(c) Effectiveness of the tax planning ideas
One of Mr Chan’s ideas is to hold the property in the name of his daughter, who has always lived in the UK and has no
connection with Hong Kong. It is Mr Chan’s belief that this would render the rental income to be tax-free for Hong Kong tax
purposes. As mentioned in (b)(i) above, property tax is imposed on any owner of land or building (or land and building)
situated in Hong Kong. As long as the land or building (or land and building) is situated in Hong Kong, property tax is payable
on any rental income received for the right to use. The citizenship, residence or place of domicile of the owner is irrelevant.
Another idea is to hold the property in the name of a company incorporated in an offshore tax haven with a view to avoiding
tax in Hong Kong. Under the property tax regime, as explained above, the rental income received from properties located in
Hong Kong will be taxable regardless of the citizenship, residence or place of domicile of the owner. This is also applicable
in the case of a corporate owner. Therefore, if rental income is received by an offshore tax haven company which is the
registered owner of a property located in Hong Kong, property tax is still payable by the company.
As far as profits tax is concerned, however, whether or not the tax haven company is taxable under s.14 depends on whether
or not the company carries on its property letting business in Hong Kong. The issue of ‘carrying on business’ is a matter of
fact but is usually contentious. Simply setting up the company offshore may not necessarily be sufficient to prove that the
company does not carry on a business in Hong Kong. By having a property located in Hong Kong and let for rent, it will be
regarded as carrying on business in Hong Kong and thus subject to profits tax under s.14(1), since the rental income must
have a source in Hong Kong.
(d) Tax implications arising from the disposal of properties
In the event of the disposal of the properties, any profits arising from the disposal will be subject to profits tax in Hong Kong
if they are considered revenue in nature. Profits which are capital in nature are not taxable in Hong Kong. Whether the profits
are capital or revenue will be decided by applying the principles commonly known as the badges of trade, which look at
various parameters of facts, including the nature of the subject matter itself, the intention at the time of acquisition,
19circumstances leading to the disposal, length of ownership, frequency of transaction, profit-motive, any additional work done
to the property before sale, and method of financing, etc. These factors are relevant regardless of whether the properties are
held by an individual or a company.
If the properties are held by an individual as a trading stock, i.e. for trading, property tax and profits tax are both chargeable
during the period in which rental income is received, subject to offsetting under s.25 (as in (b) above). A loss is allowed under
profits tax but not property tax. In the event of disposal, profits tax will be calculated based on the excess of the disposal
proceeds over the original cost of the properties. Direct related costs such as legal fees may be deducted.
If the properties are held by a company, upon exemption from property tax under s.5(2)(a), profits tax is paid during the period
when the ownership remains with the company. As stated above, it is possible to incur a loss if the total expenditure such as
mortgage interest and depreciation allowance is in excess of the rental income received and such a loss incurred can be
carried forward by the company for offset against future profits. In the year of disposal when taxable revenue profits are
derived, the profits will be reduced by the accumulated tax loss brought forward. It is therefore possible that the taxable profits
from the disposal will be reduced.
Where commercially feasible, it is also possible to dispose of the shares in the special purpose company instead of the
property itself. Whether the gain arising from the disposal of shares is taxable or not again depends on the badges of trade
as mentioned above. However, the main difference here is the different rate of stamp duty applicable to a transfer of shares
as opposed to a transfer of property. For a transfer of shares, the contract notes (both bought and sold notes) will be liable to
stamp duty under Head 2 of the Stamp Duty Ordinance (SDO) at the rate of 0·2% on the consideration or the value of shares
bought and sold. For a transfer of property, the agreement for sale and purchase of the property will be liable to ad valorem
duty under Head 1(1A) of the SDO at the rate of 1·5% to 4·25% on the greater of the consideration or the unencumbered
value of the property. The formal assignment executed in conformity with the stamped agreement will only be liable to duty
at the fixed rate of $100.
