Further Refinements to be made to Hong Kong's New Foreign-Sourced Income Exemption Regime

Hong Kong was placed on the EU’s watchlist of non-cooperative jurisdictions for tax purposes in 2021. In response, the Hong Kong implemented the new Foreign-Sourced Income Exemption (FSIE) regime in relation to certain types of passive income (i.e. interest, dividend, disposal gain from the sale of equity interests in an entity, and IP income) with effect from 1 January 2023. The Hong Kong government has recently announced that it will continue to refine the FSIE regime this year in light of the new EU guidance on foreign-sourced income regimes issued in December last year, in the hopes of being delisted from the EU’s watchlist as soon as possible.

It is expected that the refinements to the FSIE regime will be around disposal gains. Currently, the in-scope disposal gains are only gains arising from disposal of “equity interests in an entity”, but we expect that the Hong Kong government will expand it to cover gains arising from disposal of other types of assets, regardless of whether they are of a financial or non-financial nature, received by MNE entities in Hong Kong (e.g. IP assets). This is to align with the new EU guidance which provides that adequate substance requirements should be implemented in respect of “all types of passive income concerned”. The Hong Kong government is in on-going discussion with the EU to ascertain the specific requirements. So far no further details have been announced yet.

Further, the Hong Kong government has announced that it will launch a consultation exercise on the taxation of onshore capital gains in mid-March this year. We welcome the government’s decision to provide clarity and transparency on the rules regarding taxation of capital gains.

Taxpayers are recommended to actively track the developments of the FSIE regime and the rules around taxation of capital gains in Hong Kong, and consult their tax advisors to see if they will be impacted by the new rules. We will provide further information and analysis when details of the new rules are available.