The Hong Kong SAR government is expected to administer the refined FSIE regime pragmatically with a view to maintaining Hong Kong as an effective investment holding platform. Taxpayers can obtain certainty and simplify the annual compliance process through the advance ruling mechanism.
Hong Kong’s FSIE regime will be fine-tuned in response to EU’s latest guidance on foreign-sourced capital gains
On 14 February 2023, the European Union (EU) released an updated list regarding international tax co-operation. Given the updated guidance on FSIE regimes promulgated by the EU in December 2022, Hong Kong is kept on the EU watchlist and needs to fine-tune its tax legislation on foreign-sourced capital gains by the end of 2023. The Hong Kong SAR government reassures that this will not result in any adverse impact on Hong Kong enterprises.
Hong Kong SAR government continues to refine regime against cross-border tax avoidance
On 14 February 2023, the European Union (EU) released an updated list regarding international tax co-operation. Hong Kong remains on the watchlist as the EU promulgated an updated guidance on FSIE regimes in December 2022 explicitly requiring capital gains as a general class of income to be covered by an FSIE regime, subject to economic substance requirement. Hong Kong is granted an extension of time until the end of 2023 to refine its tax legislation on foreign-sourced capital gains. The Hong Kong SAR government will conduct a consultation exercise in this regard. Please stay tuned for our upcoming Tax News Flash for more details and observations.
Bill on refined FSIE regime passed
The bill on the refined FSIE regime, along with certain Committee Stage Amendments, was passed on 14 December 2022 and will take effect from 1 January 2023. Other key developments include the Hong Kong SAR Government’s responses to written submissions on the bill and the European Union’s agreement on the ‘headline rate’ approach for the purpose of the ‘subject to tax’ condition.
EU’s agreement to “headline rate” approach with regard to the “subject to tax” condition
After vigorous exchange of views with Hong Kong SAR government and having regard to the precedents of other jurisdictions, the EU eventually agrees to the proposed “headline rate” approach with regard to the “subject to tax” condition. However, if the income is taxable under a special tax legislation at a lower rate than in the main legislation, and the lower rate is not a tax incentive for carrying out substantive activities, the headline tax rate should be the highest stipulated tax rate in the special legislation.
Hong Kong SAR government’s responses to the comments and suggestions on the FSIE bill as raised in the written submissions
The Hong Kong SAR government provided responses to the comments and suggestions on the FSIE bill as raised in the written submissions made by various organisations, including PwC, on 21 November 2022.
Hong Kong SAR government proposed to amend the FSIE bill via Committee Stage Amendments
In response to the European Union’s concerns, the Hong Kong SAR government proposed to amend the FSIE bill by (1) removing the carve-out of an “excluded entity” from the definition of an “MNE entity”, and (2) adopting an “excluded income” approach for entities benefitting from the existing preferential tax regimes with substantial activities requirement via Committee Stage Amendments (CSA).
10 November 2022
Hong Kong SAR government proposed certain amendments to the bill on the refined FSIE regime
After further discussions with the European Union on the bill on the refined FSIE regime, on 7 November 2022 the Hong Kong SAR government shared with stakeholders about its proposal to amend the bill by (1) removing the carve-out of an ‘excluded entity’ from the definition of an ‘MNE entity’, and (2) adopting an ‘excluded income’ approach for entities benefitting from the existing preferential tax regimes with substantial activities requirement. The Hong Kong SAR government emphasised that the proposed amendments should not give rise to material adverse impact on most of the covered taxpayers.
9 November 2022
The bill on refined FSIE regime is gazetted
The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill 2022 (Bill) is gazetted on 28 October 2022 and will be introduced into the Legislative Council on 2 November 2022. The overall framework of the refined FSIE regime under the Bill remains largely the same as that in the consultation paper. Stay tuned for our News Flash to be issued soon for more details of the Bill.
28 October 2022
Commissioner’s Opinion as an interim measure to obtain certainty on economic substance requirements under refined FSIE regime
The Inland Revenue Department will introduce a new mechanism as an interim measure for taxpayers to obtain an opinion from the Commissioner of Inland Revenue as to whether they meet the economic substance requirements under the refined foreign source income exemption regime expected to be effective on 1 January 2023.
17 October 2022
Proposed refinements to foreign source income exemption regime: Hong Kong as an effective investment holding platform
With the Hong Kong SAR government’s continuous effort to address questions and concerns expressed by different businesses, it appears that Hong Kong’s advantage as an effective place for setting up investment holding companies should not be significantly undermined by the proposed refinements to foreign source income exemption regime for passive income.
15 September 2022
Proposed refinements to Hong Kong’s foreign source income exemption regime for passive income
The Hong Kong SAR government proposed to refine Hong Kong’s foreign source income exemption (FSIE) regime for passive income with effect from 1 January 2023. Four types of offshore passive income, namely (1) interest, (2) income from intellectual properties, (3) dividends and (4) disposal gains in relation to shares or equity interest, will be deemed to be sourced from Hong Kong and chargeable to profits tax under certain circumstances.
27 June 2022
South China (incl. Hong Kong SAR) Tax Leader, PwC China
Tel: + (755) 8261 8899