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Ultra-rich save millions exploiting Hong Kong home loophole
[HONG KONG] When Pan Sutong, the billionaire chairman of Hong Kong investment conglomerate Goldin Group, splashed out a reported HK$2.5 billion (S$437.9 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? The three-storey mansion with swimming pool was held via a shell company, meaning the purchase incurred just 0.2 percent in stamp duty. Assuming 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's a perfectly legal route 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 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 can't 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. Mr 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 Holdings Ltd said Mr Pan wasn't immediately available for comment.
The proportion of property transactions made via company share transfers on the Peak 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 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.
Some 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 chief executive officer 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 of 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 body has urged the government to make it mandatory for companies owning residential properties to declare changes in beneficial ownership.
It's also a back door that's pretty much reserved exclusively for the ultra-rich. That's because buyers using a shell-company structure generally aren't permitted to take out a mortgage to finance the purchase. In a city where Demographia estimates that it takes 19.4 years of income for the average person to buy a home, that's a nonstarter for regular earners.
For those who can afford it, it might seem the perfect way to save a bundle, 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."