Hong Kong Ordinances

INLAND REVENUE ORDINANCE - SECT 15E

Stock borrowing and lending

(Past version on 30/06/1997).

(1) This section applies where-

   (a)  in relation to a stock borrowing under a stock borrowing and 
        lending agreement, the borrower has used the borrowed stock obtained
        from a lender for one or more than one specified purpose and has
        effected a stock return;

   (b)  if any distribution is made or a right or option is issued in respect
        of the borrowed stock during the borrowing period, regardless of
        whether that event occurs before or after the borrowed stock is
        disposed of by the borrower to a third party, the lender receives from
        the borrower the distribution or identical property, the right or
        option or an identical right or option, or a compensatory payment
        equal to the value of the distribution or the value of the right or
        option;

   (c)  the lender does not dispose of, whether by transfer, declaration of
        trust or otherwise, the right to receive any part of the total
        consideration payable or to be given by the borrower under the stock 
        borrowing and lending agreement;

   (d)  both the borrower and the lender were dealing with each other at arm's
        length in relation to the stock borrowing and the stock return; and

   (e)  the lender does not enter into the stock borrowing with the purpose,
        or main purpose, of avoiding or deferring the inclusion of any amount
        in profits in respect of which the lender is chargeable to tax under
        this Part.

(2) For the purpose of determining whether an amount, other than any fee
payable under a stock borrowing and lending agreement, should be taken into
account in ascertaining the profits in respect of which a lender is chargeable
to tax under this Part in respect of a stock  borrowing or a stock return, the
lender is to be treated as if-

   (a)  the stock borrowing, to the extent of the quantity and description of
        the borrowed stock in respect of which the stock return is
        subsequently made, had not been entered into;

   (b)  the stock return had not been made;

   (c)  the lender had, at all times during the relevant borrowing  period,
        held the borrowed stock in respect of which the stock return is made;
        and

   (d)  the stock which is the subject of the stock return were the
        borrowed stock in respect of which the stock return made.

(3) Where-

   (a)  a lender receives from a borrower in relation to the borrowed  stock a
        distribution or identical property or a right or option or identical
        property; and

   (b)  had the borrowed stock continued to be held by the lender at all times
        during the borrowing period an amount would have been included or
        excluded, as the case may be, in ascertaining for a year of assessment
        the profits in respect of which the lender is chargeable to tax under
        this Part in respect of the distribution or the right or option, then
        an equal amount shall be likewise treated in ascertaining the
        chargeable profits of the lender for that year of assessment.

(4) Where a lender receives from a borrower in relation to the borrowed stock
a compensatory payment in respect of a distribution made or right or option
issued during the borrowing period, then in determining whether an amount is
to be included or excluded, as the case may be, in ascertaining for a
year of assessment the profits in respect of which the lender is chargeable to
tax under this Part in respect of the compensatory payment, the lender is to
be treated as if-

   (a)  the distribution had been made, or the right or option had been issued
        directly to him in respect of the borrowed stock; and

   (b)  he had disposed of the distribution or right or option immediately
        after its making or issue, as the case may be, for a consideration
        equal to that compensatory payment.

(5) In determining the amount, if any, other than a fee payable under a
stock borrowing and lending agreement, to be taken into account in
ascertaining the profits in respect of which a borrower is chargeable to tax
under this Part in respect of a stock borrowing or a stock return, the
borrower is to be treated as if the stock borrowing and the stock return
respectively had been carried out for a consideration equal to the market
value of the borrowed stock at the time of the relevant stock borrowing.

(6)Where a person has entered into a stock borrowing and lending agreement
under which a stock borrowing has been effected, and at the time of making an
assessment of profits tax on that person for any year of assessment the
assessor is of the opinion that the requirements specified in subsection

(1) have been or will be satisfied, the assessor may make the assessment on
the basis that this section is applicable.

(7) Where-

   (a)  an assessment has been made on the basis that this section is
        applicable; and

   (b)  after the making of the assessment, the assessor becomes satisfied
        that this section is not applicable, then the assessor may accordingly
        adjust the assessment.

(8) In this section-

"borrower" (借用人), "borrowed stock" (被借用證券), "lender"
(借出人), "recognized
stock market" (認可證券市場), " specified purpose" (指明用途), "
stock borrowing" (證券借
用), "stock borrowing and lending agreement" (證券借用及借出協議)
and "stock return" (證券交還), subject to subsection (9), have the same
meanings as in the Stamp  Duty Ordinance ( Cap 117); (Amended 56 of 1996 s. 2;
5 of 2002 s. 407)

"borrowing period" (借用期間) , in relation to any borrowed stock, means
the period commencing when that stock was borrowed under a stock borrowing and
ending when a stock return is effected in relation to that stock;

"distribution" (派發) includes-

   (a)  an interest payment;

   (b)  a dividend;

   (c)  a share issued by a company to a shareholder in the company where the
        share is issued as a bonus share;

   (d)  an amount credited by the trustee of a unit trust to a unit holder
        other than by way of redemption, realization or liquidation;

   (e)  a unit issued by the trustee of a unit trust;

"option" (認購權) includes-

   (a)  in relation to a company, an option to acquire shares in the company;

   (b)  in relation to a unit trust, an option to acquire units in the unit
        trust;

"right" (權利) includes-

   (a)  in relation to a company, a right to acquire shares in the company or
        to acquire an option;

   (b)  in relation to a unit trust, a right to acquire units in the unit
        trust or to acquire an option;

"specified securities" (指明證券) means any of the following, not being
Hong  Kong stock the sale and purchase of which in Hong Kong are subject to
the rules and practices of a recognized stock market- (Amended 5 of 2002 s.
407)

   (a)  any shares, stocks, debentures, loan stocks, funds, bonds or notes of
        or issued by any body, whether corporate or unincorporate, or any
        government or local government authority, or any other similar
        investment of any description;

   (b)  any units under a unit trust scheme;

   (c)  any right, option or interest in or in respect of any security
        referred to in paragraph (a) or (b), which the Commissioner may
        specify in writing, either generally or in any particular case, for
        the purposes of this section. (Added 56 of 1996 s. 2)

(9) For the purposes of construing a term by reference to the Stamp 
Duty Ordinance ( Cap 117) in subsection (8), a reference in the
corresponding term in the Stamp Duty Ordinance ( Cap 117) to "Hong Kong stock"
or to "Hong Kong stock the sale and purchase of which in Hong Kong are subject
to the rules and practices of a recognized stock market", is construed as
including a reference to specified securities that the Commissioner has
specified under subsection (8). (Added 56 of 1996 s. 2. Amended 5 of 2002 s.
407)

(10) For the purpose of the definition of "specified securities" in
subsection (8), the terms "Hong Kong stock", "unit" and "unit trust scheme"
have the same meanings as in the Stamp Duty Ordinance ( Cap 117). (Added 56 of
1996 s. 2) (Added 71 of 1994 s. 2)

"borrower" (借用人), "borrowed stock" (被借用證券), "lender"
(借出人), "recognized
stock market" (認可證券市場), " specified purpose" (指明用途), "
stock borrowing" (證券借
用), "stock borrowing and lending agreement" (證券借用及借出協議)
and "stock return" (證券交還)

"borrowing period" (借用期間)

"distribution" (派發)

"option" (認購權)

"right" (權利)

"specified securities" (指明證券)