GOVT OPTIMISES TAX REGIME

The Government today welcomed the European Union's (EU) positive feedback on the efforts made by Hong Kong in putting in place a new foreign-sourced income exemption (FSIE) regime.

In response to the EU’s inclusion of Hong Kong on its watchlist on tax co-operation in 2021, the Government enacted the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 last December to enforce a new FSIE regime for foreign-sourced dividend, interest, intellectual property income and disposal gain in relation to shares or equity interests received in Hong Kong.

The regime, which came into effect on January 1, seeks to address the possible exploitation of Hong Kong’s tax arrangement by multinational enterprise entities without substantial economic substance in Hong Kong to bring about double non-taxation of such income, the Government explained.

It was pleased to note that the EU welcomed this development and confirmed that Hong Kong’s FSIE regime fully complies with the Guidance on FSIE Regimes originally published in 2019 with regard to dividend, interest and intellectual property income.

Additionally, in light of the EU’s recent update to its Guidance on FSIE Regimes, the Government said it will refine the city’s FSIE regime regarding foreign-sourced disposal gain in relation to assets other than shares or equity interests.

Last December, the EU promulgated another guidance, explicitly requiring capital gains, as a general class of income covered by an FSIE regime, to be subject to the economic substance requirement.

Jurisdictions with ongoing FSIE reforms, such as Hong Kong, will be kept on the tax watchlist by the EU until necessary legislative amendments are made by the end of 2023 for implementation with effect from January 2024.

The retention of Hong Kong on the watchlist will not result in any adverse impact on the city’s enterprises, the Government stressed.

Under the upcoming refined regime, foreign-sourced capital gains in relation to assets received by multinational enterprise entities in Hong Kong will remain exempt from tax provided that the economic substance requirement is complied with.

Individuals, standalone local companies and purely local groups will not be affected.

The Government will conduct a consultation to seek stakeholders’ comments on the proposed FSIE regime refinements.

It will also request the EU to swiftly remove Hong Kong from the watchlist after making the necessary legislative amendments.

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