Introduction

In order to cool down the property market in Hong Kong, in November 2016, the Hong Kong Government increased the ad valorem stamp duty (AVD) rates for all residential property transactions to a flat rate of 15% of purchase price, irrespective of the amount or value of the consideration of the residential property with an exemption that a Hong Kong Permanent Resident (HKPR) acquiring a residential property where he/she is acting on his/her own behalf and does not own any other residential property in Hong Kong at the time of acquisition will be subject to lower rates (i.e. AVD at Scale 2 rates) (the “Exemption”).

It might be tempting for a non-HKPR and/or a HKPR who already owned other residential properties in Hong Kong (collectively the “homebuyer”) to purchase residential properties using the names of other HKPRs who do not own any residential property in Hong Kong in order to save stamp duty. The homebuyer might agree or make an arrangement with a HKPR who does not own any residential property in Hong Kong to use the name of the HKPR as the buyer of the residential property (the “Transaction”). However, both the homebuyer and HKPRs who provided their names might be subject to criminal offences and other risks and liabilities under such circumstances.

Criminal Offences

False statutory declaration

When applying to pay AVD at lower rates under the Exemption, the HKPR has to submit a statutory declaration declaring, amongst others, that he/she is acquiring the residential property on his/her own behalf. Such statement and declaration are made by virtue of the Oaths and Declarations Ordinance (Cap. 11).

Under section 36 of the Crimes Ordinance (Cap. 200), any person who knowingly and wilfully makes (otherwise than on oath) a statement false in a material particular in a statutory declaration shall be guilty of an offence and shall be liable on conviction upon indictment to imprisonment for 2 years and to a fine.

Therefore, HKPRs who provided their names would be liable for the offence of making a false declaration and the homebuyer might equally be liable for the offence of abetting others to make false statutory declarations.

Fraudulent practices

Both the homebuyer and the HKPRs who provided their names might also be liable for fraudulent practices under the provisions of Stamp Duty Ordinance (Cap. 117) (“SDO”) by way of the HKPRs giving a false declaration to the Stamp Office to pay lower stamp duty for the property transaction.

Under section 59 of the SDO, any person who practises any fraudulent act with intent to defraud the Government of any stamp duty commits an offence. Upon conviction, such homebuyer and the HKPR might be liable to a fine of HK$100,000 and to imprisonment for one year.

Other Risks and Liabilities

Underpayment and penalty

In addition to criminal liabilities, the HKPR will also be liable under section 29DH of the SDO, civilly to the Collector of Stamp Revenue for the amount that would have been payable if the chargeable property transaction was properly stamped. If the Transaction was later found to be a sham transaction, the purported claim of Exemption would become invalid and both the homebuyer and the HKPR might be liable jointly and severally for the underpayment of stamp duty. In addition, since the property transaction was not rightfully and properly stamped within the stipulated period of time, the HKPR and the homebuyer might also be liable for the penalty payable under section 9 of the SDO.

Possible dispute over the title of the property

Under the Transaction, the HKPR who provided his/her name as buyer would be treated the legal owner of the residential property. If he/she later disputed the Transaction and claimed as the sole beneficial owner of the residential property, the homebuyer would encounter difficulties in arguing the contrary, since the HKPR had given a statutory declaration declaring that he/she was acquiring the residential property on his/her own behalf.

Some homebuyers might try to create a declaration of trust with the HKPR who provided his name as trustee with a view to protecting the homebuyer’s interest in the residential property. Such declaration of trust would not only become a chargeable agreement under the provisions of SDO, but also constitutes concrete evidence that corroborate the criminal offences and fraudulent practices of both the HKPR and the homebuyer. If the homebuyer attempted to use the declaration of trust to claim his beneficial interest in the residential property, he/she would have to admit the fraudulent act of defrauding the Government of stamp duty and that he abetted the HKPR in making a false statutory declaration. As such, the risk of successful criminal prosecution against both the homebuyer and the HKPR who provided his/her name would be high and the civil liability of underpayment of AVD and the penalty would follow.

Conclusion

As warned by the Financial Secretary Paul Chan Mo Po in his online blog on 30 April 2017, he has instructed the Treasury Bureau and the Inland Revenue Department to check and verify the statements of the HKPRs applying for the Exemption strictly and upon discovery would prosecute the homebuyers and those who provided their names.

No matter how tempting it is to save stamp duty payment in residential property transactions, we warn homebuyers and HKPRs not to test the law or to avoid extra stamp duty or to risk any dispute over the title of the residential property.

For enquiries, please contact our Property Department:

E: property@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and practice on this subject are very specialised and complicated. This article is merely a general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.