In January 2023, the proposed refined Foreign Source Income Exemption (FSIE) regime is expected to take effect. The European Union (EU) has always been committed to promote good tax governance standards in relation to tax transparency, fair taxation and anti-BEPS measures. In October 2021, the EU published the EU list of non-cooperative jurisdictions with the aim to encourage positive change in their tax legislation and practices. Following this, the Hong Kong SAR government launched a consultation on a proposal to refine the Hong Kong FSIE regime for passive income.
This regime affects the following four types of passive incomes:
(ii) income from intellectual properties;
(iii) dividends; and
(iv) disposal gains in relation to shares or equity interest.
Active incomes such as those arising from trading activities or provision of services are not in-scope offshore passive incomes, and are not affected by the refined FSIE regime. This is provided it satisfies the nexus approach requirements.
In order to avoid double taxation issue, the refined FSIE regime introduces a participation exemption in regards to dividends and disposal gains even if the economic substance requirement is not met, provided certain conditions are satisfied.
The legislative bill is expected to be put forward in the last quarter of 2022, just in time for it to come into effect in January 2023, with no grandfather arrangement.
These new rules with no doubt cause confusion and makes the current tax environment to be complex. To shine light, more clarification from the Hong Kong SAR government would be vital in this instance, especially during the legislative phase. Our team at InCorp Hong Kong is committed to ensuring that our clients are constantly updated on important news like this. For more information on this, feel free to reach out to us.
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