This article contains insights on how companies in Hong Kong are entitled to be exempted from paying stamp duty when their immediate holding company (which incorporated in foreign country), is absorbed by another company through merger. i.e. there will be a change in Hong Kong company's shares ownership - from previous immediate holding company to the merged company.
Background - Stamp duty
Every company in Hong Kong is required to pay stamp duty whenever there is a transfer of company shares ownership. The latest rate of stamp duty (in year 2022) is 0.26% of the consideration paid for the shares transfer or 0.26% of the value of the shares, whichever is higher. In general, each of the purchaser and seller split the stamp duty payable evenly, i.e. each pays 0.13% of the consideration / of the shares value.
Stamp Duty Relief - Merger
In certain situations, the change of shares ownership in a Hong Kong company can be exempted from stamp duty. - The general principle is to illustrate that there is no beneficial interest passes. i.e. no change in the beneficial ownership of Hong Kong shares, provided that the transmission in question takes place by operation of law.
We see merger in financial and many other industries fall within the stamp duty relief framework as set out in section 27 of Stamp Duty Ordinance. To be qualified to the stamp duty relief, the merger should be effected by way of the universal succession where the merged company (i.e. the surviving company) is entitled to all the assets and liabilities of the merging company (i.e. the absorbed company), being the legal successor of both companies in every respect, and the transmission in question takes place by operation of law (i.e. not a merely voluntary transfer).
For example, a Luxembourg company (being a merging company) holds shares in a Hong Kong company and merged with a company in Germany (the merged company). In general this merger does not give rise to a charge to stamp duty on the transmission of Hong Kong shares from the Luxembourg company to the merged company.
Applying for Relief
Stamp Office has not published official guidance on stamp duty relief in connection with mergers, therefore, company in question should seek professional guidance. In order to apply for stamp duty relief, the following are required to be presented to the Stamp Office, together with other relevant documents :-
a certified true copy of the merger agreement
a certified true copy of the merger certificate showing the effective date of the merger
a copy of the latest annual return / annual filing document of the merging company
a copy of the public record (e.g. Gazette in the merger jurisdiction) publishing the merger
copy of official evidence showing that the merging company has ceased to exist and has been dissolved as a result of the merger
certified copy documentation showing the universal transmission of all assets and liabilities of the merging company to the merged company
If the relief is granted, the application will be adjudicated by Stamp Office to confirm that no stamp duty is payable. When so adjudicated, the relevant instruments of transfer would enable the company secretaries of the Hong Kong company to register the transmission of shares.
Insights
Value of the shares in question
Shares' value for assessing the stamp duty is typically computed by reference to the net asset value of the company as indicated in the company's latest audited financial statements and accounts.
Tax relief
As mentioned, the tax authority in Hong Kong has not published official guidance on stamp duty relief in connection with mergers, therefore, the success rate is hard to assess, it also depends if sufficient information has presented to the Stamp Office and if the wording of the documents e.g. the merger agreement, a in line with the definition of shares transmission as set out in the tax relief framework.
Other obligation
Some countries, for example, China, may require additional statutory filing after the shares transmission and tax relief granted in Hong Kong.
Scope
The abovementioned stamp duty relief is also applicable to stocks listed in Hong Kong public market and immovable property situated in Hong Kong.