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December 12, 2023

Hong Kong passes bills on asset disposal gain regimes

  • Recently passed bills further revise Hong Kong's refined foreign-sourced income exemption regime covering asset disposal gains and introduce safe harbor rules for onshore equity disposal gains.
  • Multinational enterprises may want to review their Hong Kong asset profiles to assess potential tax implications.

Executive summary

Two bills making additional revisions to the foreign-sourced income exemption (FSIE) regime regarding asset disposal gains and providing safe harbor rules for onshore equity disposal gains1 have now been passed in the current form. The FSIE ordinance was gazetted on 8 December and the safe harbor ordinance will be gazetted on 15 December; both will come into effect starting from 1 January 2024. This Alert highlights the key features of the new rules.

Detailed discussion

Refined FSIE regime

As requested by the European Union, Hong Kong has now revised its FSIE regime to extend the scope of foreign-sourced disposal gains to cover a non-exhaustive list of assets, whether they are financial or nonfinancial in nature. Such foreign-sourced gain will be deemed as sourced from Hong Kong and chargeable to profits tax unless the entity satisfies the nexus requirement for intellectual property (IP) assets, or the economic substance requirement for non-IP assets.

Several exclusions and relief measures are in place if specific conditions are met:

  • The exemptions for regulated financial entities and taxpayers benefitting from preferential regimes are available.
  • Disposal gains of traders are excluded from the scope of the FSIE regime without requiring the trader to have substantial business activities in Hong Kong.
  • Intra-group transfer relief is available to defer tax charged if prescribed conditions are satisfied, i.e., the selling and acquiring entities should remain associated and be within the "charge to profits tax" in Hong Kong for two years. Subsequent offshore disposal gain will also be determined by the nexus requirement referred to above.

Other features of the existing FSIE regime have been adopted, including eligibility for unilateral or bilateral double-taxation relief, the treatment of disposal loss, simplified reporting procedures and availability of advance ruling applications.

Tax-certainty enhancement scheme for onshore equity disposal gains

Under the Hong Kong tax rules, onshore disposal gains are nontaxable in Hong Kong if they are classified as capital in nature. However, there currently is no bright-line test for what constitutes gains on a capital account; hence the taxability of disposal gains requires a fact-specific "badges of trade" analysis under the domestic tax law to determine how the gains should be characterized.

Hong Kong has now introduced safe-harbor rules to provide upfront certainty on onshore equity disposal gains without undertaking the "badges of trade" analysis. The safe harbor allows such gain to be deemed a nontaxable capital gain in Hong Kong if at least 15% of the total equity interest in the investee entity was held for a continuous period of at least 24 months prior to disposal. Disposal in tranches is allowed, provided subsequent disposals are made within 24 months after the first disposal.

The safe harbor rules do not apply to certain disposal gains, however (e.g., gains on disposal of certain property-related investee entities for which the risk of abuse is relatively high). Nonetheless the taxability of disposal gains would continually be determined under the current badges-of-trade analysis. Finally, special rules apply when the equity interest changes from trading stock to capital asset.


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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 See EY Global Tax Alert, Hong Kong introduces bills on asset disposal gain regimes, dated 1 November 2023.


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