Tracking the tax dodgers: A study on avoidance of residential property tax by share transfer
in Hong Kong
Background
- Property speculation aggravated by transactions through “share transfer”: The
government introduced multiple measures since 2010 in a bid to drive out investors and
clamp down the overheated property market, including Double Stamp Duty (later called the
new ad valorem stamp duty), Buyer Stamp Duty and Special Stamp Duty. Nonetheless,
these can be worked around effortlessly through transfer of shares in companies owning
residential property to the new buyers (the “share transfer” loophole).
- Property speculation out of government’s radar: Transferring shares in companies
owning residential properties does not involve changes in legal ownership in the Lands
Registry, therefore the government cannot swiftly assess the actual condition of the market
to formulate policies to tame property speculation accordingly.
- Loopholes left unplugged in the new land and housing policies: The government
claims that increasing land supply is the prime solution in solving the looming housing
crisis, and that affordability issues can be resolved by providing more subsidized housing.
However in a bigger picture, these measures have not tackled the uneven distribution of
land and housing resources, which is further exacerbated by speculators exploiting the
“share transfer” loophole.
- Creating an avenue to capital flight and tax avoidance: Contrary to global effort on
clamping down illicit financial flow and tackling tax avoidance, Hong Kong has largely
turned a blind eye to this covert channel of capital flight and tax avoidance despite being
repeatedly named as a tax haven by taxation experts and watchdogs.
Research method
- Tracking tax avoidance by “share transfer”: The research team identified potential tax
avoidance cases since 2010 (when cooling measures on property market were put in
place). The addresses of the residential properties concerned as well as the buyers/sellers
were identified through keyword search in news search engine and property transaction
databases. These were then verified by searches in Land Registry and Companies
Registry. The research team further investigated whether there was a trend of investors
opting for “share transfer” to buy and sell properties, in particular, whether there were
complete changes in directorships of the companies owning residential properties.
Research results
- Latest trend and amount of tax avoided: Out of the 126 cases identified (potential tax
avoidance: HK$9.4 billion) since 2010, 96 took place after the government raised the
“Double Stamp Duty” to 15% (to become the new ad valorem stamp duty) in 2016. The
amount of potential tax avoided was HK$8.3 billion. This shows that the cooling measures
were dodged by investors who are continually fueling the overheated market despite government’s apparent effort in taming the prices.
- Profiles of buyers: Out of the 126 cases identified, 90 were foreign buyers, which included
26 foreign individual buyers and 22 foreign company buyers. Within the 22 foreign company
buyers, 20 were British Virgin Islands (BVI) companies and 2 were Bermuda companies.
Both countries are generally considered as tax havens. In addition, 42 cases were
immigrant buyers, among which 23 buyers have resided in Hong Kong for fewer than 7
years, whereas the length of residence of the rest (19 buyers) cannot be determined.
Among the 42 immigrant buyers, 41 were suspectedly coming from Mainland China as their
names were spelt in pinyin. Background of buyers were diverse: from members of the
Chinese People’s Political Consultative Conference to local actresses.
- Geographical distribution of residential properties concerned: Majority of residential
properties concerned (62%) fall in Yau Tsim Mong District (30 cases), Southern District (29
cases) and Wan Chai District (19 cases). In particular, they are concentrated in West
Kowloon developments (65% of all cases), such as The Harbourside, The Arch, The
Waterfront, Sorrento and The Cullinan.
- Abuse of “Starter Homes” tax concession: Several cases reveal that investors have
further abused other tax concessions. Investors acquiring residential properties through
buying company shares are not buying in their own names, thereby rendering them eligible
for “Starter Homes” tax concession which is dedicated to first-time buyers.
- Proliferation of “shell companies”: The research team identified at least 26 suspected
cases of transaction via shell companies, among which 4 shell companies shared the same
registered address. This indicates that property transaction via shell companies has
become a general trend.
Issues
- Circumventing cooling measures and dichotomizing property market: The existence
of the “share transfer” loophole has created a relatively higher threshold in entering a
property investment market which yields a higher return (as they are able to avoid stamp
duty). This is because mortgage amount allowed via this avenue is generally lower, and
only the ultra weathly are able to play the game. This has exclusively enabled them to
circumvent stamp duty and dichotomized the property market.
- Housing crisis exacerbated by competition from investors: The original intent of the
cooling measures was to drive out investors and to protect local buyers’ interests.
Unfortunately the “share transfer” loophole has created a backdoor for investors to enter the
overheated property market, which is counter-productive to government’s apparent effort to
tame the skyrocketing housing prices.
- Government’s effort to assess market conditions obstructed: The “share transfer”
loophole allows investors to bypass the Land Registry’s oversight on ownership changes.
The associated abuse of separate legal entity status of companies has further left property
speculation unchecked.
- Harming Hong Kong’s status as an international financial centre: the “share transfer” loophole has turned Hong Kong into a magnet for capital flight and investors seeking tax avoidance, which strengthened Hong Kong’s status as a tax haven and harmed Hong Kong’s image.
Policy recommendations
- Establishing a taxation principle that links stamp duty regime with changes in
beneficial ownership of companies owning residential properties: Drawing reference
from overseas taxation reforms, the government should require local and foreign
companies owning residential properties in Hong Kong to declare changes in beneficial
ownership to the government so that such transactions could be taxed.
- Setting up a public register on “significant controller” of companies owning
residential properties in Hong Kong: The government should set up a publicly
accessible, cross-departmental database that logs changes in property ownership including
those via “share transfer”. This suggested practice is in line with the global trend of
increasing transparency in ultimate beneficial ownership of residential properties.