Hong Kong: proposed refinements to FSIE regime has been saved
Hong Kong: proposed refinements to FSIE regime
On 28 October 2022, the draft legislation on FSIE was gazetted, which proposes that specified foreign-sourced income would be deemed taxable unless certain conditions are met.
An entity if is part of a multinational enterprise group and carries on a business in Hong Kong will be in-scope. The regime covers foreign-sourced (i) interest; (ii) dividend; (iii) disposal gain from the sale of equity interests (other than partnership interests); and (iv) income derived from the use of intellectual property (IP) that is received in Hong Kong. For interest, dividend, and disposal gain, they will continue to be tax exempt if the economic substance requirement is met.
For dividend and disposal gain, even if the economic substance requirement is not met, there is still tax exemption if the participation exemption applies, provided conditions (e.g., meeting the holding percentage and holding period thresholds) are satisfied and the anti-abuse rules are not otherwise triggered. For IP income, the exemption only applies to certain qualifying IP income and is based on the nexus requirement. Bilateral/unilateral tax credit is potentially available if the income is taxed under FSIE, and foreign taxes have been paid in respect of such income. Subject to legislative procedures, the regime will be effective from 1 January 2023.
Industry players should keep a close eye on the latest development and assess the potential impact on their group. Since based on the current draft legislation, interest, dividends, and disposal gains generated by a regulated financial entity from the carrying on of regulated business would be excluded from the FSIE regime, regulated/licensed financial services providers with business in Hong Kong may wish to see if they can avail of such “income exclusion” from FSIE. On the other hand, in respect of fund/investment management entities, it is worth noting that as the European Union does not agree with a carve-out of "excluded entity" from the regime, the current exclusion of "investment fund" in the draft legislation is expected to be removed. As such, if any fund entity (or its holding vehicle) currently has a Hong Kong nexus and could be impacted by FSIE, it may wish to revisit its operational model, and explore notarization, exemption under the Hong Kong unified tax exemption regime for funds, etc.
As a transitional measure prior to the coming into operation of the FSIE regime (i.e., from now up to 31 December 2022), there is a mechanism to allow taxpayers to apply for an opinion from the Commissioner of Inland Revenue (CIR Opinion) on whether the adequacy test of the economic substance requirement is satisfied, which may help taxpayers obtain certainty and reduce the tax reporting burden. The CIR Opinion will remain valid for up to five years commencing from the year of assessment 2022/23 or 2023/24 if there is no substantial change in the arrangement. Upon the passage of the draft legislation and the coming into operation of the FSIE regime on 1 January 2023, this transitional measure on application for CIR Opinion will cease and taxpayers may apply for an advance ruling on the enacted FSIE. CIR Opinions that have already been issued will continue to be valid.
For further information on these developments, see here:
- Tax Analysis about the draft legislation dated 29 October 2022
- Tax Newsflash about the proposed amendments to the draft legislation dated 11 November 2022
For further information on the FSIE, please contact Anthony Lau.