Purchases of residential properties in Singapore by companies attract Additional Buyer Stamp Duty (ABSD) of 15% rate in addition to usual Buyer Stamp Duty (BSD) of up to 3%. Seller Stamp Duty (SSD) is also payable if residential properties are sold within the restricted period from date of purchase. Prior to 11 March 2017, we witnessed many deals involving the sale and purchase of shares in property holding companies instead of direct sale and purchase of the residential properties owned by these companies. In the former cases, the stamp duty paid by the Purchaser of shares was 0.2% of the net asset value of the relevant company or of the share sale consideration (whichever is higher) instead of the ABSD and BSD chargeable on the underlying residential assets.
In the light of several high profile transactions involving such sale and purchase of shares of property holding companies, the Government responded strongly with sweeping changes to the stamp duty legislation, in particular, with the introduction of new sections 23 and 23A to D of the Stamp Duties Act (the Act).
Additional Conveyance Duties (ACD) will now apply in respect of certain qualifying acquisitions and dispositions of equity interests in residential Property Holding Entities (PHE) on or after 11 March 2017. An Entity could be a company, partnership (including limited liability partnership) or property trust.
What are the Qualifying Acquisitions
The purchaser (transferee of shares) is a significant owner of the entity immediately before the execution of the conveyance of shares or becomes one upon execution of the conveyance. The threshold for significant ownership is 50% of equity ownership or 50% of the voting power.
This will include the equity ownership or voting power of associates of the purchaser. Associates of an individual include the immediate family members of the individual and partners of the individual. Associates of a purchaser entity include holding entity which owns 75% or more of the voting capital and 50% or more of the voting power of the purchaser entity.
What are the Qualifying Disposals
The Vendor (transferor of shares) is (or was) a significant owner of the entity and the equity interest disposed of was acquired on or after 11 March 2017 and disposed of within the prescribed period (of three years) after acquisition, on a "first in first out" basis.
The “entity” should be a Residential PHE, which can be a Type 1 PHE or Type 2 PHE or both (as defined in the Act).
Type 1 PHE means a target entity where the market value of its residential properties makes up at least 50% of its total tangible assets (TTA)
Type 2 PHE means a target entity which has 50% or more beneficial interests in one or more entities (related entities) which is a Type 1 PHE, and the sum of the market value of the residential properties owned by the target entity and its related entities is at least 50% of the TTA of the target entity and its related entities.
The ACD payable on the Contract for purchase of equity interest in respect of a qualifying acquisition is a stamp duty equivalent to ABSD of 15% and BSD (up to 3%) in addition to the usual share sale stamp duty of 0.2%. The ACD payable on the Contract for sale of equity interest in respect of a qualifying disposition is a stamp duty equivalent to SSD at flat rate of 12%.
Other than contracts for sale and purchase of equity interests, conveyance via gift, settlement and assignment are also caught by the aforesaid new laws.
The Government has also introduced a new section 23C of the Act which gives the Commissioner of Stamp Duties broad powers to disregard avoidance arrangements which have the effect of increasing or reducing the equity interests in the company so as to trigger the relevant ACD.
We urge you to be extremely cautious in any attempt to change the shareholding in any of your residential PHEs, whether these are direct or indirect PHEs because transfer of part equity interests may be caught under the aforesaid new laws.
You may wish to consider the following examples of various Transactions of a PHE:
Conveyance 1 - on 1 June 2017, X owns no shares in a PHE and buys 30% of the shares.
Conveyance 2 - on 1 Dec 2018, X buys a further 30% bringing his total ownership to 60%.
Conveyance 3 - on 1 March 2019, X buys a further 30% to bring total ownership to 90%.
Conveyance 4 - on 1 July 2021, X sells 50% of shares in the PHE, bringing down his ownership to 40%.
Conveyance 5 - on 1 November 2021, X sells 10% bringing his total ownership to 30%.
Conveyance 6 - on 1 January 2023, X buys 15% bringing total ownership to 45%.
Conveyance 7 - on 1 January 2024, X buys another 15% bringing total ownership to 60%.
We assume the aforesaid laws apply and X is a significant owner if his equity ownership in the residential PHE is 50% or more.
* Duty A - ABSD 15% and BSD 3% less $5400
** Duty B - SSD 12%
Duty A is not chargeable on Conveyance 1 because X does not become a significant owner as a result of the conveyance.
Duty A is chargeable on Conveyance 2 and amount of duty is computed on basis of all shares bought since 11 March 2017 (that is, 60%).
Duty A is chargeable on Conveyance 3 on basis of the 30% acquired.
Duty B is chargeable on Conveyance 4 but only in relation to shares bought within the holding period of three years. Shares acquired first deemed to be sold first. As such, only 20% shareholding acquired under Conveyance 2 and disposed under Conveyance 4 will be used in computing the duty.
Duty B is chargeable on Conveyance 5 even though X no longer a significant owner.
Duty A is not chargeable on Conveyance 6 as X is not a significant owner and does not become one as a result of the conveyance.
Duty A is chargeable on Conveyance 7 as X becomes a significant owner as a result of this Conveyance. The duty is computed on basis of difference between 60% and the least percentage since X was last a significant owner (i.e. 30%).
^Adapted from the Explanatory Statement to the Stamp Duties (Amendment) Bill No. 18/2017
The Government has stated that the policy rationale for the ACD is to address the stamp duty differential between a direct sale/purchase of residential properties, and an indirect sale/purchase of equity interests in residential property-holding entities. However, our observation is that the scope of application of the ACD is wider than expected, with possible surprise or unintended effects on unsuspecting parties. This could be seen, for example, in:
The “Significant Ownership” concept – which includes equity ownership or voting power of not only the purchaser/seller, but that of their associates
The Type 2 PHE concept – which extends ACD not only to direct equity interests in PHEs but indirect equity interests in PHEs
ACD rate for sale – a flat 12% within three years of purchase, rather than the tiered SSD rates for residential properties
Stamp duty on shares – ACD for purchase applies in addition to, and not in place of, 0.2% stamp duty on shares
Time of stamping of agreements – contracts/agreements for the sale/purchase of equity interests in PHEs is subject to ACD upon execution of contract, rather than upon completion. This shift of timing from completion to contract, applies to all share sales and not just PHE share sales in view of amendment to section 22(1) of the Act.
Even without these changes, the Government would have been able to take similar action under the pre-existing general anti avoidance rule (GAAR) in the Stamp Duties Act, in respect of certain share transfers. Of course, the new provisions are much more specific, and remove much of the uncertainty on this issue. In particular, the pre-existing GAAR would not apply if parties had bona fide commercial reasons for entering into the transactions as they did. This limitation no longer applies to the new provisions. A new detailed GAAR, on top of existing laws, has been created in the provisions of section 23C specifically for ACD avoidance, signalling the Government’s resolve to plug any potential loopholes in the new legislation.
In summary, the new laws warrant caution in dealings of equity interests (whether in full or in part) in residential PHEs, especially if purchaser (transferee of shares) is a significant owner of the entity immediately before the dealing or becomes one upon such dealing.