New law may bolster Hong Kong market for Islamic finance
Davide Barzilai, a banking partner at Norton Rose, talks about Islamic finance in Hong Kong
The Financial Services and the Treasury Bureau presented feedback last year on the consultation on proposed amendments to the Inland Revenue Ordinance and the Stamp Duty Ordinance to ease development of an Islamic bond, or sukuk, market in Hong Kong.
As part of the Hong Kong government's long-standing policy initiative to develop Islamic finance in the city, the bureau sent out a consultation paper with detailed proposals for the amendment of relevant tax-related legislation. The essence of the proposal is that a level playing field needs to be created to enable Islamic finance products to be structured in Hong Kong.
The way things stand now, if property located in Hong Kong is used as the underlying asset in a sukuk then there would be a significant additional tax burden compared with a conventional product yielding similar economic returns, such as a bond.
In brief, Islamic law prohibits various activities, including the payment and receipt of interest. This means that while loans and bonds can be issued, no interest or coupon payments can be made or received. Several different structures have been developed over the centuries, many of which have roots in the medieval commercial markets that were pervasive in the Persian Gulf during Koranic times.
One group of these structures is often referred to as a sukuk (Arabic for "notes"). The notes issued under a sukuk represent an undivided beneficial interest in an underlying asset or business of the issuer. This asset or business is structured to generate a financial return that is often set at a pre-defined rate for the period of the note. This way, a sukuk can be structured to give an economic return similar to that provided by conventional fixed-income securities.
It should be noted that the Hong Kong financial services sector has been involved in many Islamic finance transactions but those transactions involve property and businesses outside of Hong Kong.
At present, if a company compliant with Islamic sharia law in Hong Kong wanted to finance a property or business located in the city, it would need to find a more structured solution involving assets located in a tax-neutral jurisdiction.