The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill 2022 (the Amendment Bill) was gazetted on 28 October 2022 and was introduced into the Legislative Council on 2 November 2022 to provide a new framework for Hong Kong’s FSIE regime with a view to bringing the regime into force from 1 January 2023. The Amendment Bill aims to amend the Inland Revenue Ordinance (Cap. 112) (IRO) to regard certain foreign-sourced income as arising in or derived from Hong Kong and to provide for relief against double taxation in respect of certain foreign-sourced income.

Double Taxation Relief

If an MNE entity has specified foreign-sourced income chargeable to profits tax and has paid tax in a territory outside Hong Kong which is of substantially the same nature as profits tax (similar tax), double taxation relief will be available regardless of whether that territory has entered into a comprehensive avoidance of double taxation arrangement (CDTA) with Hong Kong or not. The amount of tax credit is capped at the lower of foreign tax paid and the profits tax that would have been payable on the same income.

Tax credit under CDTAs

For any similar tax payable on specified foreign-sourced income in a territory outside Hong Kong with which CDTA has been made (CDTA territory), bilateral tax credit pursuant to the relevant CDTA will be granted to the MNE entity if it is a Hong Kong resident person.

To align the treatment on foreign tax paid in a CDTA territory and a non-CDTA territory, similar tax payable in respect of the underlying profits out of which a foreign-sourced dividend was paid in a CDTA territory but is not allowable as bilateral tax credit under the CDTA may be allowed as a unilateral tax credit against profits tax charged on the foreign-sourced dividend.

Unilateral tax credit

For any similar tax payable on specified foreign-sourced income in a non-CDTA territory, unilateral tax credit will be provided to the MNE entity if it is a Hong Kong resident person. Any tax credit allowed will be set off against the profits tax payable in respect of the specified foreign-sourced income concerned. In other words, unilateral tax credit will be provided when the income is received in Hong Kong. Also, no tax credit will be available if the specified foreign-sourced income is exempt from profits tax under the new FSIE regime or if the tax paid in a non-CDTA territory relates to income other than specified foreign-sourced income.

Where the specified foreign-sourced income is a dividend, tax credits will be allowed in respect of not only the foreign tax paid on the dividend, but also the foreign tax paid on the investee entity’s underlying profits out of which the dividend is paid, provided that the MNE entity has held at least 10% equity interests in the investee entity when the dividend is distributed.