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February 20, 2023

Hong Kong to further revise its foreign source income exemption regime to expand scope of disposal gain

  • Hong Kong’s refined foreign source income exemption (FSIE) regime will be further revised to expand the scope of disposal gains on more asset classes.

  • The related legislative amendments are expected to be enacted by the end of 2023 with the revised FSIE regime to enter into force from January 2024.

  • Multinational enterprises (MNEs) should review their Hong Kong asset profile to assess the potential tax implications.

Executive summary

As a response to the recent update of European Union (EU) guidance, Hong Kong announced that it will further revise its FSIE regime by end of 2023 in relation to the scope of foreign-sourced disposal gains to enable Hong Kong to be removed from the EU watchlist of non-cooperative jurisdictions for tax purposes. A consultation will be held during 2023 on the proposed further amendments to the refined FSIE regime.

Detailed discussion

Hong Kong’s refined FSIE regime came into effect on 1 January 2023, whereby specified foreign-sourced income in the form of: (i) dividends; (ii) interest; (iii) intellectual property (IP) income; and (iv) disposal gain in relation to shares or equity interests received in Hong Kong will be subject to tax unless certain additional requirements are met.

The refined FSIE regime was recently confirmed by the EU to be fully compliant with the guidance on the FSIE regime originally published in 2019 but only with regards to: (i) dividends; (ii) interest; and (iii) IP income. However, as per the updated guidance issued by the EU last December, the scope of disposal gains, subjected to the economic substance requirement under Hong Kong’s refined FSIE regime, would need to be further extended to cover more asset classes.

In response, Hong Kong announced that it will further amend the refined FSIE regime in relation to the scope of foreign-sourced disposal gains. The related legislative amendments are expected to be made by end of 2023 to bring the revised FSIE regime into force from January 2024. The Government indicated that it will conduct a consultation to seek stakeholders’ comments on the proposed additional amendments.

Meanwhile, the Government will also solicit views from stakeholders on the safe harbor rules for treating disposal gains on equity interests as being capital in nature. Such a safe harbor rule would facilitate MNEs in evaluating their disposal gains and where the same are treated as onshore capital gains, the same would be non-taxable in Hong Kong.


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


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