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.
People can’t just set up a new company for the purposes of evading tax, however. A few years ago, Hong Kong’s government cracked down on the creation of new shell companies to buy property, which are taxed at 15 percent now. Still, the pre-existing shell companies only pay 0.2 percent.
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.”
This article was provided by Bloomberg News.