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Foreign Sourced Passive Income Tax exemption in Hong Kong

Latest Development of the Proposed Foreign Sourced Income Exemption (FSIE) Regime in Hong Kong

Today (26 October 2022), the Financial Services and The Treasury Bureau of Hong Kong conducted
a briefing session about the latest development of the FSIE Regime, including certain proposed
amendments to the provisions. You may refer to our previous article for more details on the proposed FSIE Regime.
The proposed amendments include but, not limited, to the following:

  • The definition of ‘income received in Hong Kong’ has been clarified;
  • One of the conditions for the newly to be introduced participation exemption has been revised as such that the exemption can apply when the investor company holds the shares/equity interests in the investee company for at least 12 months immediately prior to the accrual of the relevant income/gain. Previously, it is required that the investee company should not generate more than 50% passive income;
  • In respect of the double taxation relief, in case the income concerned is dividend income and the participation exemption cannot be applied, tax credit will be offered in respect of the foreign tax paid on the dividend income and also the foreign tax paid on the investee company’s underlying profits out of which the dividend is paid. Furthermore, the foreign tax paid on the underlying profits earned by a chain of a maximum of five tiers of entities held by the dividend-receiving company will be taken into account when calculating the tax credit.

Next steps

It has been scheduled that the Bill regarding the proposed FSIE Regime will be gazetted on 28
October 2022 (this Friday) and introduced into the Legislative Council on 2 November 2022 (next
Wednesday). As originally targeted, the new FSIE Regime will be implemented in Hong Kong as
from 1 January 2023 (i.e. about 2 months later).

The Inland Revenue Department (“IRD”) will publish an Administrative Guidance regarding the FSIE
Regime upon the gazettal of the Bill (i.e. this Friday) so that taxpayers can have more information
about the implementation and operation of the FSIE Regime.

Application for the Commissioner of Inland Revenue (“CIR”)’s opinion

The IRD will introduce a mechanism, under which taxpayers are allowed to apply for the CIR’s
opinion regarding compliance with the economic substance requirements (“ESRs”) pursuant to the
proposed FSIE Regime.

To apply for the CIR’s opinion, taxpayers will need to provide the CIR with certain information, including but not limited to the details of the substance maintained in Hong Kong and specified economic activities carried out in Hong Kong. The CIR will give the opinion based on the information provided, normally within 1 month after the application together with the complete information has been received. The application, however, can only be made between the gazettal of the Bill in respect of the proposed FSIE Regime and the operation of the new Ordinance.

Having said that, taxpayers can still apply for an advance ruling on compliance with the ESRs
with the IRD, which will be valid for up to five years, after the introduction of the new Ordinance.

Our HKWJ tax team can provide further advice regarding the FSIE Regime, including application for
the CIR’s opinion and advance ruling on your company(s)’s compliance with the ESRs, assessing
whether and how the FSIE Regime will impact your company(s) and providing recommendations on
how to maintain tax efficiency for your company(s).

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