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Intra-group share transfer involving UK LLPs is eligible for stamp duty relief

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Lewis Lu and John Timpany of KPMG China discuss a recent court judgment in Hong Kong on stamp duty relief relating to an intra-group share transfer involving foreign LLPs.

On July 15 2022, the District Court of Hong Kong handed down its judgment in John Wiley & Sons UK2 LLP and Another v The Collector of Stamp Revenue and held that the foreign limited liability company (LLC) and UK limited liability partnership (LLP) were associated body corporates within the meaning of Section 45 of the Stamp Duty Ordinance (SDO). Accordingly, the subject intra-group transfer of the shares in a Hong Kong company from the UK LLP to the foreign LLC was entitled to stamp duty relief.

Background to the case

The case concerned an intra-group transfer of the shares of a Hong Kong company from a UK LLP to a foreign LLC as part of an internal group restructuring.

Both a UK Intermediary LLP and the UK LLP were incorporated as LLPs in the UK under the Limited Liability Partnerships Act 2000 and both of them were body corporates with legal personality separate from their members and had unlimited capacity.

The LLP agreements, which organised the UK intermediary LLP and the UK LLP and governed the rights and obligations of their members, provided that:

  • The initial members of the LLP shall contribute the specified capital to the LLP;

  • Each of the initial members acquires a share in the LLP in accordance with the amount or value of their contribution to the LLP; and

  • The members shall share any profits or losses of a capital nature in the same proportions as their capital contributions to the LLP.

The issues in dispute

  • Whether the term ‘issued share capital’ as used in Section 45 of the SDO has the same specific meaning as the term has in a company law context and carries with it the same attributes and requirements as provided under the Hong Kong Companies Ordinance (the Collector’s interpretation); and

  • 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.

The District Court’s judgment and analysis

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

  • The amendments made to the old Stamp Ordinance in 1981 (the concept of ‘body corporate’ was introduced to replace ‘company with limited liability’) indicated that the legislative intent was to open up the ambit of the Section 45 relief to encompass all body corporates regardless of whether they are incorporated as companies and whether they are limited liability entities;

  • There is no valid reason or purpose why the legislature would intend to selectively offer relief only to those associated body corporates with issued share capital but not the others;

  • 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 term should be interpreted according to its natural and ordinary meaning in view of the legislative purpose of Section 45, which is to use the test of closeness of association to determine whether a transfer is between body corporates that are genuinely closely associated; and

  • Having regard to the context and purpose of Section 45, the term ‘issued’ should 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 UK Intermediary LLP and UK LLP had ‘issued share capital’ within the meaning of Section 45 and the transferor and transferee 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 observations

As 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, it set a legal precedent on the interpretation of the term for the Section 45 relief purpose. Business groups that seek to rely on Section 45 stamp duty relief on an intra-group transfer of Hong Kong company or immovable property involving an LLP, LLC, or other forms of body corporates without issued share capital should closely monitor the development and final outcome of this case.

Click here for more details and KPMG’s interesting observations on the case.

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