Question

Roy is a resident in Singapore who came to Hong Kong in March 2018 for holiday. He was introduced by a HK property agent to visit a residential property in Tai Koo Shing. The property was owned by a Hong Kong company, Blue Ltd, which is wholly owned by Mr. Chan. After consulting with Frankie, Roy’s cousin, Roy acquired the property in his own name in April 2018 in HK$30 million. He settled 70% of the acquisition cost by cash and financed the balance with a 1-year loan from a bank. After the acquisition, Roy returned to Singapore and placed the property for sale with a few HK property agents for HK$33 million, but was unsuccessful in the sale. In June 2018, Roy let Frankie use the property temporarily. In February 2019, Roy found the buyer and sold the property, making a profit of HK$3 million. Roy wondered whether the HK$3 million profit on disposal of the property would be subject to Hong Kong tax or not. Required: (a) Comment on the difference in stamp duty implications by comparing Roy’s acquisition of the property in his own name; with the alternative of acquiring the shares in Blue Ltd. (Note: Calculation of the amount of stamp duty payable is not required). (b) Explain whether the gain on disposal of Roy’s property in February 2019 is subject to Hong Kong tax. [Total for Question 4: 15 marks]

Answer 1

a. The main advantage of buying a Property in Hongkong in own name and instead of buying the shares of a company owning the property is the savings in Stamp Duty.

Here Roy acquired the residential property in April 2018 owned by Blue Ltd , which is a company wholly owned by Mr.Chan for HK $30 million. This will result in Mr.Roy paying the Ad Valorem Stamp Duty and and the Special Stamp Duty , since he has acquired a Residential property.

Instead of this had Roy acquired the shares of the company , as per the Hongkong stamp duty rules for buying and selling of Shares in a Hongkong Company is 0.2 % of the higher of consideration and Fair value of the shares to be Split 50/50 between the Seller and Buyer.

That is in comparision ,buying the property directly could lead to extra taxes to the buyer.

b. Hongkong does not have Capital gains Tax and under usual circumstances gains from disposal of a property are not subject to tax other than Stamp Duty.

Under Hongkong Laws "Profits arising from the sale of Capital assets " are outside the scope of charge for profits tax. But if the purchase and sale of the property was in the nature of a Trade , then the profits will be assessable to profit Tax. This depends on the purchaser's intention on acquiring the property. That is short duration purchase and sale of property may result in the taxation of the profit.

Here Mr. Roy acquired the property in March 2018 for Rs.HK$ 30 million and sold it in February 2019. Here he held the property only for less than an year. Usually under Hongkong property transactions if the property is sold within a short duration , say within 2 Years of its acquisition , the profit will get taxed. So Roy has to bear tax on the profit he got on sale as well as the rental income he received in Hong Kong.