Introduction

In the 2021-2022 Hong Kong Budget (the “2021-2022 Budget”), the Financial Secretary of Hong Kong announced that Hong Kong’s economy recorded a negative growth of 6.1% with the latest unemployment rate rising to 7% in the past year. Whilst the 2021-2022 Budget focuses on stabilising the economy and relieving people’s burden, it also seeks ways to increase the government revenue in the long run, such as by way of introducing new revenue sources, revising tax rates or reducing one-off relief measures.

The Financial Secretary announced that, having duly considering Hong Kong securities market’s international competitiveness and the potential impact on the local market, the government decided to introduce a bill to raise the rate of stamp duty on stock transfers, from the current rate of 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively, i.e. a total stamp duty rate of 0.26%, instead of adjusting the rates of profits tax or salaries tax.

It is expected that the measure introduced by the government would increase the government revenue and fiscal reserves and restrain speculative trading activities by high-frequency traders to a certain extent.

Rationale for the increase in stamp duty

The Financial Secretary estimated that the fiscal deficit to be faced by Hong Kong would be HK$101.6 billion, accounting for 3.6% of gross domestic product (GDP) of the upcoming financial year. Although it might be lower than the deficit recorded for the financial year 2020-2021 i.e. HK$257.6 billion, the Government has to seek ways to increase revenue as the deficits are mainly caused by the fact that the rise in government expenditure is outpacing the increase in government revenue.

The rate of stamp duty on stock transfers is prescribed under Head 2(1)(A) of the First Schedule to the Stamp Duty Ordinance (Chapter 117 of the Laws of Hong Kong) (the “Stamp Duty Ordinance”). At present, both of the buyers and sellers are required to pay stamp duty at 0.1% of the amount of consideration or value of each transaction respectively. The rate of stamp duty to be paid by each side has been reduced three times from the original rate of 0.15% in 1993 to the current level of 0.1%.

According to the government data, the stamp duty on stock transfers has been an important government income source over the past decade, contributing HK$20 billion to HK$37 billion each year, representing 5.7% to 8.8% of the Government’s operating revenue during the period.

An average daily turnover of HK$132.32 billion is recorded in the stock market during April 2020 to December 2020, generating a total of approximately HK$37.5 billion government revenue from stamp duty on stock transfers. Assuming the same trend of receipts, it is projected that the contribution of stamp duty on stock transfers to government revenue could amount to HK$51 billion in the financial year 2020-2021.

In view of the above, the government considered that increasing the stamp duty on stock transfers would be one of the most appropriate measures to increase government revenue, address its fiscal needs and sustain financial market development. It is estimated that the proposal would bring an additional HK$8 billion revenue in the eight months in the financial year 2021-2022.

Implications of increase in stamp duty

As the proposal of increasing the stamp duty will increase the transaction costs of stock trading, there are some concerns that the measure may decrease the stock market turnover in Hong Kong and eventually drive some companies to opt for listing in other capital markets. The market has noticed that the shares of Hong Kong Exchanges and Clearing Limited fell by nearly 10% after the announcement of the proposed increase in stamp duty in the 2021-2022 Budget by the Financial Secretary.

Nonetheless, given the continued efforts in increasing the breadth and depth of the Hong Kong stock market in recent years, it is expected that the market may remain robust and vibrant and the proposal of increasing stamp duty may not have material adverse impact on the stock market.

The higher transaction costs due to the increased stamp duty may also help restrain the high-frequency trading, which is a method of trading that uses computer programs to transact a large number of orders in stocks, futures and other financial products and make money off the smallest market movements by buying and selling repeatedly within fractions of a second. Whilst high-frequency trading may boost trading volumes and widen the financial liquidity of the capital market, it exacerbates market volatility during times of stress. The significant rise in stamp duty will increase the costs of high-frequency trading and hence may limit the high-frequency trading to a certain extent.

Further, many property investors in Hong Kong prefer to purchase properties by way of acquiring the shares of the property-holding companies due to a much lower stamp duty rate, compared with those for property transactions. The measure proposed in the 2021-2022 Budget will increase the costs of purchasing property-holding companies in Hong Kong and may to a certain extent drive the investors away from the Hong Kong property markets.

Current status

On 5 March 2021, the Government published the Revenue (Stamp Duty) Bill 2021 (the “Bill”) in the gazette containing the aforesaid proposal of increasing the rate of stamp duty on stock transfers. The proposal seeks to amend the Stamp Duty Ordinance to increase the rate of stamp duty payable on contract notes for sale or purchase of Hong Kong stock and correspondingly on certain transfers of such stock with effect from 1 August 2021. It is of the view that the proposal has struck a balance between the need for increasing government revenue and sustaining financial market development.

The Bill has been introduced in the Legislative Council for first reading on 17 March 2021. If the proposal is passed, it is expected that the stamp duty on stock transfers will increase from 0.1% to 0.13% payable by buyers and sellers respectively on 1 August 2021 and Hong Kong will become the world’s second-most expensive capital market for transacting shares, behind only the United Kingdom.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very 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.