On 14 December 2022, the Hong Kong Legislative Council has passed the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill 2022.

The bill introduces a new foreign-sourced income exemption (FSIE) regime for passive income in Hong Kong, which will take effect on January 1, 2023.  The bill strengthens Hong Kong’s tax regime for better combatting cross-border tax avoidance arising from double non-taxation and fulfils the commitment made by Hong Kong to the European Union in 2021 to amending its tax law.

Under the regime, multinational enterprise entities which have a substantial economic presence in Hong Kong will continue to be able to claim tax exemption for specified foreign-sourced passive income, namely interest, dividends and disposal gains in relation to shares or equity interests, received in Hong Kong. Foreign-sourced intellectual property income from qualifying intellectual property received in Hong Kong will also be exempt to the extent that the nexus requirement is complied with. Individuals and local companies will not be affected.”

The FSIE regime will put in place an economic substance requirement and nexus requirement to safeguard against possible exploitation of Hong Kong’s tax arrangement by shell companies to achieve double non-taxation in respect of foreign-sourced passive income.

To assist taxpayers concerned in complying with the new regime, the Inland Revenue Department (IRD) will implement a package of tax compliance facilitating measures, which seeks to minimise compliance burden on affected taxpayers, enhance tax certainty and ensure tax transparency. These include simplified reporting procedures and the publishing of administrative guidance with illustrative examples on its website. A dedicated team has also been set up by the IRD to provide technical support. Taxpayers may also apply from the IRD for advance rulings on whether the economic substance requirement is met under the FSIE regime.