It’s no secret the rich are getting richer, and that’s especially true overseas where homeowners are taking advantage of a relatively new tax loophole in a market that’s famous for its laissez-faire economics.
A permanent resident of Hong Kong, which is someone who already owns property in the Chinese territory, is typically required to pay a 15 percent levy on the purchase of another home. However, if the second house or additional residence is bought via a shell company, the 15 percent levy drops to a 0.2 percent stamp duty. That means the homeowner is left paying just a 75th of the taxes they would pay otherwise. The difference is because when a company buys property, it is considered a share transfer rather than a home purchase.
Chinese buyers are taking advantage of the loophole and saving millions. Pan Sutong, chairman of Hong Kong investment conglomerate Goldin Group, recently purchased a second home in Hong Kong for a whopping $318 million. However, he bought the home through a shell company, so he was able to save more than $47 million. The three-story mansion is in the exclusive Deep Water Bay community in the Southern District of Hong Kong, where homes often cost millions if not hundreds of millions of dollars.
The loophole took effect in 2013 when only 13 percent of purchases in the area were sold through a company and share transfer. Since then, those sales have jumped to 27 percent. A report by Midland Realty also estimates that $2 billion worth of homes were sold since the beginning of 2017 using the loophole to achieve a significant tax cut. These homeowners saved a combined $200 million in the past 18 month or so. Overall, more than $1 billion has been saved due to the loophole. In the eyes of Liber Research Community’s Henry Chan, “the stamp duties are made ineffective because there’s a back door to avoid paying these.”
Hong Kong is known for its dramatic gap between the rich and poor. The territory has the second highest Gini coefficient in the world, which reflects inequality in wealth distribution. Hong Kong also has the least affordable housing market, taking the so-called average person nearly 20 years to earn enough income to purchase a property. Compared to the least affordable city in San Jose, that is almost twice as long.