BUSINESS TAX BILL TO BE GAZETTED

The Government today said that the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill 2022 will be gazetted on October 28 and will be introduced into the Legislative Council (LegCo) on November 2.

The bill is to refine and strengthen Hong Kong's tax regime to better combat cross-boundary tax avoidance arising from double non-taxation.

A package of measures will be put in place to minimise the tax compliance burden for corporations, mitigate possible double taxation, enhance tax certainty and maintain the city's tax competitiveness.

The bill creates a new Foreign-sourced Income Exemption (FSIE) regime that will allow tax exemptions for specified foreign-sourced passive income, namely interest, dividends, disposal gains in relation to shares or equity interests and intellectual property income, received in Hong Kong by multinational enterprise entities provided that certain exemption conditions as described below are met.

The bill upholds Hong Kong's territorial source principle of taxation to the effect that determination of the source of profits will not be affected by the new regime. Under the new regime, taxpayers can still be exempted from tax in respect of the specified foreign-sourced passive income received in Hong Kong if they have a substantial economic presence in the city.

The Government said the bill aligns with the international tax standard of requiring a corporate taxpayer benefitting from preferential tax treatment in a jurisdiction to have a substantial economic substance in that jurisdiction, and prevents shell companies from deriving tax benefits through double non-taxation.

The European Union (EU) has placed Hong Kong on a watchlist since October 2021 on the grounds that the non-taxation of foreign-sourced passive income is not accompanied by adequate substance requirements and robust anti-abuse rules.

The EU invited Hong Kong to make a commitment to amend its FSIE regime by December 31, 2022, and that the amended regime would take place with effect from January 1, 2023.

To avoid Hong Kong being blacklisted by the EU as a non-co-operative jurisdiction for tax purposes, Hong Kong aims to implement the new FSIE regime in January 2023 by amending its tax law.

The Government said the bill was drawn up based on the legislative building blocks confirmed by the EU Code of Conduct Group (Business Taxation) (COCG) in June 2022. Due regard has been given to the EU's promulgated Guidance on Foreign Source Income Exemption Regimes and the parameters as communicated by the COCG.

To mitigate possible double taxation, a range of enhancement and mitigation measures would be introduced such as a participation exemption regime.

To minimise the compliance burden and enhance tax certainty, a business-friendly approach will be taken including simplified reporting procedures and a dedicated unit which provides technical support to taxpayers and responds to enquiries.

To prepare for the introduction of the new regime, taxpayers affected by the new regime may apply for a Commissioner's Opinion in respect of their compliance with the economic substance requirement as a transitional measure upon the bill gazettal.

The Government said it will request the EU to remove Hong Kong from the watchlist once the bill is passed by LegCo.

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