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Hong Kong Releases Consultation Conclusions On Sukuk Taxation

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

31 October 2012


Hong Kong’s government has released the conclusions of a consultation, which ended in May this year, to provide a taxation framework for Islamic bonds (sukuk) on a par with that for conventional bonds, with a view to promoting Islamic finance development in Hong Kong.

"Islamic finance is among the fastest growing segments in the international financial system,” said a spokesman for the Financial Services and the Treasury Bureau. “Globally speaking, Islamic finance assets have expanded from USD150bn in the mid-1990s to USD1.3 trillion in 2011. Sukuk are one of the most prominent instruments used in Islamic finance, and have been commonly issued for raising funds in the domestic and international capital markets."

"Given our role as a leading international financial centre and China's global financial centre, Hong Kong has the advantage of matching the needs of fund raisers and investment demands of investors among China, the Middle East and other parts of the world interested in Islamic financial products," he added. "We believe enactment of these legislative amendments would help anchor more asset management activities in Hong Kong."

With reference to the current tax treatments which apply to conventional bonds, the proposed legislative amendments seek to remove additional profits or property tax liabilities or stamp duty charges arising from the inherent complexity of typical sukuk product structures.

However, the government is being careful to emphasize that it is not conferring special tax favours on the Islamic finance sector; only that financial instruments of similar economic substance are afforded similar tax treatments.

Since sukuk have more complex product structures than their conventional bond counterparts (that is to say, sukuk are usually structured with special purpose vehicles and multiple asset transfers), they may attract additional profits or property tax exposures, or stamp duty charges under Hong Kong’s current tax laws. Therefore, with reference to the current tax amendments which apply to conventional bonds, the proposed amendments seek to remove that possible additional taxation.

Certain conditions have been proposed to qualify the types of sukuk product structures eligible for the tax relief. The government is aware that it needs to ensure that the relevant sukuk product is economically equivalent to a typical conventional bond structure, such that it is eligible for the proposed tax treatments under Hong Kong tax; and to put reasonable safeguards in place to minimise tax avoidance.

The government is therefore said to have taken on board many useful suggestions and comments from respondents, regarding the coverage, features and qualifying conditions for sukuk products eligible for the proposed tax treatment, as well as relevant tax administration matters.

The government is now finalising a bill with a view to introducing it to the Legislative Council in early 2013.

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: tax | investment | property tax | law | capital markets | corporation tax | legislation | stamp duty | Hong Kong

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