Hong Kong: Regulations for Islamic finance system are being officially developed in Hong Kong as the government of Hong Kong 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.
According to officials, Hong Kong’s government has taken this step in a view to promoting Islamic finance development in the country.
A spokesman for the Financial Services and the Treasury Bureau said, “Islamic finance is among the fastest growing segments in the international financial system.”
“Globally speaking, Islamic finance assets have expanded from $150 billion in the mid-1990s to $1.3 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,” he added.
He further said, “Given our role as a leading international financial center and China’s global financial center, 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. 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 favors 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 minimize 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 finalizing a bill with a view to introducing it to the Legislative Council in early 2013.