Hong Kong Tax News Flash

Oct 2023, Issue 15

Legislative bill on further refinements to the FSIE regime published

Following extensive consultations with stakeholders, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 (Bill), which seeks to refine the existing foreign-sourced income exemption (FSIE) regime under the Inland Revenue Ordinance (IRO) by expanding the scope of assets in relation to foreign-sourced disposal gains to cover assets other than equity interests, was gazetted on 13 October 2023.

While the European Union (EU) has rejected the Government’s proposals to (i) confine the scope of assets subject to the refined FSIE regime and (ii) allow the rebasing of the cost of an asset to its fair market value prior to the effective date of the refined FSIE regime (or an alternative taper relief), it has agreed to (i) the exclusion of disposal gains derived by traders of assets other than intellectual property (IP) and (ii) the introduction of an intra-group transfer relief.

Furthermore, the Government has adopted several recommendations made by stakeholders (including PwC) to mitigate the impacts of the refinements on covered taxpayers. For instance, less stringent conditions are imposed on the proposed exclusion for traders, and the association condition under the newly proposed intra-group transfer relief is drafted very broadly such that taxpayers with entities in different business forms within their MNE group would be able to enjoy the relief.

The Bill will be introduced into the Legislative Council on 18 October 2023 and it is proposed that the refinements will apply to disposal gains accrued and received by covered taxpayers on or after 1 January 2024.

This news flash outlines the refinements to the existing FSIE regime as proposed under the Bill and its major differences from prior proposals, followed by our take on the refined FSIE regime.