Update: further refinements to Hong Kong’s new FSIE regime
4 August 2023 - On 1 January 2023, Hong Kong implemented a new foreign-sourced income exception (FSIE) regime covering four types of offshore passive income, collectively known as "in-scope offshore passive income”, that are subject to profits tax under certain circumstances, namely:
- Dividends;
- Disposal gains in relation to shares or equity interest;
- Interest income; and
- Income derived from Intellectual Property (IP).
However, further changes are on the horizon, which will have an impact on entities operating in the city.
The Hong Kong government must additionally refine its regime in response to the European Union (EU)’s Updated FSIE Guidance on the coverage of disposal gains from all types of assets, issued in December 2022.
This next phase will see Hong Kong expand the remit of its FSIE regime to cover foreign-sourced gains from the disposal of assets, in addition to shares and equity interests.
A breakdown of the proposed changes and potential impact
In its consultation paper, circulated on 6 April 2023, the Hong Kong government detailed the proposed changes to the regime, seeking expert views and feedback from key stakeholders in the city. The focus was on the expanded scope of assets in relation to foreign-sourced disposal gains.
Features of the FSIE regime |
Proposed changes/issues |
Covered person |
|
Covered assets for disposal gains |
|
Covered income |
|
Computation of disposal gains or losses |
|
Economic substance requirements |
|
Participation exemption |
|
New exemption or relief for multinational enterprises (MNE) |
|
Where are we now in the process?
Unlike the legislative exercise conducted in 2022 introducing the FSIE regime, the Hong Kong government took a slightly different approach this time by launching a consultation process to collate industry views on numerous outstanding issues captured within the document. This was a beneficial approach for the government, who is now better equipped with robust feedback from key stakeholders, including the Big Four, to resume its negotiations with the EU.
Next steps and key dates
Following the closure of the consultation period on 6 June 2023, and once negotiations are complete, it is expected that the draft bill for the refined regime will be introduced in October this year. As such, Hong Kong’s expanded FSIE regime should take effect from January 2024.
Once published, the Hong Kong government will also issue administrative guidelines providing further details. The Citco group of companies (Citco) will continue to closely monitor this development and assist our clients who are navigating the updated FSIE tax regime in Hong Kong.
As experts in entity life cycle management, Citco Corporate Solutions companies pragmatically support Family Offices, Corporate and Fund clients in both in Hong Kong and around the world.
Kiki Yang, Director – Client Services, Citco Hong Kong Limited