp Duty regime, i.e. BSD and SSD for residential properties, double Stamp Duty up to the rate of 8.5% for non-residential properties, and AVD at the rate of 15% for residential properties, it has become more and more prevalent for property buyers to purchase real property (particularly luxury residential property) by acquiring the entire issued share capital of the property holding corporation for the purpose of avoiding the payment of higher rates of Stamp Duty.
The sale and purchase of shares only attracts a total Stamp Duty of 0.2% of the amount of the consideration or of its value at the date on which the contract note falls to be executed plus a HK$5.00 fixed Stamp Duty on the executed instrument of transfer. Therefore, due to a much lower rate for the Stamp Duty compared to conveyance on sale of immovable property which is liable to pay various types of Stamp Duty as aforesaid, Stamp Duty may generally be saved by transferring the shares of the corporation holding the property rather than by conveyancing the property itself.
(ii) Conveyancing Transactions vs Corporate Transactions
However, the transactions involving a sale and purchase of a company are more complicated than normal conveyancing transactions. In respect of conveyancing transactions, the purchaser's main concern is the title of the seller in the subject property. For corporate transactions, as the purchaser will acquire the shares of the company which holds the landed property, the purchaser will also be concerned with the seller’s title in the shares of the company and various other aspects of the company, e.g. liabilities, encumbrances, litigation, etc. in addition to the title of the company in the subject property.
To illustrate, the sale and purchase of a company will generally involve the following typical stages: -
1. Signing of Preliminary Agreement
The terms of the preliminary agreement, which may take the form of a letter of intent or memorandum of understanding, are usually legally binding in nature on the parties to the agreement. The preliminary agreement will usually contain undertakings, conditions, representations and warranties and completion obligations, etc.
As such, solicitors should be engaged at a preliminary stage as early as the signing of the preliminary agreement.
2. Due Diligence: Legal, Financial and Tax
The purchaser should be concerned about any risks and liabilities he/she may assume when acquiring the company. It is therefore important to conduct thorough due diligence on the company in relation to its legal, financial and tax aspects.
In relation to legal due diligence, typical aspects of the company which should be investigated during the due diligence exercise include the title and ownership of shares (Register of Members, complete chain of transfer documents (where there are previous transfers), such as original instruments of transfer, bought and sold notes and share certificates), completeness of corporate and statutory documents and records (e.g. company kit, registers, minutes book), compliance with filing requirement under the Companies Ordinance (Cap. 622) and whether the company is subject to any litigation or winding-up orders, whether the company has any assets other than the subject property. Other aspects of the company include its insurance, employment, material contracts, tenancies/leases and environment etc. should be investigated during the due diligence exercise.
In relation to due diligence review on the financial and tax position of the company, accountant/ audit firm or financial advisors should be engaged for the verification of audited accounts and management accounts and whether there are any banking/loan facilities. The review also includes investigations on whether the company has outstanding debts/liabilities or taxation.
3. Signing of Formal Sale and Purchase Agreement
4. Completion
(iii) Financing
One distinctive feature between purchasing a property directly and purchasing a company holding a property is that in the former case, the purchaser generally can obtain mortgage financing to finance the acquisition; whilst in the latter case, the purchaser generally cannot obtain mortgage financing owing to section 275 of the Companies Ordinance (Cap. 622) in relation to the prohibition against financial assistance by a company: -
“(1) If a person is acquiring or proposing to acquire shares in a company, the company or any of its subsidiaries must not give financial assistance directly or indirectly for the purpose of the acquisition before or at the same time as the acquisition takes place, except as provided by this Division.
(2) If—
(a) a person has acquired shares in a company; and
(b) any person has incurred a liability for the purpose of the acquisition,
the company or any of its subsidiaries must not give financial assistance directly or indirectly for the purpose of reducing or discharging the liability, except as provided by this Division.”
Therefore, in view of the aforesaid provision, a company cannot provide a loan to the purchaser to facilitate the purchase of the company’s own shares which amounts to direct financial assistance. Likewise, the purchaser cannot procure the company to charge its property as security to obtain bank financing for the purchase of the shares of the company which amounts to indirect financial assistance.
D. Conclusion
If you are acquiring a property in Hong Kong, it is important to consider and be familiar with the prevailing Stamp Duty policies in relation to property transactions in Hong Kong, i.e. the AVD, BSD and SSD which may all be payable. End-users or property investors may also consider acquiring the entire issued share capital of the property holding corporation for the purpose of avoiding the payment of higher rates of Stamp Duty.
The law and procedure on this subject are specialised and complicated. This article is just a general outline for reference only and cannot be relied upon as legal advice in any individual case. The readers are recommended to seek professional legal advice concerning their specific legal questions.
