Hong Kong Tax Alert: 19 July 2013

New law enacted to level the playing field for Islamic bonds

  • Share

Islamic finance is one of the fastest growing sectors of the international financial system. In recent years, a number of Asia-Pacific jurisdictions such as Malaysia, Singapore and Japan have amended their tax laws to facilitate the development of Islamic finance.  As a result, these jurisdictions have captured a significant portion of the regional activity in Islamic finance. 

Owing to certain Islamic religious principles, in particular the prohibition of the payment and receipt of interest, the issuance of Islamic bonds (known as “Sukuk” [pl.] or “Sakk” [sg.]) often involves the use of structures which are more complex than those relating to the issuance of conventional bonds. Sukuk are usually structured with special purpose vehicles and multiple asset transfers.  Although the economic substance of a complex sukuk structure is comparable to that of a conventional bond, the sukuk structure may attract additional tax and stamp duty charges under the provisions of the previous tax law of Hong Kong. This has hindered the development of a sukuk market in Hong Kong.

With the objective of providing a platform conducive to the development of Islamic finance activities, Hong Kong today enacted a new law in the form of the Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Ordinance 2013. 

Briefly, the main provisions of the new law amend the Inland Revenue Ordinance and Stamp Duty Ordinance to provide a comparable taxation framework for some common types of Islamic bonds, vis-à-vis conventional bonds.  However, no special tax incentives are conferred on sukuk.

Clients can refer to our previous Hong Kong Tax alert issued on 24 January 2013 (2013 Issue No. 2) for the detailed provisions of the new law.  This previous Tax alert explained the provisions of the legislative proposal, then in the form of a bill which has now been enacted as the new law in essentially identical terms. 

As regards the implementation of the new law, the Inland Revenue Department has also undertaken to issue departmental practice notes in order to provide some guidance to taxpayers.

The new law will apply to sukuk issued on or after 19 July 2013.