Foreign-sourced income exemption regime for foreign-sourced disposal gains
Circular Ref: A(23)94
Issue Date: 25 May 2023
Earlier, we advised you, vide circular A(23)70 dated 11 April 2023, about the government consultation exercise on the captioned subject, briefly as follows:
- For international tax co-operation, the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 was enacted in December 2022 to put in place a new foreign-sourced income exemption (FSIE) regime for foreign-sourced dividends, interest, and income derived from the use of intellectual properties and disposal gains in relation to shares or equity interests with effect from 1 January 2023. In this connection, the EU confirmed that the regime was fully in compliance with its Guidance on FSIE Regimes originally published in 2019 with regard to dividend, interest and intellectual property income.
- In December 2022, the EU promulgated an updated FSIE Guidance (“updated FSIE Guidance”), which included disposal gains as part of the reform for FSIE regimes. Jurisdictions with ongoing FSIE reforms, including Hong Kong, are requested by the EU to further amend their tax treatments of foreign-sourced disposal gains in compliance with the updated FSIE Guidance by the end of 2023 for implementation with effect from January 2024 and are, in the interim, kept in the EU watchlist pending completion of the necessary legislative amendments.
- To secure the removal of Hong Kong from the EU watchlist, the Hong Kong SAR Government is refining the FSIE regime to bring it in line with the updated FSIE Guidance.
- The government paper (attached) sets out the proposed key parameters of the refined FSIE regime. The Government has advised that in formulating the proposals, efforts have been made to "preserve the simplicity, certainty and transparency of Hong Kong’s tax regime, uphold the territorial source principle of taxation, and minimise the compliance burden of taxpayers”.
- Such refinements are related to the coverage of the taxpayer groups, the definition of the covered assets, the extent of the covered income, the computation of the disposal gains/losses, and the conditions for seeking tax exemption or relief.
- The Government would like to know public views on the material impact of the EU’s implementation timelines. Should members have any views or queries on the proposed refinements to the FSIE regime, they may write directly to the Financial Services and the Treasury Bureau by e-mail (fsie@fstb.gov.hk) by 6 June 2023.
The Association has received further reference materials (attached) from the government, for members’ reference.
Also, the Legislative Council Panel on Financial Affairs discussed the subject matters on 8 May. The Panel paper (attached) and the link for the webcast are given for members’ reference:
Given the complexity of tax matters and the possible implications of the government proposals for your operations, we would strongly advise you to consult your professional team.
Of course, please also feel free to contact the Association secretariat, if necessary, by the end of May.