The government is planning to make legislative changes to subject "significant owners of residential-property-holding entities" to stamp duties when they transfer equity interest in such entities, in the same way they would be subjected to stamp duties if they were to buy or sell the properties directly.
This planned move is perceived by some industry players as plugging an existing regulatory loophole.
Currently, a direct purchase of a residential property will incur buyer's stamp duty of 3 per cent plus 15 per cent additional buyer's stamp duty (ABSD), but the buying of shares of the holding company that owns the property will incur a tax of only 0.2 per cent of the net asset value of the holding company.
The seller's stamp duty (SSD), which applies to the sale of residential properties within a four-year holding period, also does not apply to the sale of shares of the holding company.
In response to a suggestion from member of parliament Yee Chia Hsing on reviewing the concept of ownership of residential properties, Minister for National Development Lawrence Wong told Parliament on Tuesday that the government has been studying this issue.
Mr Yee had proposed that if a residential property is held by a corporate entity or a special purpose vehicle, and the shares of the company are transferred from seller to buyer, the normal residential stamp duties should apply.
Mr Wong said: "In principle, we should treat transactions in residential property on the same basis, regardless of whether a property is transferred directly or through a transfer of shares in a company that holds primarily residential property in Singapore. We plan to make legislative changes to effect this."
He explained that the aim is not to impact the ordinary buying and selling of shares in such companies, if they are listed on the stock market, by retail investors.
"However, significant owners of residential-property-holding entities will be subject to the usual stamp duties when they transfer equity interest in such entities, like what would happen if they were to buy or sell the properties directly," said Mr Wong.
Legal and tax professionals note that such a change in legislation may affect developers with large unsold inventory.
Several of them have undertaken bulk sale of residential properties via the sale of shares in property-holding entities to avoid hefty extension charges under qualifying certificate (QC) conditions for unsold units.
Among them, CapitaLand had in January sold its 100 per cent stake in Nassim Hill Realty, which owned the remaining 45 units at The Nassim, to Wee Cho Yaw's family firm Kheng Leong for S$411.6 million.
Wing Tai Holdings had sold its half share in its joint venture company Summervale Properties to CDL last July, followed by the sale of shares in Summervale by CDL in October to high-net worth Singaporeans through an innovative platform known as profit participation securities (PPS).
Teo Wee Hwee, PwC's real estate and hospitality tax leader, noted that the proposed legislative change is not likely to put a brake on such transactions for developers saddled with massive bank loans, QC extension charges and, in some cases, the looming clawback on ABSD remission.
"But developers will have to sell at substantially discounted prices with the government closing this loophole," he added.
Dentons Rodyk & Davidson senior partner Lee Liat Yeang noted that any amendment to the Stamp Duty Act on this has to be clear that it applies only to a pure SPV with no other businesses and whether the transfer of shares will incur buyer's stamp duty, ABSD or SSD. He recalled that a similar rule that the government introduced in 1996 applied only the SSD on sale of shares of the property holding company.
Another real estate legal partner, who declined to be named, felt that a tricky situation may also arise if a developer buys shares of a company holding a commercial property, only to convert it into residential later on.
KPMG Singapore principal tax consultant Leung Yew Kwong noted that the proposed legislative change looks straightforward on the outset but there may be other conceptual issues.
"Are you selling the holding company or a business if you, as the developer, cannot finish building a project and sell the holding company to another developer to complete? If the SPV has other businesses, what value do you peg to the net asset value of the holding company?"
Adapted from: The Business Times, 8 March 2017