A recent decision of the Court of Appeal throws into doubt the availability of section 45 relief for stamp duty on transfers of shares. Otherwise known as the intra-group exemption, the section provides an exemption from stamp duty under the Stamp Duty Ordinance where Hong Kong stock is transferred from one corporate group entity to another associated corporate group entity. Under the decision, the peculiar characteristics of the legal nature of the equity interests in the transferor must be examined more closely, with the result that it is no longer adequate to simply have regard to the extent of common equity ownership between the transferor and the transferee. For corporate groups using limited liability partnerships, limited liability companies and other corporate vehicles that fall outside boundaries of a traditional company with issued share capital, the decision may complicate restructuring activities. If you’d like more information about this decision or Hong Kong tax generally, please contact one of our lawyers.
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Stamp duty is normally payable on the transfer of a beneficial interest in Hong Kong stock. However, section 45 of the Stamp Duty Ordinance (“SDO”) provides an intra-group exemption for such transfers “from one associated body corporate to another […], where in each case the bodies are associated, that is to say, one is beneficial owner of not less than 90 per cent of the issued share capital of the other, or a third such body is beneficial owner of not less than 90 per cent of the issued share capital of each”. The exemption has historically been critically important to maintain tax neutrality in intra-group restructurings where a Hong Kong company is moved from one holding company to another holding company within the same corporate group.
Though the Stamp Office has historically accepted that changes in the holding of a Hong Kong company involving holding vehicles which are limited liability companies and limited liability partnerships (which are separate legal persons) may qualify for s. 45 relief from stamp duty, recent practice has evolved so that such bodies corporate have been refused exemptive relief on the basis that such bodies lack “issued share capital” and thus, cannot meet criteria for association.
District Court Decision
On July 15, 2022, the District Court handed down its decision in John Wiley & Sons UK2 LLP and Wiley International LLC v The Collector of Stamp Revenue [2022] HKDC 716, the effect of which was to restore the historical position and affirm that bodies corporate whose equity interests are not commonly unitized into “shares” can nevertheless qualify for association and thus, s. 45 stamp duty relief. In that case, a UK limited liability partnership (“LLP 2”) owned by another UK limited liability partnership (“LLP 1”) transferred the shares in a Hong Kong company to a Delaware limited liability company (“LLC”) which beneficially owned LLP 2. The transfer was held to be eligible for s. 45 stamp duty relief on the basis that LLP 2 had issued share capital within the meaning of the SDO, s. 45 and that LLP 2 was ultimately wholly owned by LLC; hence both LLP 2 and LLC met the 90 per cent. association requirement under SDO, s. 45.
For further background on, and analysis of, that District Court decision, please refer to our earlier article.
Court of Appeal Decision
The Collector of Stamp Revenue (“Collector”), unhappy with the decision of the District Court, appealed to the Court of Appeal which heard the appeal on April 26, 2024.
On July 5, 2024, the Court of Appeal handed down its decision in John Wiley & Sons UK2 LLP and Wiley International LLC v The Collector of Stamp Revenue [2024] HKCA 578 in favour of the Collector. In so doing, the Court of Appeal denied s. 45 stamp duty relief.
In setting aside the District Court’s decision, the Court of Appeal accepted that the statutory object or purpose of SDO, s. 45 was to provide relief from stamp duty on share transfers where the transfers were intra-group. However, it did not agree that s. 45 should be construed to exempt transfers within the same corporate group simply because the requisite degree of association (i.e. 90 per cent) existed between the transferor and the transferee.
Body Corporate
After reviewing the legislative history, it concluded that the term “body corporate” encapsulates a broader scope than the concept of “company” as defined under the relevant company legislation, but noted that the adoption of the term “body corporate” “was intended to afford relief to transactions involving overseas bodies corporate if the requirements in Section 45 were met” (i.e. overseas body corporates that have “issued share capital”).
Issued Share Capital
Though it found the term “body corporate” was intended to cover a broader range of vehicles than domestic companies, it found that there were no legislative materials which could assist in construing the meaning of the term “issued share capital”.
The Collector contended that the term “issued share capital” should be understood in the company law sense. To support this argument, the Collector referenced the judgment of Megarry J in Canada Safeway Ltd v IRC1 [1973] Ch 374, which addressed whether the “90 per cent. of the issued share capital” threshold should be based on actual or nominal share value, with Megarry J ruling in favor of the latter.
The Court of Appeal acknowledged that the Canada Safeway case did not serve as a direct precedent for the current case. However, it held that it established a framework for interpreting the term “issued share capital” by reference to company law that has been applied in various UK tax contexts. As the Court of Appeal stated:
“On the other hand, the expression ‘issued share capital’ is a well understood concept under company law. When used in a tax statute, it should, prima facie, be interpreted to bear the same meaning as it is employed in the company law context, in the absence of any specific or different definition for that expression or any special context which suggests that a different meaning is intended. There is nothing in the context or language of Section 45 to indicate that the legislature intends to use the expression ‘issued share capital’ in any different sense.”
On this basis, the Court of Appeal rejected LLP 2 and LLC’s assertion that “share capital” refers to “a class of participation interest in the corpus and income of the corporation (or body corporate) issuing it that is economically and juristically analogous to share capital at Hong Kong law, albeit not necessarily identical to it” on the basis that such a definition is vague and uncertain and lacks support from the historical context or language of s. 45, as well as from any legal precedents.
Disposition
On the basis of the foregoing, the Court of Appeal held that although LLPs do in fact qualify as “bodies corporate”, they do not constitute “companies”. As only “companies” have share capital to meet the association requirement, they cannot qualify as “associated bodies corporate” within the meaning of SDO, s. 45. Whilst there is no doubt that an LLP is not a company, the court’s conclusion construes the term “body corporate” narrowly, equating it in effect to companies with share capital.
The Court of Appeal then stated that it was not in dispute that LLP 2 had no share capital. As s.45 stamp duty relief requires that the one body corporate (i.e. the LLC) is the beneficial owner of not less than 90 per cent of the issued share capital of the other body corporate (i.e. LLP 2), no relief was possible.
Finally, the Court of Appeal then went on to note that no shares in the capital of LLP 1 and LLP 2 ever exist and no such shares have ever been issued. Hence, there could be no “issued” share capital.
Analysis
The Court of Appeal’s decision is unusual.
Although it acknowledged that the legislative intent behind SDO, s. 45 was to grant stamp duty relief for intra-group transfers of Hong Kong shares and immovable properties where there is no significant change in ultimate beneficial ownership, its decision leads to a focus on form rather than substance. As a result of the decision, the peculiarities of how Hong Kong companies are held and, in particular, whether holding vehicles do or do not issue shares in the company law sense, will determine the availability or non-availability of relief. In our view, it would be more consistent with the legislative purpose for relief to be premised on the requisite degree of equity ownership so as to offer a more uniform approach to relief focused on the core issue of whether the transfer is indeed a true intra-group transfer.
Given the wide range of corporate vehicles available globally, it would have been far more pragmatic for s. 45 to have been interpreted in a way which offers flexibility in ownership structures of a Hong Kong subsidiary.
The decision is even stranger when it is noted that it does not, per se, restrict the use of LLPs, LLCs or other non-company body corporates. For example, a share transfer from a body corporate that has issued share capital in the narrow company sense to an LLP as its parent is exempt. On the specific language of s. 45, there is no requirement for the LLP, as transferee, to even have any “issued share capital”, whether in the company sense or otherwise, because “the bodies are associated, that is to say, one [i.e. the transferee LLP] is beneficial owner of not less than 90 per cent of the issued share capital of the other [i.e. the transferor body corporate]. On the other hand, for example, a share transfer from an LLP to a parent company with issued share capital in the narrow company sense is not eligible for exemptive relief because the parent company does not (and cannot) own 90 per cent. of the issued share capital of the LLP as LLPs do not have share capital.
These peculiar results appear to have been completely overlooked both by the Collector and the Court of Appeal, yet strongly suggest that s. 45 was drafted to offer exemptive relief in respect of a transfer from “one associated body corporate to another” even where one of those bodies corporate has no issued share capital in the company sense. This cuts across the reasoning used by the Court of Appeal to reach its decision.
Are we to believe that, in the above examples, the intention of the draftsman was to allow a non-company body corporate to use the exemption only where it is the transferee? That makes no sense from a policy perspective and more importantly no such distinction is actually made in the drafting.
Further Drafting
Appeals heard by the Court of Appeal may be further appealed to the Court of Final Appeal (“CFA”) if specific conditions are satisfied. Stamp duty payers whose applications for s. 45 stamp duty relief are currently being held in abeyance by the Stamp Office should monitor any developments regarding a potential appeal to the CFA, as such an appeal would result in a ruling that either affirms or overrules the judgment of the Court of Appeal.
In the meantime, groups considering a corporate restructuring involving direct or intermediate entities within the group, particularly those types of entities that do not traditionally issue “shares”, should consider seeking professional advice to evaluate whether such transactions may incur Hong Kong stamp duty and, if options are available, to square such transactions within the scope of the exemption.