Real Estate Going Global Hong Kong

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1 Real Estate Going Global Hong Kong Tax and legal aspects of real estate investments around the globe 2013 Real Estate Going Global Hong Kong 1

2 Contents Contents Contents... 2 Real Estate Tax Summary Hong Kong... 3 Contacts... 7 All information used in this content, unless otherwise stated, is up to date as of 10 April Real Estate Going Global Hong Kong 2

3 Real Estate Tax Summary Hong Kong Real Estate Tax Summary Hong Kong General Foreign investors may invest in Hong Kong property through a non-resident entity or, more commonly, through a resident entity. Rental income Rental income derived from Hong Kong property is taxable in Hong Kong. If the property owner is a company, whether resident or non-resident, the rental income is liable to profits tax at the rate of 16.5%. If the property owner is an individual, whether resident or non-resident, then the rental income is subject to property tax at the rate of 15%. Corporate investors Interest on loans used to acquire property can be deducted against rental income if the lender is subject to tax on the interest income in Hong Kong, or if the lender is a financial institution and the loan is not secured or guaranteed by any deposit or loan, the interest from which is not subject to tax in Hong Kong. Other costs incurred in deriving rental income, such as insurance premiums, repair and maintenance expenses, property management fees, etc., are also deductible. Capital expenditures, such as stamp duty and legal costs incurred in acquiring the property, are not deductible. Individual investor Property tax is levied on the rental income received after deduction of government rates, if these are paid by the property owner. A notional deduction of 20% of the net rental income amount is also allowed to cover repairs and other recurrent expenses. Resident individuals may opt for personal assessment, whereby the net taxable rental income is offset by the attributable mortgage interest incurred, if any. The net amount is then subject to tax, either at progressive rates with the deduction of personal allowances, or at the standard rate of 15% without the deduction of personal allowances, whichever is lower. Stamp duty A lease agreement is subject to stamp duty, generally at a rate of 0.25% to 1% of the average yearly rent, depending on the length of tenancy. The Financial Secretary announced various measures to curb short-term speculation which included changes in the ad valorem stamp duty rate, and the introduction Real Estate Going Global Hong Kong 3

4 Real Estate Tax Summary Hong Kong of Special Stamp Duty and Buyer s Stamp Duty on transfer of properties. The Stamp Duty Ordinance would be revised to reflect these measures or the revised rates. Ad valorem stamp duty Unless specially exempted, the disposal of Hong Kong property (residential and nonresidential) whereby the agreement is executed on or after 23 February 2013 would be subject to Hong Kong ad valorem stamp duty of up to 8.5% on the higher of the sales consideration or market value of the Hong Kong property. The ad valorem stamp duty is normally payable by the purchaser. Special Stamp Duty Hong Kong introduced a Special Stamp Duty (SDD) with effect from 20 November Unless specifically exempted, any residential property acquired on or after 20 November 2010, either by an individual or a company (regardless of where it is incorporated), and resold or transferred within a specified period of time after acquisition, would be subject to SDD. The SDD payable is calculated by reference to the stated consideration or the market value, whichever is higher, at the following regressive rates for the different holding periods by the vendor or transferor before the disposal. The SDD rates were revised for any residential property acquired on or after 27 October Period within which SSD Rates SSD Rates the residential property is (for residential property (for residential property resold or transferred after acquired between acquired on or after its acquisition 20 November 2010 and 27 October 2012) 26 October 2012) 6 months or less 15% 20% More than 6 months but for 12 months or less More than 12 months but for 24 months or less More than 24 months but for 36 months or less 10% 15% 5% 10% Not applicable 10% All parties to a contract are liable to the SSD. Buyer s Stamp Duty Hong Kong introduced a Buyer s Stamp Duty (BSD) with effect from 27 October Unless specifically exempted, a purchaser (any individual without Hong Kong permanent residence or any corporation irrespective of its place of incorporation) would be liable to BSD for transfer of residential property on or after 27 October BSD is charged at 15% on the higher of sales consideration or market value. Depreciation allowances Corporate investors are entitled to a tax depreciation allowance on the property in computing their liability to profits tax. Accounting depreciation is capital in nature, and is not tax-deductible. Real Estate Going Global Hong Kong 4

5 Real Estate Tax Summary Hong Kong Certain components of a building, whether new or second-hand, may be considered to be plant or machinery. These are tax depreciable by way of an initial allowance of 60% of the cost in the year of acquisition, and an annual depreciation allowance ranging from 10% to 30% of the depreciated value, depending on the nature of the plant and machinery. Lift equipment or elevators, escalators, air-conditioning systems, sprinklers, etc. for example, are considered to be plant or machinery eligible for a 60% initial depreciation allowance and an annual depreciation allowance at the rate of 10%. A building or structure, or a part thereof, other than the physical plant and equipment, may be eligible for a tax depreciation allowance on the cost of construction. If the building or structure is used by the owner, or its tenant, in a qualifying business, such as milling, manufacturing, transportation, public utilities, farming and trade of storage, etc., then an industrial building allowance is available. An initial depreciation allowance of 20% on the cost of construction is available for the first use of an industrial building, and an annual depreciation allowance at the rate of 4% on a straight-line basis is available where the building or structure remains in use in a qualifying business. For a second-hand industrial building, the annual allowance is computed by reference to the unclaimed residual tax value and balancing adjustment (see below), divided by the remaining portion of the building s statutory deemed useful life of 26 years. In respect of new buildings or structures other than those qualifying as industrial buildings, an annual commercial building allowance of 4% of the construction cost is available. For a second-hand commercial building, the annual allowance is computed on the same basis as an industrial building. When the relevant interest in the building or structure is sold, or the building or structure is demolished or destroyed, there may be a balancing adjustment on the unclaimed tax residual value by reference to the sale proceeds, resulting in either a deductible balancing allowance or a taxable balancing charge. For capital expenditure relating to the renovation or refurbishment of a building or structure (other than a domestic building or structure), corporate investors may alternatively claim an annual profits tax deduction at the rate of 20% on a straight-line basis. No tax depreciation allowance on the building or property is available to an individual investor who is subject to property tax. Capital gains on the sale of real property There is no capital gains tax in Hong Kong. A gain on disposal of real property may, however, be liable to profits tax if the owner is engaged in a venture in the nature of a trade in real property. Withholding tax on dividends There is no dividend withholding tax in Hong Kong. A resident company may distribute its retained earnings to shareholders, whether resident or non-resident, tax-free. Real Estate Going Global Hong Kong 5

6 Real Estate Tax Summary Hong Kong Loss carryforward Operating losses may be carried forward indefinitely to offset future taxable profits. There is no loss carryback. Rates and Government rent Rates are charged at the current rate of 5% on the rateable value, which is the estimated annual rental value of property. Rates are payable by either the owner or the occupier, depending on their agreement. In the absence of any agreement to the contrary, the liability to rates rests with the occupier. Government rent applies to land held under a Government lease that expired prior to 30 June 1997, or has been granted since 27 May Government rent is calculated at 3% of the rateable value of the property. The owner is liable for Government rent, unless there is an express agreement to the contrary. Real Estate Going Global Hong Kong 6

7 Contacts Hong Kong Contacts Advisory Victor Huang Tel: Assurance Alan Ho Tel: Tax KK So Tel: Jacqueline Wong Tel: Real Estate Going Global Hong Kong 7

8 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in the publication, and, to the extent permitted by law. PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. Not for further distribution without the permission of PwC. PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm s professional judgment or bind another member firm or PwCIL in any way.

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