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FSDC Suggests Reforms To Develop Hong Kong REITS

by Mary Swire, Lowtax.net, Hong Kong
21 November, 2013

The Financial Services Development Council (FSDC) has pointed out that, while Hong Kong has all the criteria to have a thriving real estate investment trust (REIT) market, it is substantially lagging behind the growth of such markets in other Asian countries.

In a report, entitled "Developing Hong Kong as a Capital Formation Center for Real Estate Investment Trusts," the FSDC considers REITs to be a valuable alternative for investors in many markets and, in the light of the explosive growth of the real estate market in the region and the need for asset securitization products for investors, such as pension funds, the REIT market is poised for growth in Asia in the coming decade.

However, it points out that, while the birth of the Hong Kong REIT (H-REIT) market came with the enactment of the Hong Kong REIT Code in 2003, only ten H-REIT offerings have taken place since then, and notes that the failure to capitalize on REIT market growth potential is largely due to the relative restrictiveness and lack of incentives of the H-REIT regime.

"From the lack of tax incentives to investment restrictions and takeover hurdles," it states, "H-REITs are facing a much tougher operating environment than regional markets, such as Singapore and Malaysia, which are more proactive in growing their REIT markets by addressing issuer and sponsor concerns and facilitating market reforms."

"Development of the international financial industry is robust and rapid," the FSDC adds, "Hong Kong must strengthen its advantages in view of the rapid growth of wealth, the need for investment products to cater to the growing retirement savings market in Asia and other market developments in the region. In most REIT regimes, regulatory changes and tax incentives have proven to be effective tools to grow the market."

For example, in major overseas REIT markets, REITs enjoy certain tax advantages when compared to property companies with a similar business nature. The FSDC believes that such a tax advantage is a fundamental characteristic for REITs as an investment product. Usually, in other jurisdictions, as long as a REIT satisfies the requirement to distribute most of its income to unitholders, it is not subject to income tax at the trust level.

However, Hong Kong's REIT regulations do not accord H-REITs with any tax advantages. Currently, H-REITs have to pay 16.5 percent corporate tax on their profits, despite the REIT Code requirement to distribute 90 percent of their after-tax income. Such tax levied on H-REITs "reduces the distributable amount they can pay to their unitholders, thus putting H-REITs at a clear disadvantage against overseas peers which can offer a higher yielding investment to investors."

The FSDC therefore proposes to give H-REITs equivalent tax transparency as in other jurisdictions, in that the Inland Revenue Department (IRD) should consider amending the Inland Revenue Ordinance to exempt profits tax for H-REITs on rental income.

Furthermore, another discrepancy between the H-REIT market and other REIT markets is seen to be the exemption from payment of stamp duty for the sale or transfer of property. Under Hong Kong laws, both the buyer and seller are jointly and severally liable to pay the stamp duty, and, whether it is a sponsor identifying assets for injection into a soon-to-list H-REIT, or a listed H-REIT trying to expand its portfolio by acquiring new assets from third parties, H-REITs do not enjoy any stamp duty waiver or incentive.

The FSDC therefore recommends that the IRD should consider giving H-REITs a more level playing field with, for example, their Singaporean counterparts, and eliminate the rates for non-residential property acquired by an H-REIT that is listed on the Hong Kong Stock Exchange.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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