Global Daily Tax News, HK Lawmakers Agree Further FSIE Regime Changes, (Nov 30, 2023)

Hong Kong's Legislative Council on November 29 passed the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023.

The Bill amends Hong Kong's foreign-sourced income exemption (FSIE) regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover assets other than shares or equity interests.

Namely, disposal gain will be expanded to cover gain or profit derived from the sale of any property, including movable property or immovable property.

Under the refined FSIE regime, foreign-sourced non-intellectual property (IP) disposal gains will continue to be exempt from tax if the multinational enterprise (MNE) entity has adequate economic substance in Hong Kong, the Government said.

For foreign-sourced IP disposal gains, the extent of the tax exemption will be determined by the modified nexus approach, developed by the OECD.

The refined FSIE regime will be implemented with effect from January 1, 2024. The Government said it would request Hong Kong's removal from the EU's tax watchlist, which includes countries that have made commitments to comply with tax good governance criteria within a specific timeframe.

The latest amendment supplements the new foreign source income exemption regime that was introduced from January 1, 2023, in response to EU concerns that the existing regime was harmful.

The current regime allows tax exemptions for specified foreign-sourced passive income, namely interest, dividends, disposal gains in relation to shares or equity interests (disposal gains) and intellectual property (IP) income, received in Hong Kong by relevant multinational enterprise entities (MNE entities) provided that certain exemption conditions are met.

An MNE entity wishing to claim a tax exemption relating to foreign-sourced interest, dividend and disposal gains must meet economic substance requirement, which can be met by employing an adequate number of qualified employees and incurring adequate operating expenditures in Hong Kong.

MNE entities that are pure equity-holding companies are subject to a reduced economic substance requirement involving only the holding and managing of equity participations, providing they comply with the corporate law filing requirements in Hong Kong.

The Hong Kong Government has released technical guidance for taxpayers and their agents on the extent of the changes.