Inland Revenue Ordinance 17A: Specified Alternative Bond Scheme and its Tax Treatment

  1. s2(3): Bond arrangement
    • Under the Bond arrangement:
    • (a) one or more persons (each is referred to as an initial bond-holder ) pays a sum of money (bond proceeds) to another person (bond-issuer);
    • (b) the bond-issuer is a special purpose vehicle for the scheme;
    • (c ) on behalf of the initial bond-holders, the bond-issuer enters into investment arrangement;
    • (d) the bond-issuer issues instruments (alternative bonds ) to the initial bond-holders evidencing their rights and interests in or in relation to the specified asset ;
    • (e) if the alternative bonds are transferable from 1 person to another, transferees of any such alternative bonds become holders of the alternative bonds (subsequent bond-holders ) because of the transfers (any initial bond-holder or subsequent bond-holder is referred to as a bond-holder); and
    • (f) the bond-issuer undertakes:
    • (i) to make a payment (redemption payment ), whether or not by instalments, to the bond-holders during or at the end of the specified term to redeem the alternative bonds;
    • (ii) to make other payments (additional payments ) to the bond-holders on one or more occasions during, or at the end of the specified term; and
    • (iii) to use the investment return and the proceeds of disposal under investment arrangement , or part of these sums, for payment of the redemption payment and additional payments.
  2. s2(4): Investment arrangement
    • The bond-issuer enters into investment arrangement with another person (originator), under which:
    • (a) the bond-issuer uses the bond proceeds (acquisition cost) to acquire an asset (which asset, or an asset that is subject to the scheme in the circumstances described of this Schedule, is referred to as the specified asset);
    • (b) the bond-issuer arranges for the management of the specified asset with a view to generating income or gains during the specified term (the income or gains are referred to as the investment return); and
    • (c) the bond-issuer is to dispose of the specified asset by the end of the specified term (the consideration received by the bond-issuer for the disposal of the specified asset is referred to as the proceeds of disposal).
  3. s4: Specified alternative bond scheme arrangement
    • A scheme is a specified alternative bond scheme at any time (material time) if at the material time, and from the commencement of the specified term of the scheme up to the material time:
    • (a) the terms of the scheme are, and have always been, those as described of an alternative bond scheme in s.2 of this Schedule; and
    • (b) the terms of the investment arrangement in the scheme are those as described of a specified investment arrangement in Division 2 of this part, and have always been those as so described of the same specified investment arrangement.
  4. s5: Specified investment arrangement
    • The investment arrangement in an alternative bond scheme is a specified investment arrangement if it is:
    • (a) a lease arrangement;
    • (b) a profits sharing arrangement;
    • (c) a purchase and sale arragement; or
    • (d) an agency arrangement.
  5. s13(1): Qualified bond arrangement
    • The bond arrangement in a specified alternative bond scheme is a qualified bond arrangement at any time (material time) if the scheme at the material time complies with, and from the commencement of the specified term of the scheme up to the material time has always complied with:
    • (a) the reasonable commercial return condition;
    • (b) the bond arrangement as financial liability condition;
    • (c) the Hong Kong connection condition;
    • (d) the maximum term length condition; and
    • (e) the arrangements performed according to terms condition.
  6. s13(2): Qualified investment arrangement
    • The specified investment arrangement in a specified alternative bond scheme is a qualified investment arrangement at any time (material time) if:
    • (a) the bond arrangement in the scheme at the material time is, and from the commencement of the specified term of the scheme up to the material time has always been, a qualified bond arrangement; and
    • (b) the scheme at the material time complies with, and from the commencement of the specified term up to the material time has always complied with:
    • (i) the bond-issuer as conduit condition; and
    • (ii) the investment arrangement as financial liability condition.
  7. s21: Tax treatment for qualified bond arrangement
    • The qualified bond arrangement is to be regarded and a debt arrangement and
    • (a) the bond proceeds paid by the bond holders are to be regarded as money borrowed by the bond-issuer from the bond-holders;
    • (b) the additional payments payable by the bond-issuer to the bond-holders are to be regarded as interest payable payable on the money borrowed by the bond-issuer from the bond-holders;
    • (c) the bond-issuer is to be regarded as not being a trustee in respect of the specified asset under the specified alternative bond scheme;
    • (d) the bond-holders are to be regarded as not having any legal or beneficial interest in the specified asset under the specified alternative bond scheme;
    • (e) if the rights in an alternative bond are transferable by delivery, the concessionary tax rate under s.14A or the exemption under s.26A will apply provided that the condition stipulated for the concession and exemption are satisfied;
    • (f) if the rights in the alternative bonds are transferable by delivery, the alternative bonds are regarded as certificates of deposit for the purpose of s.15(1)(j),(k) and (l), and the making of redemption payment for the alternative bonds is regarded as the redemption on maturity or presentment of certificate of deposit;
    • (g) the additional payments are accorded the same tax treatment under s.16(2)(f) as interest payable on conventional bonds;
    • (h) the alternative bonds are regarded as "bonds" within the definition of "securities" for the purposes of s.20AC and item 1 of Schedule 16; and
    • (i) the qualified bonds arrangement is not regarded as a mutual fund, unit trust or similar investment scheme for the purposes of s.26A.
  8. s22: Tax treatment for qualified investment arrangement
    • The qualified investment arrangement is to be regarded as a debt arrangement in the following aspects-
    • (a) the acquisition cost under the qualified investment arrangement is to be regarded as money borrowed by the originator from the bond-issuer;
    • (b) the investment return payable under the qualified investment arrangement is to be regarded as interest payable on the money borrowed by the originator from the bond-issuer;
    • (c) the bond-issuer is to be regarded as not having any legal or beneficial interest in the specified asset under the specified alternative bond scheme;
    • (d) any specified asset transaction between originator and bond issuer under the qualified investment arrangement is to be disregarded;
    • (e) the specified asset, or part of its, acquired / disposed of by the bond issuer from / to a third party is regarded as acquired / disposed of by the originator directly from / to the third party;
    • (f) the income, expenditure, profits, gains or losses arising from the specified asset are regarded as those of the originator;
    • (g) the investment return, though constituting considerations payable for the right of use of land or buildings, is regarded as not being consideration for the purpose of s.5B of IRO;
    • (h) the alternative bonds are regarded as debentures or instruments and the bond issuer is treated as an associated corporation of the originator for the purposes of s. 16(2)(f)(iii) of IRO.
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yhliuaa
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331934
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Inland Revenue Ordinance 17A: Specified Alternative Bond Scheme and its Tax Treatment
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IROs17A ABS
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