Global Tax Alert | 22 July 2013

Hong Kong enacts new law to promote investment in Islamic bonds

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On 19 July 2013, Hong Kong enacted a new law in the form of the Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Ordinance 2013, with the objective of providing a platform conducive to the development of Islamic finance activities.

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”) 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 Hong Kong’s previous tax law. This has hindered the development of a sukuk market in Hong Kong.

In summary, 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, equivalent to conventional bonds. However, no special tax incentives are awarded to sukuk.

With respect to 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.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong
  • Tracy Ho
    +852 2846 9065
    tracy.ho@hk.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM3667