Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

June 30, 2022
2022-5625

Hong Kong proposes to refine its foreign source income exemption regime for certain passive income

Executive summary

In response to the concern of the European Union (EU) over potential double non-taxation arising from Hong Kong’s foreign source income exemption (FSIE) regime for certain passive income, Hong Kong has launched a consultation on a proposed refinement to the FSIE regime. This refinement is intended to enable Hong Kong to be removed from the EU watchlist of non-cooperative jurisdictions for tax purposes.

The related legislative bill is planned to be introduced in the last quarter of 2022 so as to bring the refined FSIE regime into force from 1 January 2023 with no grandfathering arrangement.

This Alert summarizes the key provisions of the tax regime.

Detailed discussion

While Hong Kong will continue to adhere to the territorial source principle of taxation, it is proposed that Hong Kong constituent entities of a multinational enterprise group, wherever headquartered and irrespective of group asset size and revenue, will be subject to a refined FSIE regime in respect of in-scope offshore passive income received in Hong Kong.

The refined FSIE regime will apply to four types of passive income, namely: (i) interest; (ii) income from intellectual properties; (iii) dividends; and (iv) disposal gains in relation to shares or equity interest. Active income (e.g., trading profits, service income etc.) will continue to be exempt from profits tax if it is regarded as offshore sourced based on Hong Kong’s existing source rules.

The in-scope offshore passive income would continue to be exempt from profits tax in Hong Kong under the FSIE regime if the entity concerned satisfies the economic substance or nexus approach requirements. Pure equity holding companies will be subject to a reduced economic substance requirement.

To avoid possible double taxation and relieve compliance burdens, the refined FSIE regime will introduce a participation exemption in respect of offshore dividends and disposal gains in relation to shares or equity interest. Regardless of whether the economic substance requirement is met, the relevant income will continue to be tax-exempt in Hong Kong if the conditions are satisfied, subject to specific anti-abuse rules.

Recognizing that covered taxpayers would suffer double taxation if they do not qualify for exemption under the refined FSIE regime, a unilateral tax credit will also be introduced such that overseas taxes paid in respect of in-scope offshore passive income received from jurisdictions that have not concluded comprehensive double taxation agreements with Hong Kong will be creditable against the Hong Kong tax payable on the same income under the refined FSIE regime.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more