Following a public consultation process, Hong Kong has commenced the legislative process for the introduction of tax changes to permit the issuance of Sukuk.

The proposed legislation was published in a Legislative Council Brief on December 28, 2012, which seeks to establish a level playing field for the taxation of conventional bonds and Sukuk (referred to as “alternative bond schemes” or “ABS” in the legislation) and details tax exemptions for qualifying structures.

The legislation contemplates four qualifying structures, namely: a “lease arrangement” – Ijarah, “profits sharing arrangement” – Musharakah and Mudarabah, “purchase and sale arrangement” – Murabahah and “agency arrangement” – Wakalah. The term of any Sukuk (or ABS) is currently limited to 15 years.

The proposed legislation will now move through a process of consideration and debate by the Legislative Council in Hong Kong. The Asian financial markets are of increasing interest to Middle East issuers and investors and Hong Kong is seeking to establish a framework to compete with Singapore and the more established Malaysian market for Sukuk.