May 26 2023

Hong Kong Publishes Advance Tax Ruling on Economic Substance Requirement Under FSIE Regime

Source: IBFD Tax Research Platform News

On 22 May 2023, the Inland Revenue Department (IRD) published an advance tax ruling (Advance Ruling Case No. 69) that illustrates the application of section 15K of the Inland Revenue Ordinance (IRO), which provides an exception to the tax treatment of specified foreign-sourced passive income under the foreign-sourced income exemption (FSIE) regime where the economic substance requirement is met.

Briefly, the FSIE regime that became effective from 1 January 2023 subjects specified foreign-sourced income to profits tax if the income is received in Hong Kong by a multinational entity (MNE) carrying on a trade, profession or business in Hong Kong unless economic substance, nexus and/or participation requirements are met. The ruling focuses on the economic substance requirement and applies for the years of assessment 2023/24 to 2027/28.


The Applicant is a private limited company incorporated in Hong Kong and an MNE entity as defined under the IRO. It holds 20% equity interests in Company F (a company incorporated in Jurisdiction F) from which it derives offshore dividend income but is not a pure equity-holding company. The principal business activities of the Applicant are sales of hospitality packages for sporting events and investment holding.


  • The Applicant carries out or arranges to carry out its specified economic activities in Hong Kong, i.e. making necessary strategic decisions in respect of assets it acquires, holds or disposes of and managing and bearing principal risks in respect of the relevant assets.
  • The Applicant has several directors and employees in Hong Kong to manage and support its business operations. It also outsources its legal and business support activities to a non-associated service provider in Hong Kong.
  • Apart from its principal business activities, the Applicant has advanced two interest-free loans to its related parties in Hong Kong and bears principal risks of the loans. The loan transactions have already occurred and have been made within the same multinational enterprise group, hence minimal activities are required by the Applicant to manage the loans. The relevant activities in relation to overseeing the loans are carried out by the Applicant's director in Hong Kong.
  • The Applicant has planned to:
    • have a predetermined number range of employees with the necessary qualifications to carry out the specified economic activities in Hong Kong each year;
    • incur a predetermined amount range of annual operating expenditures in Hong Kong for the specified economic activities; and
    • undertake adequate monitoring of the specified economic activities carried out in Hong Kong by the service provider.


The IRD has ruled that the Applicant will satisfy the economic substance requirement under section 15K of the IRO. Advance Ruling Case No. 68 was also published on 22 May 2023, with similar facts and arrangements and also ruled as satisfying the exception requirement.