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August 15, 2022
2022-1233

Hong Kong Court holds limited liability partnerships are entitled to intra-group stamp duty relief

  • The LLPs were previously denied stamp duty relief by the Collector of Stamp Revenue on the grounds that the respective LLPs did not have "issued share capital" and did not meet the association requirement for the Relief.
  • The Court adopted a purposive interpretation approach, rejecting the narrow interpretation of the Collector of Stamp Revenue.
  • Taxpayers should review their organization structure to determine if they qualify for intra-group stamp relief in an internal group restructuring.

Executive summary

Hong Kong's District Court recently overturned a determination made by the Collector of Stamp Revenue (the Collector) and handed down a favorable ruling regarding the eligibility of limited liability partnerships (LLPs) for Hong Kong intra-group stamp duty relief (the Relief). The Collector previously refused to grant the Relief on the grounds that the LLPs concerned did not have "issued share capital" and therefore could not meet the association requirement for the Relief.

Adopting a purposive interpretation approach, the Court rejected the narrow interpretation adopted by the Collector and held that the term "issued share capital" should be accorded its ordinary and natural meaning. It was held that so long as: (i) the participating or share capital of an LLP was "issued," i.e., "having been legally given to (those entitled to the share capital) in a legally completed transaction"; and (ii) the share capital can be divided into quantifiable portions under the laws under which the LLP was incorporated, such capital qualified as "issued share capital" for purposes of the Relief.

Detailed discussion

Currently, stamp duty is imposed on certain types of instruments related to the transfer of beneficial interests in Hong Kong immovable property and stock. In an internal group restructuring, relief for the above dutiable documents would however be granted if the transferor and the transferee are bodies corporate that are not less than 90% associated by reference to direct or indirect beneficial ownership as defined. Such association can be satisfied by way of either: (i) the transferor and the transferee are not less than 90% associated by reference to the beneficial ownership of their issued share capital; or (ii) a third body corporate is the beneficial owner of not less than 90% of the issued share capital of both the transferor and the transferee. The "issued share capital" of a body corporate that is not a company with limited liability would still need to be "similar" to that of the latter under the Companies Ordinance of Hong Kong.

In the present case, there was an internal group restructuring whereby the entire share capital of a Hong Kong company was transferred from an LLP incorporated in the United Kingdom (UK) to an LLC. The transferor LLP was wholly owned by the transferee LLC through an intermediary wholly owned LLP incorporated in the UK.

The Collector refused to grant the Relief on the grounds that the LLPs concerned do not have "issued share capital," and therefore could not meet the condition as being at least 90% associated with the LLC.

Adopting a purposive interpretation approach, the Court rejected this narrow interpretation and held that the term "issued share capital" should be accorded its ordinary and natural meaning. The Court held that so long as: (i) the participating or share capital of an LLP was "issued," i.e., "having been legally given to (those entitled to the share capital) in a legally completed transaction"; and (ii) the share capital can be divided into quantifiable portions under the laws under which the LLP was incorporated, such capital qualified as "issued share capital" for the purposes of the Relief. Applying the said interpretations to the current facts of the case, the judge held that the association condition is met and the entities involved are therefore entitled to the Relief.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

 

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