17 May 2019 - When investing in real estate, stamp duties are perhaps the most significant add-on costs, and it is often the primary consideration when buying any property. A common, tax favourable approach is to buy a company that, in turn, owns a property. However there are pros and cons to this approach and it is important for potential homebuyers and investors to be aware of the trade-offs before making such an investment.
Pros: Significant tax savings for buyers and flexibility to resell
Purchases of residential properties in Hong Kong are subject to stamp duties, which are especially significant (potentially 30% in total) for non-first-time homebuyers, 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 of 0.2% of the consideration or market value - it doesn't matter if the buyer is a local or non-local resident, or if the buyer is 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 10-20%.
Pros: Benefits to sellers
In the case of selling a company-owned property (i.e. selling of shares in the company), 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.
For owners of company-owned properties, in addition to avoiding SSD restrictions when selling within 3 years, the company structure enables owners to more easily transfer assets for tax planning purposes (to heirs, for example), since company share sales/transfers are subject to the much lower share stamp duties than a straight property transfer.
Cons: Risks, liabilities, closer due diligence and higher legal costs
If you buy a property directly, your liability exposure is limited to the property itself, such as contribution to the building’s maintenance, renovation costs etc. However, if you buy a company (that owns a property), your liabilities are not limited to those related to property. You are acquiring all the assets and liabilities of the company, including any debts the company may have. These potential liabilities are more difficult to ascertain and require additional legal due diligence. 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. Thus legal fees and time required for due diligence are both greater than if purchasing a property directly.
Cons: Mortgage financing is not an option
Another major difference between purchasing a property directly and via a company is the difficulty (or inability) to secure a mortgage in the latter case. Banks generally do not offer mortgages for company purchases given the higher risk of hidden liabilities mentioned above. Thus, funding a company purchase often requires 100% cash unless the purchaser has access to indirect debt funding from other assets.
Cons: 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 which depend on the jurisdiction of the company being acquired. For example, Hong Kong companies tend to have more reporting requirements than BVI companies (which are not required to conduct annual audits and pay no corporate taxes). However, the due diligence of BVI companies is more difficult and hence legal costs are typically higher than for HK companies. In contrast, owning a property directly has no such annual requirements or associated costs.
Weighing the pros and cons
Buying a company-owned property has several advantages, particularly in upfront tax savings. However, there are additional risks, ongoing costs and the need to fund the acquisition with cash. The relative merits and trade-offs also depend on the government cooling measures in place, which may change over time. Thus, there is no single “right answer” to the question of what structure is optimal, other than “it depends” (as in many things in life!)
If you are considering purchasing a company-owned property, the best strategy is to carefully think about both the short and long-term considerations and to retain a trusted lawyer with specific experience in this area as their role and advice is critical.
Disclaimer: This article in no way constitutes legal or tax planning advice and is solely the opinion of the author, not of OKAY.com / OKAY Property Agency Limited. You are advised to consult legal and tax advisors before entering into any property transaction.