The recent decision of the Court of Final Appeal in John Wiley & Sons UK2 LLP & Anor. V. The Collector of Stamp Revenue upheld restrictions in the availability of intra-group stamp duty relief and complicates corporate re-structuring activities in corporate groups whose members include bodies without share capital such as limited liability partnerships ("LLPs"), limited partnerships ("LPs") and limited liability companies ("LLCs"). The decision calls for urgent legislative reform to meet the expectations of businesses with Hong Kong entities.
Though stamp duty is normally payable upon a transfer of beneficial ownership in Hong Kong stock and Hong Kong immovable property, the Stamp Duty Ordinance ("SDO"), s. 45 provides an exemption where the transferor and transferee are "associated bodies corporate". The exemption facilitates corporate restructuring, allowing, for example, a parent company to move a Hong Kong incorporated subsidiary from one holding entity to another holding entity without stamp duty.
However, the SDO provides that bodies are only "associated" if:
"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".
In John Wiley & Sons UK2 LLP & Anor. V. The Collector of Stamp Revenue, the taxpayer corporate group reorganized, moving a Hong Kong subsidiary from a limited liability partnership holding vehicle to a limited liability company holding vehicle. The Collector of Stamp Revenue assessed the transfer with ad valorem stamp duty. The holding vehicles appealed, contending that the transfer was exempt as an intra-group transfer between associated bodies corporate.
District Court
The holding vehicles succeeded at the District Court, with the court holding that although the definition of an associated body corporate relies upon the concept of "issued share capital", bodies corporate without equity interests referred to in common parlance as "shares" may nevertheless qualify for relief.
Court of Appeal
The Court of Appeal reversed the decision of the District Court, holding that the reference to "issued share capital" used to define whether corporate bodies were associated was a reference to issued share capital in the domestic (i.e. Hong Kong) law company sense rather than to a broader concept of a participation interest in the corpus and income of a corporation that is economically and juristically analogous to share capital at Hong Kong law.
Court of Final Appeal
The Court of Final Appeal affirmed the decision of the Court of Appeal on the basis that it was common ground that a limited liability partnership could not issue share capital. The Court stated:
It is undisputed that an LLP cannot issue and allot share capital. As a result, the Appellants cannot satisfy the "association" criterion of s 45 of the Duty Ordinance.
The Court held the term "issued share capital" should not be construed more broadly to accommodate a wider concept of equity participation interest, justifying its rejection of the wider construction on the basis that it was too vague and uncertain. The Court stated at para 34:
The Court of Appeal correctly held (at §71) that the Appellants' definition of "share capital" (as a "taxonomic class" looking to features of an LLP "materially analogous" to "share capital") is vague and uncertain with no support in the historical context of s 45.
The Court recognized the difficulties the business community may face in corporate restructuring given the interpretation but concluded that this was a matter for the legislature.
Originally published on www.timothyloh.com
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