Under the new regime, taxpayers can still be exempted from tax in respect of the specified foreign-sourced passive income received in Hong Kong if they have a substantial economic presence in Hong Kong.
The Hong Kong government is mulling changes to combat cross-border tax avoidance arising from double non-taxation.
The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill, 2022 will minimize the tax compliance burden for corporations, mitigate possible double taxation, enhance tax certainty, and maintain Hong Kong’s tax competitiveness. The Bill was introduced into the Legislative Council (LegCo) on November 2.
The Bill creates a new Foreign-sourced Income Exemption (FSIE) regime that will allow tax exemptions for specified foreign-sourced passive income, namely interest, dividends, disposal gains in relation to shares or equity interests (disposal gains), and intellectual property (IP) income, received in Hong Kong by relevant multinational enterprise entities (MNE entities) provided that certain exemption conditions as described below are met.
The Bill upholds Hong Kong’s territorial source principle of taxation to the effect that determination of the source of profits will not be affected by the new regime. Under the new regime, taxpayers can still be exempted from tax in respect of the specified foreign-sourced passive income received in Hong Kong if they have a substantial economic presence in Hong Kong.
To mitigate possible double taxation, a range of enhancement and mitigation measures would be introduced. In addition, to minimise the compliance burden and enhance tax certainty, a business-friendly four-pronged approach will be taken.
In October last year, the European Union placed Hong Kong on a watchlist on the grounds that the non-taxation of foreign-sourced passive income was not accompanied by adequate substance requirements and robust anti-abuse rules. At the time, Hong Kong committed to implement the new FSIE regime in January 2023.
“We will request the EU to remove Hong Kong from the watchlist once the Bill is passed by the LegCo,” a government spokesman said.