Hong Kong: Intra-group share transfer involving UK LLPs eligible for stamp duty relief (court decision)

A court decision concerning intra-group share transfer involving UK LLPs eligible for stamp duty relief

A court decision concerning intra-group share transfer involving UK LLPs

A district court recently held that a foreign limited liability company (Foreign LLC) and a UK limited liability partnership (UK LLP) were “associated” corporate bodies within the meaning of section 45 of the Stamp Duty Ordinance (SDO) although the LLP did not have any “issued share capital” similar to that of a company limited by shares. Accordingly, the court held that the intra-group transfer of the shares in a Hong Kong company from the UK LLP to the Foreign LLC was entitled to the stamp duty relief under section 45 of the SDO. 

Background

Both a UK Intermediary LLP and the UK LLP were incorporated as LLPs in the UK under the Limited Liability Partnerships Act 2000 (LLP Act 2000). Both entities were a “body corporate” with legal personality separate from its members and had unlimited capacity. There is no requirement under the LLP Act 2000 that the capital of an LLP be organised into a denomination of a certain number of shares each of certain nominal value. Also, the LLP Act 2000 does not contain any provisions similar to those regulating the class, allotment, issuance, and registration of shares under the Hong Kong Companies Ordinance. However, the subsidiary legislation of the LLP Act 2000 provides that all members of an LLP are entitled to share equally in the capital and profits of the LLP in the absence of any agreement between the members.

The basis on which UK Intermediary LLP and UK LLP were organised and the rights and obligations of their members were governed by the respective LLP agreements. In particular, the LLP agreements provided that: (1) the initial members of the LLP would contribute the specified capital to the LLP; (2) each of the initial members would acquire a share in the LLP in accordance with the amount or value of its contribution to the LLP; and (3) the members would share any profits or losses of a capital nature in the same proportions as their capital contributions to the LLP.

The appellants (the Foreign LLC and UK LLP) applied for a stamp duty relief under section 45 of the SDO for the intra-group transfer on the basis that Foreign LLC (the transferee) and UK LLP (the transferor) were “associated” body corporates. 

The Collector of Stamp Revenue rejected the relief application on the basis that: (1) an LLP can be a parent of a group but cannot be a subsidiary of another body corporate as it does not have issued share capital and (2) the existence of “shares” is the key in deciding whether body corporates are “associated.

The key issues were: (1) whether the term “issued share capital” as used in section 45 of the SDO has the same specific meaning as the term has in company law context and carries with it the same attributes and requirements (as to allotment, registration and reporting, etc.) as provided under the Hong Kong Companies Ordinance (the Collector’s interpretation); and (2) whether the term forms part of the requirement of the “form of association” and not merely as part of the test of the closeness of the association between the body corporates concerned.

Court’s judgment and analysis

Below is a summary of the court’s analysis and comments:

  • The amendments made to the former Stamp Ordinance in 1981 (when the concept of “body corporate” was introduced to replace “company with limited liability” as reflected in section 45 of the current SDO) indicated that the legislative intent was to open up the ambit of the section 45 relief to encompass all body corporates (including entities incorporated overseas under foreign law) regardless of whether they are incorporated as companies and whether they are limited liability entities.
  • Bearing the above in mind, there is no valid reason or purpose that the legislature would intend to selectively offer relief only to those associated body corporates with issued share capital but not the others, even though the closeness of association can be demonstrated by other means.
  • The term “issued share capital” is not defined in the SDO, and there were no previous Hong Kong or UK cases discussing the point at issue.
  • The court was not persuaded that the Collector’s interpretation was the true and proper construction of the term—rather, the term must be interpreted according to its natural and ordinary meaning in view of the legislative purpose of section 45 (i.e., the purposive approach of statutory interpretation).
  • The legislative purpose of section 45 is to use the test of “closeness of association” to determine whether a transfer is between body corporates that are genuinely closely associated.
  • Having regard to the context and purpose of section 45, the term “issued” must be construed to mean “having been legally given to in a legally completed transaction” and the term “share capital” simply means “the capital of a body corporate that is divided into quantifiable portions and all such portions together make up 100% of the total value of its capital that is legally recognized.”

Applying the above interpretation, the court held that the Intermediary UK LLP and UK LLP had “issued share capital” within the meaning of section 45 and that the transferor (UK LLP) and transferee (Foreign LLC) met the test of closeness of association as the transferor was ultimately wholly owned by the transferee. Accordingly, the two were “associated” body corporates and entitled to the section 45 relief. 

KPMG observation

  • This is the first court case in Hong Kong dealing with the interpretation of “issued share capital” under section 45 of the SDO. Subject to any further appeal lodged by the Collector, the case set a legal precedent on the interpretation of the term for the section 45 relief purpose.
  • The court’s judgment appears to be a sensible outcome from a policy perspective and in the context of section 45, given the divergency in the forms of body corporate employed by business groups. Thus, business groups that seek to rely on section 45 of the SDO for a stamp duty relief on an intra-group transfer of Hong Kong company or immovable property involving an LLP, LLC or other forms of body corporate without issued share capital need to monitor the development and final outcome of this case.
  • The final outcome of this case could affect a number of ongoing disputes between business groups and the Stamp Office involving intra-group transfers when LLCs / LLPs are in the group structures. These disputes have arisen as a result of the Stamp Office changing its practice in relation to section 45 relief applications involving LLCs.


For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com

 

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.