Hong Kong Government makes good on promise to axe stamp duty on exchange traded funds

Summary

On 5 December 2014, the Hong Kong Government formally released its draft legislation to waive stamp duty for the transfer of shares or units of all exchange traded funds (“ETFs”). The Stamp Duty (Amendment) Bill 2014 will be introduced into the Legislative Council on 17 December 2014 (“the Bill”). It is expected to have wide support. The proposed ETF stamp duty waiver will take effect on the day on which the enacted Stamp Duty (Amendment) Ordinance is published in the Gazette after its enactment by the Legislative Council.

Background

Under current law, for ETFs with their registers of holders maintained in Hong Kong that track indices comprising more than 40% in Hong Kong stocks, the buyer and the seller each needs to pay a stamp duty at 0.1% of the value of the transaction (0.2% in total).

The Government has since 2010 extended a stamp duty remission for ETFs with their registers of holders maintained in Hong Kong that track indices comprising not more than 40% in Hong Kong stocks as an initiative to encourage the Hong Kong listing of ETFs tracking regional indices. As of 30 September 2014, there were a total of 121 ETFs listed in Hong Kong; and of these, 26 ETFs fell outside the remission measure such that stamp duty applies to sale and purchase of their shares or units.

Key Points of Stamp Duty (Amendment) Bill 2014

• The Bill effects measures announced in the 2014-15 Budget to waive the stamp duty for the transfer of all ETF shares or units, so that the transaction costs of ETFs with their registers of holders maintained in Hong Kong and with more than 40 per cent of Hong Kong stocks in their portfolios will be reduced as well.
• According to the Government, the measures will remove the competitive disadvantage faced by ETFs tracking Hong Kong stocks on the Stock Exchange of Hong Kong (“SEHK”) and which have their registers of holders maintained in Hong Kong. This appears to verify the effectiveness of past stamp duty planning measures implemented in relation to ETFs tracking Hong Kong stocks listed on stock exchanges outside Hong Kong and which maintain their registers of holders outside Hong Kong.
• ETFs are currently not defined under any Hong Kong statutes. Having regard to the nature and operation of ETFs in Hong Kong and other markets, the draft legislation defines an ETF as “an open-ended collective investment scheme the shares or units of which are listed or traded on a recognized stock market”. This wide definition suggests that, with planning, the exemption can apply to a broader-class of listed collective investment schemes beyond traditional ETFs.

Overall, this is a welcome step to promote the development, management and trading of ETFs in Hong Kong, and is in line with the approach of other financial centres like London and Singapore.

A copy of the Bill is available here: http://www.fstb.gov.hk/fsb/topical/doc/etf_bill_2014_e.pdf

The Secretary for Financial Services and the Treasury’s press release on the Bill is available here: http://www.fstb.gov.hk/fsb/ppr/press/doc/pr051214_e.pdf

A copy of the Financial Services and the Treasury’s question and answer note on the Bill is available here: http://www.fstb.gov.hk/fsb/topical/doc/etf_faq_e.pdf