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Qualifying Debt Instruments
1.
Q:
What is a qualifying debt instrument (QDI)?
A:
It is a debt instrument specified in Part I of Schedule 6 to the Inland Revenue Ordinance (IRO) that:
| (a) | is in respect of a debt issue which in its entirety has been lodged with and cleared by the Central Moneymarkets Unit operated by the Monetary Authority (HKMA) or listed on a stock exchange in Hong Kong; |
| (b) | is issued by a person and at all relevant times has a credit rating acceptable to the HKMA from a credit rating agency recognised by the HKMA. For acceptable credit ratings from the credit rating agencies recognised by the HKMA, please refer to the website of the HKMA; |
| (c) | where it was issued prior to 1 April 1999, has a minimum denomination of $500,000 or its equivalent in a foreign currency; or where it was issued on or after 1 April 1999, has a minimum denomination of $50,000 or its equivalent in a foreign currency; |
| (d) | is issued to the public in Hong Kong. From 25 March 2011 onwards, the instrument must be, at issuance, issued in Hong Kong to (i) 10 or more persons; or (ii) less than 10 persons none of whom is an associate of the issuer of the instrument. For definition of "associate", please see Q11; and |
| (e) | if it is a scripless instrument, it is one that would qualify in the terms of the definition of QDI if it were in a physical form. |
2.
Q:
What is the tax concession or exemption available for QDI issued before 25 March 2011?
A:
With effect from 24 May 1996, interest income and trading profits derived from a QDI issued in Hong Kong with an original maturity of not less than 5 years are subject to a concessionary tax rate equivalent to 50% of the normal profits tax rate. Commencing from the year of assessment 2003/04, this concession is expanded to cover a "medium term debt instrument" issued in Hong Kong on or after 5 March 2003 having an original maturity of less than 7 years but not less than 3 years. In addition, interest income and trading profits derived from a "long term debt instrument" issued in Hong Kong on or after 5 March 2003 but before 1 April 2018, with an original maturity of not less than 7 years are exempt from profits tax.
3.
Q:
What is the tax concession or exemption available for QDI issued on or after 25 March 2011 but before 1 April 2018?
A:
From 25 March 2011 onwards, the 50% tax concession further extends to cover interest income and trading profits derived from a "short term debt instrument" issued on or after that date but before 1 April 2018, with a tenor of less than 3 years. The existing tax concession for "medium term debt instrument" and tax exemption for "long term debt instrument" issued before 25 March 2011 remain the same. However, the tax concession and exemption will not apply in relation to a QDI issued on or after 25 March 2011 if, at the time during which the interest income and trading profits is/are so received or accrued, the person is an associate of the issuer of the QDI. For the definition of "associate", please see Q11.
4.
Q:
What is the tax concession or exemption available for QDI issued on or after 1 April 2018?
A:
The tax exemption available for QDI has been expanded. Interest income and trading profits derived from a QDI issued on or after 1 April 2018, regardless of its tenor, are all exempt from profits tax. However, the exemption is also subject to the same condition set out in Q3 that it will not apply if at the time during which the interest income and trading profits is/are so received or accrued, the person is an associate of the issuer of the QDI.
5.
Q:
What is a short term debt instrument?
A:
A short term debt instrument means a debt instrument that meets the requirements set out in Q1 and is issued on or after 25 March 2011 but before 1 April 2018, has an original maturity of less than 3 years or is undated and can be redeemed within 3 years from the date of its issue.
6.
Q:
What is a medium term debt instrument?
A:
A medium term debt instrument means a debt instrument that meets the requirements set out in Q1 and satisfies the following conditions:
| (a) | If it is issued before 5 March 2003, it has an original maturity of not less than 5 years or is undated and cannot be redeemed within 5 years from the date of its issue. |
| (b) | If it is issued on or after 5 March 2003 but before 1 April 2018, it has an original maturity of less than 7 years but not less than 3 years or is undated and can be redeemed within 7 years from the date of its issue but not within the first 3 years. |
7.
Q:
What is a long term debt instrument?
A:
A long term debt instrument means an instrument that meets the requirements set out in Q1 and is issued on or after 5 March 2003 but before 1 April 2018, has an original maturity of not less than 7 years or is undated and cannot be redeemed within 7 years from the date of its issue.
8.
Q:
Whether a debt instrument denominated in Renminbi would be granted tax concession or exemption?
A:
A debt instrument denominated in a foreign currency may qualify as a QDI if it, among other things, meets the minimum denomination requirement set out in A1(c). Under section 3 of the Interpretation and General Clauses Ordinance (Cap 1), "foreign currency" is defined to mean "any currency other than Hong Kong currency" which includes Renminbi.
9.
Q:
How can I know whether a debt instrument is a QDI?
A:
10.
Q:
Will the status of tax concession or exemption be affected if a QDI issued on or after 25 March 2011 is subsequently acquired from the secondary market instead of from the issuer directly?
A:
No. The words "at issuance" in A1(d) refer to the primary launch of the debt instrument. So long as the requirement of A1(d)(i) or (ii) is met at issuance, the debt instrument, provided that the other conditions in Q1 are satisfied and if, at the time during which the interest income and trading profits is/are so received or accrued, the person is not an associate of the issuer of the QDI, qualifies for tax concession or exemption, as the case may be.
11.
Q:
What does "associate" mean?
A:
The definition of "associate", in relation to the issuer of a debt instrument, can be found in section 14A(4) of the IRO. In essence, "associate" means any entity which controls the issuer, or is subject to the control of the issuer or is subject to the control of the same person as is the issuer, either directly or indirectly. However, companies which are associated merely because of common ownership by the central government of a country or its sovereign wealth funds or similar state-owned enterprises but in practice operate independently as separate commercial entities are not "associates". Relevant details can be found in section 14A(4A) of the IRO.
12.
Q:
If one of the subscribers to a debt instrument is an associate of the issuer, will other subscribers/subsequent purchasers of that debt instrument be entitled to the tax concession or exemption?
A:
If that debt instrument is, at issuance, issued in Hong Kong to less than 10 persons, it does not qualify as a QDI and all the subscribers or subsequent purchasers are not entitled to any tax concession or exemption under the QDI provisions in respect of that debt instrument. If that debt instrument is issued to 10 or more persons, the instrument still qualifies as a QDI but the tax concession or exemption does not apply to the subscriber or purchaser who at the relevant times is an associate of the issuer.
13.
Q:
If Company A and Company B are associated corporations during part of a year and Company B receives interest income on a full year basis from a QDI issued by Company A, is Company B entitled to any tax concession or exemption?
A:
It is well established judicially that interest accrues on a day-to-day basis. Accordingly, the tax concession or exemption does not apply to the period during which Company A and Company B are associated corporations. The concessionary profits tax rate or tax exemption only applies to that part of the interest income accrued to Company B during which it is not an associate of Company A. Generally, time apportionment by reference to the ratio of number of days of which Company B is not an associate of Company A to the total number of days in the basis period is an acceptable basis in ascertaining the portion of concessionary or exempted interest income.
14.
Q:
If Company C and Company D are associated corporations during part of a year and Company D subsequently derives trading profits from the disposal of a QDI issued by Company C when it is no longer Company C's associate, is Company D entitled to any tax concession or exemption?
A:
Profits are recognised when they are realised or realisable, and are earned irrespective of the timing of actual receipt of cash. Where Company D disposes of the QDI at the time when it is not an associate of the issuer, Company D is entitled to the tax concession or exemption. However, the Department may in appropriate cases consider invoking the general anti-avoidance provisions of the IRO if the circumstances warrant.