When Pan Sutong (潘蘇通), the billionaire chairman of Hong Kong investment conglomerate Goldin Group (高銀集團), splashed out a reported HK$2.5 billion (US$306 million at the current exchange rate) for a home in the exclusive enclave of Deep Water Bay last year, he saved HK$370 million in taxes.
How? The three-story mansion with swimming pool was held via a shell company, meaning that the purchase incurred just 0.2 percent in stamp duty.
Assuming that Pan, a permanent Hong Kong resident, already owns property there, he would have paid a 15 percent levy in a regular transaction.
In Hong Kong, that is a perfectly legal route that wealthy people are increasingly cottoning on to. When a property is held by a company, its sale is considered a share transfer and taxed at 0.2 percent, 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 rich Chinese buyers.
The trend is somewhat jarring in a territory plagued by a yawning rich-poor divide — one increasingly defined by who can and who cannot afford a home.
According to the Hong Kong 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 in September reported by several local newspapers, which cited anonymous sources.
A spokesman for Goldin Financial Holdings Ltd (高銀金融集團) said that Pan was not immediately available for comment.
The proportion of property transactions made via company share transfers on Victoria Peak and the south side of Hong Kong Island — where prices can easily run into the hundreds of millions of US dollars — has jumped to 27 percent this year from 13 percent in 2013, according to Midland Realty (美聯物業).
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 last year, Midland Realty’s data shows.
Non-permanent residents can save even more through this route, because they pay 30 percent stamp duty. Also, if the shell company is registered offshore, 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 of this year, the government lost out on at least HK$9.4 billion in taxes because of the method.
“The stamp duties are made ineffective because there’s a back door to avoid paying these,” said Henry Chan (陳劍青), a researcher with Liber Research Community (本土研究社).
The body has urged the government to make it mandatory for companies owning residential properties to declare changes in beneficial ownership.
It is also a back door that is pretty much reserved exclusively for the ultrarich. That is because buyers using a shell-company structure generally are not permitted to take out a mortgage for the purchase.
In a territory where Demographia estimates that it takes 19.4 years of income for the average person to buy a home, that is a nonstarter for regular earners.
People cannot just set up a new company for the purposes of evading tax. A few years ago, Hong Kong’s government cracked down on the creation of new shell companies to buy property, which are now taxed at 15 percent. However, the pre-existing shell companies only pay 0.2 percent.
For those who can afford it, it might seem the perfect way to save, but there are risks. Purchasers might 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,” said Denis Ma (馬安平), head of research for Hong Kong at JLL . “That can add to the overall transaction costs.”
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