Tax on Corporate Transactions: Hong Kong

A Q&A guide to tax on corporate transactions in Hong Kong. This Q&A provides a high level overview of tax in Hong Kong and looks at key practical issues including, for example, the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

This Q&A is part of the multi-jurisdictional guide to tax. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Jacqueline Shek, Baker & McKenzie
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The Inland Revenue Department (IRD) of the Hong Kong Government is responsible for tax assessment and enforcement. Within the IRD, the Stamp Office is the designated unit responsible for stamp duty assessment and collection.

 
2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction? If yes, provide brief details, including whether clearance or guidance is binding.

It is possible to obtain an advance ruling from the IRD in relation to the application of any provision of Inland Revenue Ordinance (IRO) to a specific arrangement or transaction. The ruling granted is only binding on the taxpayer applicant for that particular transaction for the specified period, provided the facts set out in the ruling are complete and remain correct.

The advance ruling mechanism is not available for stamp duty issues.

 

Main taxes on corporate transactions

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions? In relation to each tax/fee identified, explain briefly:
  • Its key characteristics.

  • What triggers it.

  • Who is liable.

  • The applicable rate(s).

Stamp duty

Stamp duty is a tax on the:

  • Conveyance on the sale of real property.

  • Lease of real property.

  • Transfer of Hong Kong stock.

  • Issuance of bearer instruments.

The transfer of immovable properties in Hong Kong attracts stamp duty at a progressive rate ranging from HK$100 for properties under HK$2 million to 4.25% of the consideration for properties above HK$21,739,120. All parties executing the instrument are liable for the duty. As at 1 March 2011, US$1 was about HK$7.8.

There are proposals which, if enacted, will take effect retrospectively to impose special stamp duty on certain real estate transactions involving residential properties acquired on or after 20 November 2010. The seller will be liable for the duty.

The duty will apply if the seller holds the property for less than 24 months. The rate of stamp duty will be:

  • 15% of the sale price if the resale is within six months of purchase.

  • 10% if the resale takes place between six and 12 months.

  • 5% if the resale takes place between 12 and 24 months of purchase.

The transfer of Hong Kong stock attracts stamp duty at 0.2% on the higher of the consideration or market value of the shares (that is, 0.1% on the shares sold and a further 0.1% on the shares bought) together with a fixed amount of HK$5 on the instrument of transfer. The agent, or where there is no agent, the principal effecting the transfer is liable.

Duplicates and counterparts generally attract a fixed duty of HK$5.

 
4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions? In relation to each tax identified, explain briefly:
  • Its key characteristics.

  • What triggers it.

  • Who is liable.

  • The applicable rate(s).

A person is liable to Hong Kong profits tax if he carries on trade or business in Hong Kong and derives Hong Kong source business. Profits tax is chargeable at 16.5% for corporations.

Hong Kong does not tax capital gains. However, the onus is on the taxpayer to satisfy the IRD that a gain is capital in nature, as opposed to a revenue gain (see Question 9).

 
5. What are the main value added and/or sales taxes potentially payable on corporate transactions? In relation to each tax identified, explain briefly:
  • Its key characteristics.

  • What triggers it.

  • Who is liable.

  • The applicable rate(s).

There is no value added tax (VAT), goods and services tax (GST) or similar tax.

 
6. Are any other taxes potentially payable on corporate transactions? In relation to each tax identified, explain briefly:
  • Its key characteristics.

  • What triggers it.

  • Who is liable.

  • The applicable rate(s).

Capital duty is levied on registering or increasing the share capital of a company, at HK$1 for every HK$1,000 or part of it, subject to a maximum fee of HK$30,000 per case. The amount is not significant, therefore the remainder of this chapter will not further discuss capital duty.

 
7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Foreign companies are liable to Hong Kong profits tax if they carry on trade or business in Hong Kong and derive Hong Kong source profits. Under domestic law, the threshold for "carrying on business" is very low in Hong Kong. Case law indicates that even minimal activities can amount to carrying on business in Hong Kong. For example, the activities of either an employee or an agent can be attributed back to a company. However, foreign companies may be able to seek protection under applicable double tax agreements.

Further, non-residents, including foreign companies, can enjoy an exemption from Hong Kong profits tax for profits from securities trading transactions carried out in Hong Kong under the offshore funds exemption regime when they trade in listed securities and the transaction is arranged by a licensed person. There are, however, anti-avoidance rules that apply if the non-resident is ultimately owned by persons resident in Hong Kong.

Foreign companies are liable to stamp duty if they deal with Hong Kong stock or immovable properties in Hong Kong regardless of whether they have presence in Hong Kong.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions? If yes, provide brief details.

Dividends income is not taxed.

 

Share acquisitions and disposals

9. What taxes are potentially payable on a share acquisition/share disposal?

Profits tax

Every person carrying on trade or business in Hong Kong is chargeable to profits tax on income arising in or derived from Hong Kong. Hong Kong does not tax gains of a capital nature (see Question 4). Further, Hong Kong has source based taxation therefore foreign-sourced income is also not taxable.

In a share disposal situation, the issues include:

  • Whether the seller carries on business in Hong Kong.

  • Whether there were any profits from the disposal.

  • Whether the profits were capital or revenue in nature.

  • Whether the profits were Hong Kong sourced.

The threshold for carrying on business is low (see Question 4). The onus is on the vendor to satisfy the IRD if it wishes to assert that any gain is capital in nature (that is, long term investment asset) or foreign sourced (for example, disposal of shares in an overseas company where the sale is negotiated and concluded overseas).

Where the seller is not a Hong Kong tax resident, further consideration may be given concerning:

  • Whether the offshore funds exemption applies.

  • Whether there is protection under an applicable double tax agreement.

The offshore funds exemption could be relevant where the seller is non-resident and the transaction fits within the exemption regime. However, the exemption is not available where the transaction involves shares in a private company as defined under the Companies Ordinance.

Double tax treaties may be relevant where the vendor is a non-resident.

Stamp duty

Stamp duty (see Question 3) applies if the shares being acquired or disposed falls within the definition of Hong Kong stock. Hong Kong stock is defined in the ordinance to mean stock the transfer of which is required to be registered in Hong Kong.

 
10. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

See Question 9 for the potential exemption from Hong Kong profits tax.

Stamp duty

Several exemptions and reliefs from stamp duty are available depending on the facts. The exemption from stamp duty in relation to transfer within a corporate group is most commonly used in corporate transaction. To qualify for this exemption, among other conditions being fulfilled, the transferor and transferee must be associated by having common ownership of not less than 90% of the issued share capital. The exemption is by application.

There are also stamp duty mitigation techniques such as issuance of new shares to the buyer instead of transferring existing shares. Any mitigation techniques require proper implementation.

 
11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

The buyer can generally continue to use any tax losses in the target company to offset against future taxable profits of the company. There is no requirement for the target company to maintain the same business, but there is an anti-avoidance provision denying losses where the sole or dominant purpose of a change in ownership is to access the tax losses.

From a stamp duty perspective, if the target is a property holding company, it is more efficient to transfer the shares, which attracts stamp duty at 0.2%, than to transfer the underlying properties, which could be subject to stamp duty of up to 4.25%. There is no land rich provision under Hong Kong stamp duty law.

Disadvantages

The buyer would take on the tax risks latent in the target company.

From a stamp duty perspective, if the target company has assets of significant value the transfer of which are not subject to stamp duty (such as intellectual property), it may be more cost effective to transfer the assets rather than the shares as the share transfer attracts ad valorem stamp duty.

 
12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

The seller can receive a tax-free capital gains on the disposal of shares which has been held as long-term investment. In an asset deal, the target company must separately ascertain the tax treatment on disposal of discrete assets.

Given that both the seller and buyer are liable to stamp duty in a transaction, the seller also saves stamp duty if the target company possesses valuable underlying real estate.

Disadvantages

As tax losses can be carried forward indefinitely, and there is no continuity of ownership or continuity of business requirements, a seller may wish to retain a loss making company so that it can use the company for other profit generating businesses. Tax losses cannot be transferred.

 
13. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.

The preferred structure depends on:

  • The value of the shares.

  • Whether the parties have a presence in Hong Kong.

  • Whether the company is a Hong Kong company or a non-Hong Kong company.

  • The assets held by the company.

Using a special purpose vehicle to hold Hong Kong real property is very common.

It is not uncommon for Hong Kong businesses and assets to be held by offshore companies (typically British Virgin Island (BVI) companies). This could potentially avoid Hong Kong stamp duty if the transaction involves transfer of the BVI shares.

It is also common for Hong Kong companies to be used as the holding company for a non-Hong Kong group or to hold offshore assets (that is, People's Republic of China (PRC) investments). Tax considerations on disposal are quite different in those situations.

Stamp duty is calculated on the higher of consideration and market value of the shares. For unlisted shares, the Stamp Office looks to the net asset value of the company to ascertain its market value. Where a transaction involves transfer of a Hong Kong company's shares that attracts Hong Kong stamp duty, it is common for the target company to first pay out a dividend to reduce the net asset value of the target company.

 

Asset acquisitions and disposals

14. What taxes are potentially payable on an asset acquisition/asset disposal?

Stamp duty

If the asset acquisition involves the selling of immovable properties in Hong Kong, stamp duty at a progressive rate ranging from HK$100 flat to 4.25% of the consideration is imposed. For non-residential property, the assignment is subject to ad valorem stamp duty. For residential property, the sale and purchase agreement is subject to ad valorem stamp duty.

Leases of immovable properties attract relatively low stamp duty, but the assignment of leases must be carefully effected to avoid the transaction being stamped at the higher ad valorem rates for conveyance.

No capital gains tax

If the profit arises from sale of capital assets, this gain is not taxable in Hong Kong.

No GST/VAT

There is no GST or VAT in Hong Kong.

 
15. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

Stamp duty relief for intragroup transfers (see Question 10) may also be available for conveyancing of immovable property provided the conditions for the relief are met. The conditions include (section 45, Stamp Duty Ordinance (SDO)):

  • 90% common ownership in the issued share capital.

  • There is no plan for the transferee to become dissociated from the transformer.

  • The consideration of the transfer is not funded by a third party.

The transfer of legal title without changes in beneficial interest only attracts a HK$5 flat duty.

 
16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

The buyer can "reset" the tax base for depreciable assets and claim for a higher percentage of initial tax depreciation allowance on acquisition of certain assets (for example, 60% on plant and machinery items). Interest incurred on a loan to fund the asset purchase may be tax deductible if the asset is used to produce assessable income.

Disadvantages

Higher stamp duty could be payable if the assets acquisition involves the purchase of valuable real property. In an asset acquisition, the buyer cannot use the tax losses (if any) in the target company to offset against the future taxable profits.

 
17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

Capital gains on selling assets are not taxable. The seller retaining the company may also retain the tax losses carried forward in the company to offset against future profits if they inject new businesses into the company.

Disadvantages

The seller is liable to pay half the higher stamp duty in an assets acquisition that involves the transfer of valuable real property. (However, it may be subject to commercial negotiations between the parties concerning who would bear the cost.)

 
18. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.

In an asset deal, parties are advised to allocate the consideration to specific assets being transferred. While capital expenditure on plant, machinery and building attracts capital allowances (that is, tax depreciation), the depreciation available for intangibles is limited. Purchased goodwill is neither amortisable nor deductible for the buyer.

 

Legal mergers

19. What taxes are potentially payable on a legal merger?

There is no concept of a legal merger.

Mergers are often conducted in a form of transferring trades or assets from two companies to a new company or from one company to another. The discussion on assets acquisition also applies to mergers.

Where there is a legal merger under foreign law which involves a merger of personality (as opposed to a merger of assets), beneficial ownership of the Hong Kong assets held by the merging entities could change by operation of law rather than through an instrument of transfer. In these circumstances, the transfer of assets would not be subject to ad valorem stamp duty.

 
20. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

See Question 19.

Intragroup stamp duty relief (see Question 15) may also be available to the liable party provided the conditions in section 45 of the SDO are met.

 
21. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.
 

Joint ventures

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

Stamp duty

No specific tax is payable on establishing a joint venture company. However, the purchase of immovable property in Hong Kong for the joint venture is subject to stamp duty.

 
23. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

Intragroup stamp duty relief (see Questions 15 and 20) may also be available to the liable party.

 
24. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.

While the corporate tax rules do not allow transferring of tax losses between corporate entities, a partner in a partnership can use its share of the partnership's tax losses to offset against its own profits. Therefore one planning technique is to form a partnership as a joint venture vehicle.

 

Company reorganisations

25. What taxes are potentially payable on a company reorganisation?

Stamp duty

Stamp duty is payable on the transfer of shares which involves a Hong Kong incorporated company. See Question 9.

Stamp duty is chargeable on the higher of consideration or market value of the assets. In a group reorganisation where assets may be transferred at below market value, stamp duty can still be calculated based on the market value of the asset.

Profits tax

There are profits tax issues in the context of a group reorganisation involving transfer of Hong Kong companies (and real estate):

  • Capital gains is not subject to tax in Hong Kong, however the onus is on the taxpayer to assert that any gains is capital in nature (see Question 9). The duration of the holding period is one of the indicators of whether an investment in a company is capital or revenue. In a group reorganisation, it is possible that a specific entity only held an investment for a short period before transferring it to another holding entity within the group. As each entity is assessed on a stand-alone basis, the enquiry is whether the transferring entity held the investment as a long-term investment, and if so, what justification exists for transferring the investment which triggered profits.

  • The parties sometimes propose to transfer group assets for nominal value, or at cost. The profits tax issue is whether the transfer is effected at less than market value to assist the transferring company to avoid tax by not realising (taxable) profits on disposal.

  • In a transfer at less than market value, there is also a provision in Hong Kong tax law that treats financial assistance as taxable receipts. Where an asset is transferred to a taxpayer at less than market value, there is a question of whether this transaction gives rise to taxable financial assistance for the transferee.

 
26. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

Stamp duty exemption is available for intragroup transfers (see Question 10). The exemption is by application. Therefore, if the group reorganisation involves, for example, six ownership changes in a Hong Kong company, or the transfer of six different Hong Kong companies within the group, each transfer requires its own application supported by a statutory declaration and relevant supporting documents. The timing of transaction steps is relevant to establish 90% common ownership at the relevant point in time.

Other techniques that can be used to mitigate stamp duty include:

  • Issuing new shares instead of transferring existing shares.

  • Stripping out value by paying dividends before transferring the shares.

  • Liquidating companies and distributing shares or dutiable assets in specie.

 
27. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.

The transaction structure depends on the Hong Kong companies or assets involved and the objectives of the reorganisation.

See Question 26 for stamp duty mitigation techniques.

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

There is an exemption from stamp duty on instruments relating to the property of a company being wound up by the court or under a creditors' voluntary winding up as provided in section 281 of the Companies Ordinance (Cap. 32).

Further, in a restructuring involving shareholders' voluntary winding up of a company, the beneficial interest in the property that was owned by the company vests with the shareholders when the company goes into liquidation. Therefore no stamp duty is payable when instruments are effected to transfer legal interest in the property from the liquidator to the shareholders.

Where intragroup stamp duty relief was previously granted, and the transferee subsequently ceases to be associated with the transferor, there is a claw back of the stamp duty that was exempted. The claw back period is for two years from the date of the exempted transfer.

 

Share buybacks

29. What taxes are potentially payable on a share buyback?

Profits tax

Any expense incurred by a company to redeem or repurchase its own shares is unlikely to be deductible for profits tax purposes.

Stamp duty

Under the Companies Ordinance, it is possible for a Hong Kong company to reduce its share capital and redeem its shares, or to repurchase its own shares. The stamp duty position is different in each case. The general practice of the Stamp Office is that share redemptions are not dutiable. By contrast, share buyback is treated as a normal sale and purchase of Hong Kong shares, therefore subject to 0.1% of stamp duty on both the seller and buyer.

 
30. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

To the extent that the share buyback attracts stamp duty, stamp duty relief is available for intragroup transfers where the relevant conditions are satisfied (see Questions 15, 20 and 23).

 
31. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.

A reduction in share capital is preferred if mitigating the tax burden is the key concern.

A company can pay out a dividend before buying back or redeeming its shares. This is attractive from income tax and stamp duty perspectives, as dividends are not subject to profits tax or withholding tax.

 

Private equity financed transactions: MBOs

32. What taxes are potentially payable on a management buyout (MBO)?

In line with international trends, it is difficult for a private equity fund to:

  • Assert that an asset is held for long-term investment purposes.

  • To claim residency for tax treaty purposes.

In the context of Hong Kong, the capital or revenue distinction is relevant where the private equity fund is carrying on business in Hong Kong and seeks to assert that the gain on disposal is capital in nature and therefore not taxable.

In relation to tax treaty protection, the issue tends to arise where overseas investments (typically PRC) are held through Hong Kong companies. In this case, it is the PRC tax authority that must be satisfied that the beneficial owner is a Hong Kong tax residence, and has economic substance in Hong Kong, before the transferor can claim treaty protection under the Hong Kong-PRC double tax agreement.

Stamp duty

Management buyouts (MBOs), like any other share acquisition of the company, attract 0.1% stamp duty for both the buyer and seller.

 
33. Are any exemptions or reliefs available to the liable party? If yes, provide brief details.

For profits tax, the offshore funds exemption regime provides a non-resident with relief from Hong Kong tax on profits arising in Hong Kong from specified transactions. Specified transactions typically cover transactions in, for example, Hong Kong securities, future contracts and commodities contracts that are arranged by a person licensed by the Securities and Futures Commission.

 
34. What transaction structures (if any) are commonly used to minimise the tax burden? Give brief details of the effect of each structure.

The planning techniques for share sale transactions apply equally to MBOs (see Question 31).

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

Hong Kong is undergoing a transformation in international tax planning as comprehensive double tax agreements are increasingly being negotiated and concluded. Up until about four years ago, Hong Kong only had three double tax agreements. As of March 2011, 20 agreements have been signed. This network of double tax agreements provides considerably more protection for cross-border corporate transactions.

 

Contributor details

Jacqueline Shek

Baker & McKenzie

T +852 2846 2154
F +852 2845 0476
E jacqueline.shek@bakermckenzie.com
W www.bakermckenzie.com

Qualified. New South Wales, 1998; Hong Kong; 2005

Areas of practice. Corporate tax planning; tax controversy; Hong Kong stamp duty.

Recent transactions

  • Advising clients on corporate restructuring, financial products, Hong Kong stamp duty, employee remuneration planning, and private wealth or trust planning.
  • Handling tax audits, tax controversy and litigation matters in Hong Kong.

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