1.            Introduction

More and more potential buyers of Hong Kong property are considering whether to hold the property (1) individually, (2) through the use of a Hong Kong limited company, or (3) through the use of an offshore company such as a BVI company.  Most people believe that by using an offshore company to hold property in Hong Kong, they are not liable to pay profits tax and property tax in Hong Kong.  But is that really the case?  This article discusses the pros and cons of using the various methods in holding the property, including the costs involved and the advantages/disadvantages of each method.

2.            Setting up and maintaining a limited company

A potential buyer of a Hong Kong property who is considering setting up a limited company (e.g. a Hong Kong company or a BVI company) to hold the property should be aware of the costs involved in setting up and maintaining the company.

The costs of setting up a Hong Kong Company is about HK$10,000 and the costs of maintaining the Company is about HK$12,500 per year (HK$3,000 being cost for company secretarial services, audit fees of HK$7,000 and HK$2,450 being cost for obtaining a Business Registration Certificate).  The setting up costs of a BVI company is about HK$15,000 and the costs of maintaining a BVI company is about HK$10,500 per year (about HK$3,000 as licence fee payable to the Government of BVI, HK$2,000 being fees payable to the registered agent, HK$3,000 as administrative fee and HK$2,450 being cost for obtaining a Business Registration Certificate).

As can been seen, the costs involved in using a company to hold the property can turn out to be quite expensive, especially when the property is held for years.  In contrast, an individual would not have to bear these additional costs if he were to hold the property in his own name.

3.            Anonymity of beneficial owner

Some buyers may, for one reason or another, want to maintain their anonymity as the beneficial owners of the property.  However, this anonymity cannot be achieved if the buyer holds the property as individual since the registered owners of properties in Hong Kong are shown in the public land search records maintained by the Land Registry of the Hong Kong Government.

Holding the property by using a Hong Kong company does not achieve the result of anonymity either as the names of shareholders and directors of a Hong Kong company are shown in the public company search records maintained by the Hong Kong Government Companies Registry.  A shareholder may however shield his identity by using a nominee shareholder to hold the shares on his behalf.

If anonymity is the buyer’s main concern, then setting up a BVI company to hold the property may be the best option for the buyer since the names of shareholders and directors of a BVI company are not publicly available and any party seeking such information can only obtain the information from the registered agent of the company but the registered agent will only reveal such information with the consent of the company.

4.            Profits tax

Under section 14 of the Inland Revenue Ordinance (Cap. 112) (“IRO”), profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived in Hong Kong for that year from such trade, profession or business.  Therefore, under this provision, three conditions must be satisfied, i.e., the person: -

(1)         carries on a trade, profession or business in Hong Kong;

(2)         derives profits from that trade, profession or business, other than profits arising from the sale of capital assets; and

(3)         those profits arise in or are derived from Hong Kong.

Section 2 of the IRO defines “person” very widely to include a corporation, partnership, trustee, whether incorporated or unincorporated, or a body of persons.  In addition, a “corporation” is defined as any company which is either incorporated or registered under any enactment or charter in force in Hong Kong or elsewhere.  Therefore, the wide definition of “person’ and “corporation” would no doubt include BVI Companies.

Transactions in Land

A transaction in land can be regarded as within the definition of ‘trade’ and thus be subject to profits tax.  However, trading requires an intention to trade, and the question to ask is whether this intention existed at the time of the acquisition of the asset, i.e. whether the asset was acquired with the intention of disposing of it at a profit or whether it was acquired simply as a permanent investment.  This is largely a question of fact.

In Lee Yee Shing and Another v. CIR [2008], it is recognised that “business” is a wider concept than trade.  The Judge in Lee Yee Shing also held that the term ‘business’ itself, when used in the context of a taxation statute, is the fundamental notion of the exercise of an activity in an organised and coherent way and one which is directed to an end result.

As such, a corporation which lets out any property is immediately regarded as carrying on business and the rent received will be subject to profits tax whereas an individual is normally not so regarded unless he sub-lets property held by him under lease or tenancy.  He may however be subject to Property Tax discussed below.

Difference in treatment for individual, Hong Kong Company, and BVI Company

Under the IRO, the place of residence or domicile of the person (and the place of incorporation in the case of a company) generally plays no part in determining whether liability exists.  The IRO contains no exemption from profits tax for offshore companies (e.g. BVI companies).  Therefore, whether a company is liable to profits tax depends on the nature and extent of its activities in Hong Kong.  This applies equally to Hong Kong companies and those incorporated overseas.

Again, the nature and extent of its activities in Hong Kong is a question of fact.  However, once a transaction in land in Hong Kong falls within the definition of “trade” under the IRO, it would be extremely difficult if not impossible to claim that the “trade” was not carried on in Hong Kong and/or the profits do not arise or are not derived from Hong Kong.

Given the discussions above, a BVI Company does not have any apparent advantage in terms of profits tax.  On the contrary, setting up a company to hold property may attract a higher rate charged on the profits for the company than that charged in respect of an individual person (16.5% and 15% respectively for the 2009/10 year of assessment).  Having said that, a company holding property is entitled to claim allowance for depreciation of the property which will effectively reduce the amount of profits tax payable by the company.  Such allowance does not apply to an individual person holding property in Hong Kong.

5.            Property tax

Under section 5 of the IRO, property tax shall be charged for each year of assessment on every person being the owner of any land or buildings situated in Hong Kong at the standard rate (15% for the 2009/10 year of assessment) on the net assessable value (i.e. rental income less deductibles of rates levied under the Rating Ordinance (Cap. 116) together with a deduction of 20% repairs allowance thereafter) of such land or buildings.

The definition of “person” is discussed above and would cover Hong Kong and BVI companies.

Difference in treatment for individual, Hong Kong Company, and BVI Company

Property tax will be charged in respect of the net assessable value on any person, whether it being an individual, a Hong Kong Company or a BVI Company.  However, an important exemption is available for corporation which is carrying on a trade, profession or business in Hong Kong.  As discussed above, a corporation which lets out any property in Hong Kong is regarded as carrying on business in Hong Kong and subject to profits tax.

Under Section 5(2)(a) of the IRO, a corporation which is liable to profits tax may apply in writing to the Commissioner for exemption from property tax.  The Commissioner will only grant an exemption if he is satisfied that the corporation is entitled, if exemption were not granted, to set-off the property tax against its profits tax liability under Section 25, i.e. either: -

(1)         the profits from the property are part of the profits of the trade, profession or business carried on by the corporation; or

(2)         the property is occupied by the corporation for the purpose of producing profits in respect of which it is chargeable to profits tax.

It should be noted that the letting of property by an individual is not deemed under Section 2 of the IRO to be a business.  It may nonetheless, depending on the circumstances of each particular case, amount to a business and be subject to profits tax.  See, for example, Louis Kwan-nang Kwong, Carlos Kwok-nang Kwong v CIR CACV 16/1989 where two individuals letting out a cinema as a going concern were held to be carrying on business subject to profits tax.  The exemption under Section 5(2)(a) is not available for individuals as it specifically applies only to corporations.  However, any property tax paid by an individual may be set-off against the profits tax paid by that individual under Section 25, and any amount of property tax paid exceeding the profits tax will be refunded.

Therefore, in certain scenarios where the profits tax in relation to the property is lower than the property tax, it may be beneficial to use a corporation to let a property (which is deemed to be a business and thus subject to profits tax) and make use of the provisos under Section 5(2)(a) to apply for an exemption from property tax.  However, there does not seem to be any further advantage of using a BVI Company as opposed to a Hong Kong Company.

6.            Stamp duty

The Stamp Duty Ordinance (Cap. 117) (“SDO”) imposes stamp duty on certain types of documents, which, for the purpose of this article, includes conveyance on sale (i.e. Assignment) and transfer of Hong Kong stock.

Whereas conveyance on sale is the only option open for an individual to transfer the beneficial interest in land, the owner of a corporation (Hong Kong Company or BVI Company) may transfer the beneficial interest in land to another party by transferring the shares of the corporation instead.

Conveyance on Sale

A typical conveyance on sale of immovable property in Hong Kong attracts Stamp Duty at the ad valorem rate prescribed in Head 1(1) of the SDO.  This rate is in accordance with a progressive scale dependent on the value of the property (i.e. the consideration) ranging from HK$100.00 for property valued at less than HK$2,000,000 up to a maximum of 4.25% for property valued at more than HK$21,739,120.

Transfer of Hong Kong Stock

“Hong Kong stock” is defined under Section 2 of the SDO and means stock, the transfer of which is required to be registered in Hong Kong.  As such, shares in companies which are required to keep their register of members in Hong Kong (mainly Hong Kong incorporated companies or companies listed on the Stock Exchange of Hong Kong) are within the definition of Hong Kong stock.

The transaction of Hong Kong stock attracts a total Stamp Duty of 0.2% of the amount of the consideration or of its value at the date on which the contract note falls to be executed plus a HK$5.00 fixed Stamp Duty on the executed instrument of transfer.  Therefore, depending on the value of the property held by the corporation, Stamp Duty may be saved by transferring the shares of the corporation holding the property rather than by conveyancing the property itself.

Transfer of BVI Stock

Stamp Duty may be avoided completely by the use of a transfer of shares in a BVI Company holding a property in Hong Kong.  Shares in a BVI Company does not fall under the definition of “Hong Kong stock” as the register is not required to be kept in Hong Kong and thus the transfer of the stock is not required to be registered in Hong Kong.  To avoid a possible challenge by the Inland Revenue, it is advisable to keep the register of members in BVI.

7.            Liability in case of legal proceedings arising in the course of selling and purchasing the property

If an individual fails to complete the purchase or sale of the property in accordance with the terms in the Agreement for Sale and Purchase, he may find himself personally liable for damages suffered by the other party.  In the worst case, the individual may have to be adjudged bankrupt as a result of these liabilities.

On the contrary, shareholders and directors of a limited company (Hong Kong or BVI) are not normally personally liable.  In the normal cases, only the limited company is liable to claims by other parties and the worst case is for the company to be wound up.  Hence, a potential buyer of a property may use a shelf company with nil or nominal assets to purchase the property.

8.            Additional legal costs in selling or mortgaging the property

Unlike a Hong Kong company or an individual, a purchaser or a mortgagee would most likely require a BVI company wishing to sell/mortgage its Hong Kong property to provide a Certificate of Good Standing (which confirms that the company is still in legal existence and has not been wound up), a Certificate of Encumbency (which sets out the names of the shareholders and directors), BVI legal opinion which proves the legal validity of the documents signed or executed by the company. 

The costs of obtaining such certificates and legal opinion are around HK$25,000 to HK$35,000 on top of other legal costs.

9.            Conclusion

As discussed above, using a BVI company to hold a Hong Kong property may have certain advantages such as keeping the beneficial owner anonymous or reducing the amount of stamp duty payable.  However, it may also incur additional costs such as costs of setting up and maintaining the BVI company and obtaining the certificates and legal opinion when the company wishes to sell/mortgage the property.  Similarly, holding the property individually or using a Hong Kong company has their own advantages/disadvantages.  Whether the advantages outweigh the disadvantages has to be determined on a case-by-case basis.