Buying Company-owned Properties in Hong Kong
Stamp duties are often the most significant add-on costs when buying property. A common, taxfavourable approach is to buy a company that, in turn, owns a property. However, it is important to consider the below before making such an investment.
Pro: Significant tax savings for buyers and flexibility to resell
Purchasing residential properties in Hong Kong is subject to stamp duty, which is especially significant (potentially totalling 30%) for non-first-time home buyers, non-resident individual buyers and company purchasers (even if the company owners are local permanent residents). The purchase of shares in a Hong Kong company, on the other hand, is subject to a much lower stamp duty—0.2% of the consideration or market value. It doesn't matter if the buyer is a local or non-local resident, a first-time buyer or an owner of multiple properties. There is also no restriction or additional stamp duty on the resale of shares in a property-holding company, whereas resale of any residential property within three years from acquisition is subject to a Special Stamp Duty (SSD) of 10 to 20%.
Pro: Benefits to sellers
When selling a company-owned property, sellers will often request a higher price than the stand-alone property value. In the current tax regime, this is not unreasonable and allows both the buyer and seller to share the tax savings. In addition to avoiding SSD restrictions when selling within three years, the company structure enables owners to more easily transfer assets for tax-planning purposes (to heirs, for example), since sales and transfers of company shares are subject to much lower share stamp duties.
Con: Risks, liabilities, closer due diligence and higher legal costs
If you buy a company (that owns a property), your liabilities are not limited to only property. You are acquiring all the assets and liabilities of the company, including any debts the company may have. This is why a company sale and purchase agreement has extensive warranty and indemnity language. The legal risks may be further increased if the property is owned by an offshore company, such as a BVI company. Legal fees and time required for due diligence are both greater than if purchasing a property directly.
Con: Mortgage financing is not an option
Be aware of the difficulty (or inability) to secure a mortgage for a company-owned property. Banks generally do not offer mortgages for company purchases given the higher risk of hidden liabilities mentioned above. Funding a company purchase often requires 100% cash unless the purchaser has access to indirect debt funding from other assets.
Con: Annual reporting and ongoing costs
Companies must comply with statutory requirements which incur annual costs. These can include appointing a company secretary and an auditor, filing annual returns with tax authorities and other reporting requirements depending on the jurisdiction of the company being acquired. In contrast, owning a property directly has no such annual requirements or associated costs.
Weighing the pros and cons
The relative merits and trade offs of buying company-owned property also depend on government cooling measures, which may change over time. There is no “right answer” to the question of what structure is optimal, other than “it depends”. Think carefully about both the short- and long-term considerations and retain a trusted lawyer with specific experience in this area as their role and advice is crucial.