Hong Kong’s foreign-sourced income exemption (FSIE) regime

Hong Kong should remain an effective investment holding platform under the refined foreign source income exemption (FSIE) regime

Hong Kong’s FSIE regime, which takes effect from 1 January 2023, has been further refined to cover foreign-sourced disposal gains on assets other than equity interests with effect from 1 January 2024. MNE entities in Hong Kong should assess how the latest development of the FSIE regime may impact their businesses and take necessary actions in a timely manner. Stay tuned with us for the latest updates and our insight.

 

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Insight

Hong Kong removed from European Union’s tax watchlist

On 20 February 2024, Hong Kong was removed from the European Union (EU) watchlist regarding international tax co-operation, signifying that Hong Kong fulfilled its commitments to strengthening tax good governance standard by amending its FSIE regime. In addition to Hong Kong, the EU’s external taxation strategy has also prompted legislative changes to the FSIE regime in Malaysia and Singapore. Our news flash provides a snapshot of the latest FSIE regimes in these three jurisdictions and our observations thereon.

22 February 2024

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Refinements to the FSIE regime passed into law

The amendment ordinance on further refinements to the FSIE regime was gazetted on 8 December 2023 and will take effect from 1 January 2024. The Hong Kong SAR Government made certain clarifications on the refined FSIE regime during the legislative process. Subsequent to the gazettal of the ordinance, the Inland Revenue Department also provided more illustrative examples and updates on the application for an advance ruling on compliance with the economic substance requirement. 

12 December 2023

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Bill on further refinements to the FSIE regime passed

The bill on further refinements to the FSIE regime, along with certain Committee Stage Amendments which proposed minor textual amendments to the Bill, was passed on 29 November 2023 and will take effect from 1 January 2024.

29 November 2023

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Legislative bill on further refinements to the FSIE regime published

On 13 October 2023, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 (Bill) was gazetted. The Bill seeks to refine the existing FSIE regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover assets other than equity interests. To mitigate the impacts of the refinements on covered taxpayers, the Bill also proposes to introduce an exclusion of disposal gains derived by traders of assets other than intellectual property (IP) and an intra-group transfer relief. The Bill will be introduced into the Legislative Council on 18 October 2023 and it is proposed that the refinements will apply to disposal gains accrued and received by covered taxpayers on or after 1 January 2024. Covered taxpayers may apply for a Commissioner’s Opinion or expanding the scope of the Opinion previously granted on their compliance with the economic substance requirement with respect to non-IP disposal gains in relation to assets other than equity interests.

16 October 2023

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Updates on proposed refinements to the FSIE regime for foreign-sourced disposal gains

In late July, the Inland Revenue Department organised engagement sessions with stakeholders providing updates on the changes to the proposed refinements to the FSIE regime for foreign-sourced disposal gains in response to the comments received during the consultation exercise and based on the latest round of negotiation with the European Union. The updates include scope of covered assets, determination of the source of disposal gains, computation of disposal gains or losses, exemption and relief measures, etc.

1 August 2023

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Proposal to refine Hong Kong’s FSIE regime for foreign-sourced disposal gains unveiled

To align with the European Union's latest requirements, the Hong Kong SAR government issued a consultation paper on 6 April 2023 proposing to include disposal gains on other types of assets (in addition to equity interests) under the FSIE regime. Foreign-sourced disposal gains from covered assets received by MNEs in Hong Kong will remain non-taxable if the relevant exception provision is met. Additional relief measures will be explored while other aspects of the existing FSIE regime will remain unchanged.

11 April 2023

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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.

20 February 2023

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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.

23 December 2022

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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. On the same date, the Inland Revenue Department also published on a dedicated webpage of its website, an administrative guidance on the refined FSIE regime which includes frequently asked questions, illustrative examples and procedures for applying for a Commissioner’s Opinion on the compliance with the proposed economic substance requirement.

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. The new mechanism serves as an interim measure to provide greater tax certainty to taxpayers during the period between the gazettal of the amendment bill on the refined FSIE regime and the coming into operation of the relevant amendment ordinance. 

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

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Charles Lee

Charles Lee

Tax Leader, PwC China

Tel: +[86] (755) 8261 8899

Rex Ho

Rex Ho

Asia Pacific Financial Services Tax Leader, PwC Hong Kong

Tel: +[852] 2289 3026

Gwenda Ho

Gwenda Ho

Senior Advisor, PwC Hong Kong

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Agnes Wong

Partner, PwC Hong Kong

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Charles  Chan

Charles Chan

Partner, PwC Hong Kong

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Kathleen  Wang

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Partner, PwC Hong Kong

Tel: +[852] 2289 3658

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