Wealthy buyers worldwide are resorting to loopholes, such as the use of offshore shell companies, to complete property transactions, which often allows them to hide their identities and minimize tax consequences.
Buyers in Hong Kong are no exception, according to Denis Ma, head of research at JLL in Hong Kong, as the city is one of the most active and expensive real estate markets around the globe.
More:Hong Kong Ranks World’s Least Affordable Markets
In fact, buyers there are more motivated to avoid taxes since the Hong Kong government raised the stamp duty last November to 15% for all residential transactions except for first-time buyers, experts say.
"In cases where wealthy buyers can save 15% in duty on a home that might cost US$100 million, there is a lot of motivation to find loopholes," said Michael Cole, founder of Asia real estate information provider Mingtiandi.com.
Loopholes aren’t hard to identify, either. "There are several ways in which investors can minimize stamp duty costs on property transactions," said Mr. Ma.
The most popular include: using company holding structures to transfer property; having family members purchase properties individually to take advantage of the lower rates offered to first-time buyers; and acquiring multiple properties under a single sales and purchase agreement, according to Mr. Ma.
There are a couple of big-tickets sales that have taken place since November for which buyers have used sophisticated vehicles to minimize taxes.
In December, an unidentified buyer paid HK$912 million (about US$118 million) for two connected apartments at Mount Nicholson, a new development in The Peak. Using a single sales and purchase agreement and as a first-time buyer, the buyer "reduced the stamp duty payable by HK$38.76 million (about US$5 million)," according to Mr. Ma.
More:Hong Kong Unveils Higher Stamp Duty to Cool An Overheated Market
Earlier this month, an experienced local buyer, also unidentified, acquired a 7,891-square-foot mansion at 12 Headland Road overlooking Repulse Bay, for about HK$670 million (US$86 million). By purchasing through an offshore shell company, the buyer looked to save HK$100.5 million (US$13 million), assuming he has other properties under his name, Raymond Ho, broker of the deal at Savills Plc., told Bloomberg.
The conveyance of properties through the sale of shares of holding companies has been a common practice in Hong Kong for many years, said Mr. Ma. "In many instances, the holding company does not even have to be offshore to benefit from the lower stamp duty taxes incurred on such transactions; a maximum rate of 0.3% versus 8.5%," he said.
Government has limited resources to address loopholes
Although the government is well aware of such loopholes, it doesn’t have the resources to audit all the property transactions, said Mr. Ma. "Even when we are helping clients buy/sell properties through shareholding structures, the amount of time taken for due diligence work can amount to several months," said Mr. Ma.
In the meantime, as the stamp duty is designed to ensure housing affordability for the middle class, "the tycoons trading villas and luxury flats via offshore vehicles have not been bidding against the accountants and middle-managers for two-bedroom homes in the New Territories," Mr. Cole said.
For this reason, the higher taxes have had very little effect on the luxury market, where prices continue to rise, Mr. Ma added.
A corporate buyer is expected to pay $41.8 million in taxes
Not surprisingly, a luxury home located at 8 Mount Nicholson Road set a new price record for Hong Kong as well as Asia.
According to a filing with Hong Kong’s Land Registry on Tuesday, a limited liability company, Giant Victory Holdings, paid HK$1.08 billion (US$140 million) for a 9,950-square-foot mansion at 8 Mount Nicholson Road in The Peak on Christmas Day.
More:Hong Kong Luxury Market To Remain Stable Despite Double Stamp Duty
At HK$108,543 (US$13,992) per square foot, it ranks as the most expensive home in Asia, according to the South China Morning Post, which first reported the filing.
As a corporate buyer, it pays the full stamp duty and an extra 15% of "buyer’s levy" the government has imposed since October 2012. A total of 30% of the purchase price will subject Giant Victory Holdings to HK$324 million (US$41.8 million) in taxes.
Write to Fang Block at fang.block@dowjones.com