Hong Kong Government To Issue Islamic Bonds

Hong Kong has gazetted the Loans (Amendment) Bill 2014 that seeks to accommodate the issuance of Islamic bonds under the Government Bond Program (GBP), to promote the further development of the local bond market.

Legislation to amend the Inland Revenue Ordinance and Stamp Duty Ordinance, and provide a comparable taxation framework in Hong Kong for some common types of Islamic bonds (sukuk) compared with conventional bonds, went into operation on July 19, 2013.

The amendments give tax and stamp duty relief for transactions underpinning the issuance of sukuk products. As sukuk, which cannot involve the payment or receipt of interest, have more complex product structures than their conventional bond counterparts (often using special purpose vehicles and multiple asset transfers), their issuance may attract additional profits or property tax exposures, or stamp duty charges.

The framework does not confer special tax favors on sukuk – classified as an “alternative bond scheme” – but should ensure that financial instruments of similar economic substance are afforded similar tax treatments.

“In July 2013, we amended our tax laws to enhance the competitiveness of Hong Kong in the development of a sukuk market by providing a comparable taxation framework for sukuk vis-à-vis conventional bonds,” the Secretary for Financial Services and the Treasury, Professor K C Chan, said. “To further promote the development of a sukuk market in Hong Kong, we see the merits of enabling the issuance of sukuk under the GBP, in response to prevailing market conditions and needs.”

“We envisage that the issuance of sukuk under the GBP will signal to the markets that our legal, regulatory and taxation frameworks are well established to accommodate sukuk issuances, thereby giving further impetus to other potential sukuk issuers to raise funds in Hong Kong,” he added. “This will help diversify the types of financial products and services available in our markets and consolidate our status as an international financial and asset management center.”

In parallel, the Hong Kong Monetary Authority, as the Government’s representative under the GBP, is examining practical issues in order to formulate a possible sukuk issuance plan for implementation upon enactment of the Bill, having regard for market circumstances.