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Hong Kong Begins Islamic Bond Tax Consultation

by Mary Swire, Tax-News.com, Hong Kong

30 March 2012


The Financial Services and the Treasury Bureau has launched a two-month consultation on the proposed amendments to the Inland Revenue Ordinance and Stamp Duty Ordinance to promote the development of an Islamic bond, or "sukuk", market in Hong Kong.

The Secretary for Financial Services & the Treasury, Prof KC Chan, said the amendments seek to level the playing field for common types of sukuk compared with their conventional counterparts in terms of profits tax, property tax and stamp duty liabilities.

"The legislative amendments would also help to attract sukuk issuers using our Islamic finance platform,” he explained. “The structuring of sukuk often involves transfer of underlying assets and setting up of special-purpose vehicles, which may give rise to additional tax and stamp duty implications and uncertainty under the existing laws, putting sukuk at a disadvantage when compared with conventional counterparts. Amendments are therefore necessary.”

Under the legislative proposals, the government proposes “to adopt a prescriptive and religion-neutral approach, in line with that adopted by other major financial markets such as the United Kingdom, as prescriptive legislative provisions without specific reference to Shariah principles would provide more certainty in implementation to market players in Hong Kong”.

It is proposed to cover the most common types of sukuk in the global market - Ijarah, Musharakah, Mudarabah and Murabahah – and to adopt a tripartite structure, comprising an originator, a bond-issuer and bond-holders, as the basis for the framework of the proposed legislative amendments.

Specifically, a new term would be introduced known as an alternative bond scheme containing two arrangements - a bond arrangement and an investment arrangement. The former refers to the arrangement between the bond-issuer and the bond-holders, while the latter refers to the arrangement between the bond-issuer and the originator.

Under each of the aforesaid arrangements, a set of essential features and qualifying conditions would need to be satisfied in order for the parties involved to enjoy the special tax treatment and stamp duty treatment/relief applicable to that arrangement.

Chan added that "the consultation exercise seeks to gauge market views on the proposed legislative amendments with a view to ensuring they are practicable and able to meet the latest market development needs".

In the government’s opinion, the legislative exercise would be conducive to the development of a sukuk market in Hong Kong. "This will in turn help diversify (Hong Kong’s) financial platform and consolidate (its) role as an international financial centre."

A public consultation on the proposals is open until May 28 and it is planned that a bill will be tabled in the Legislative Council in the next legislative session.

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
TAGS: compliance | tax | investment | tax compliance | property tax | law | financial services | capital markets | corporation tax | offshore | legislation | stamp duty | Hong Kong | islamic finance | legislation amendments | services

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