Hong Kong Tax News Flash

Mar 2023, Issue 3

Consultation on providing upfront certainty of non-taxation of onshore equity disposal gains launched

The implementation of the refined foreign-sourced income exemption (FSIE) regime early this year may cause some taxpayers to consider structuring their transactions involving disposal of equity interests onshore. While it is certain that an onshore disposal gain on capital account is not subject to tax in Hong Kong, the determination of whether such a gain is revenue or capital in nature is essentially a fact-specific exercise based on a ‘badges of trade’ analysis, which could lead to uncertainty.

To provide greater upfront certainty of non-taxation to taxpayers, the Financial Services and the Treasury Bureau (FSTB) released the Enhancing Tax Certainty of Onshore Gains on Disposal of Equity Interests Consultation Paper (the Consultation Paper) on 23 March 2023 for a two-month trade consultation.

The Consultation Paper proposes introducing a set of clear and objective eligibility criteria for the tax certainty enhancement scheme (the Enhancement Scheme). Under the Enhancement Scheme, onshore equity disposal gains that satisfy all of the specified criteria would be regarded as non-taxable and there is no need to conduct a ‘badges of trade’ analysis. Subject to certain exclusions, the Enhancement Scheme would apply to onshore equity disposal gains where the investor entity has held at least 15% of the equity interests in the investee entity for a continuous period of at least 24 months immediately prior to the date of disposal of such interest.

This news flash summarises the eligibility criteria of the Enhancement Scheme and our observations.