The Hong Kong Inland Revenue Department passed bills to amend further Hong Kong’s refined foreign-sourced income exemption (FSIE) regime, including asset disposal gains and introducing safe harbor rules for onshore equity disposal gains. This legislation might compel multinational corporations (MNCs) to consider evaluating their asset portfolios in Hong Kong to analyze potential tax consequences.
On 29 November 2023, the Legislative Council of Hong Kong announced the passage of the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023. The Bill refines Hong Kong’s foreign-sourced income exemption (FSIE) regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover assets other than shares or equity interests.
The FSIE ordinance was gazetted on 8 December 2023, and the safe harbor ordinance will be gazetted on 15 December 2023; both will come into effect starting from 1 January 2024.
Refined FSIE regime
The revised FSIE regime extends the scope of foreign-sourced disposal gains and includes financial or nonfinancial assets. These foreign-sourced gains will be classified as sourced from Hong Kong and subject to profits tax unless the entity satisfies the nexus requirement for intellectual property (IP) assets or the economic substance requirement for non-IP assets.
Tax-certainty enhancement scheme for onshore equity disposal gains
According to Hong Kong’s tax regulations, onshore disposal gains are non-taxable if categorized as capital. However, there are no regulations to determine what constitutes gains on a capital account. Therefore, the taxability of disposal gains is determined through a “badges of trade” analysis under the domestic tax law.
Hong Kong has recently implemented safe-harbor rules offering upfront certainty on onshore equity disposal gains without the “badges of trade” analysis. Under the safe harbor rules, if investors continuously hold a minimum of 15% of the total equity interest in the investee entity for at least 24 months, any gains from such disposal will be deemed nontaxable capital gain.
The safe harbor rules do not apply to certain disposal gains, such as disposal gains from certain property-related investee entities. However, the taxability of disposal gains will still be determined using the current badges-of-trade analysis. Additionally, there are special rules when the equity interest changes from trading stock to a capital asset.
