October 2023 / Hong Kong

18 Ottobre 2023

Hong Kong, Gazettal of Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023

The Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023 will be gazetted on October 20 and introduced into the Legislative Council on November 1. The Bill seeks to introduce a tax certainty enhancement scheme to provide greater certainty of non-taxation of onshore gains on disposal of equity interests (the gains) that are of capital nature. The scheme will help enhance the attractiveness of Hong Kong as a premier international investment and business hub, in particular with regard to facilitating business expansion and restructuring as acquisition and disposal of equity interests are common in this process. To determine the nature of the gains, the Inland Revenue Department (IRD) presently adopts a "badges of trade" approach where considerations are given to the relevant facts and circumstances of the case. The scheme will provide upfront certainty on the non-taxation of the gains which meet certain specified criteria. Specifically, the gains will be treated as capital in nature and not chargeable to profits tax if the investor entity concerned has held certain equity interests in the investee entity throughout the continuous period of 24 months immediately before the date of disposal and those equity interests having been held amount to at least 15 per cent of the total equity interests in the investee entity. To strike a balance between facilitating businesses and upholding the integrity of the tax system, the scheme excludes certain gains which are not normally considered as capital in nature and those arising in circumstances where the risk of abuse is relatively high. Where the gains are not eligible for the scheme or taxpayers do not make an election for the scheme, the IRD will continue to use the "badges of trade" approach as it does at present to consider the tax treatment of the gains.

A Government spokesman said, "Hong Kong is renowned for its simple and competitive tax system which does not tax gains on disposal of equity interests of capital nature. The scheme will further increase the competitiveness of our tax regime through greater upfront tax certainty of non-taxation of the gains based on simple and clear rules, faster tax determination and lower compliance cost of businesses." Going further, as compared to similar schemes in other tax jurisdictions, the scheme will be more competitive in that it has a wider coverage of businesses and equity interests, as well as lower equity holding threshold. It also provides more flexible arrangements such as allowing the minimum equity holding percentage of 15 per cent to be met on a corporate group basis, and covering disposal of equity interests in tranches subject to certain restrictions. The scheme also does not specify an expiry date.

The scheme will be applicable to the gains where the disposal occurs on or after January 1, 2024, and the gains accrued in the basis period for a year of assessment beginning on or after April 1, 2023.

Source: www.ird.gov.hk

11 Ottobre 2023

Hong Kong, Gazettal of Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023

The Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 (the Bill) will be gazetted on October 13 and introduced into the Legislative Council on October 18. The Bill seeks to refine Hong Kong's foreign-sourced income exemption (FSIE) regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover assets other than shares or equity interests. A Government spokesman said, "As a staunch supporter of international tax co-operation, Hong Kong has been working closely with the European Union (EU) and other international organisations in countering cross-border tax avoidance. The legislative proposal will align our FSIE regime with the international tax standard of requiring a corporate taxpayer to have substantial economic substance in Hong Kong in enjoying tax exemption with regard to foreign-sourced disposal gains, and prevent shell companies from deriving tax benefits through 'double non-taxation' of foreign-sourced disposal gains. After the proposed refinements are made to the FSIE regime, Hong Kong's tax system will continue to maintain a competitive edge, and our territorial source principle of taxation will be upheld. The majority of taxpayers including individuals, standalone local companies and pure local groups will not be affected."

In response to the EU's inclusion of Hong Kong on its watchlist on tax co-operation in 2021, the Hong Kong Special Administrative Region Government enacted the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 last December to put in place a new FSIE regime for foreign-sourced dividend, interest, intellectual property income and disposal gain in relation to shares or equity interests received in Hong Kong by multinational enterprise (MNE) entities. Through the Bill, Hong Kong's tax regime will be brought in line with the latest requirement of the Guidance on Foreign Source Income Exemption Regimes updated by the EU in December 2022 that disposal gains, as a general class of income covered by the FSIE regime, should be subject to the economic substance requirement. Hong Kong and other jurisdictions with ongoing FSIE reforms have been requested by the EU to further amend the legislation on the FSIE regime by the end of 2023 and implement the refined regime with effect from January 2024. Hong Kong is kept on the EU watchlist pending completion of the necessary legislative amendments. "We will request the EU to swiftly remove Hong Kong from the watchlist upon completion of the legislative amendments," the spokesman said. Extensive consultations with tax professionals, local and foreign chambers of commerce, trade and professional bodies and representatives of the financial services sector in respect of the proposed refinements have been held since April 2023. Stakeholders' comments have been largely taken on board as appropriate. The refined FSIE regime will continue to cover only four types of foreign-sourced passive income received by MNE entities in Hong Kong, leaving foreign-sourced active income unaffected. Under the refined FSIE regime, exemption and relief will continue to be provided to minimise the compliance burden of the affected MNE entities. Foreign-sourced non-intellectual property (IP) disposal gains will be exempt from tax if the MNE entity has adequate economic substance in Hong Kong. For foreign-sourced IP disposal gains, the extent of the tax exemption will be determined by the nexus approach promulgated by the Organisation for Economic Co-operation and Development.

Foreign-sourced non-IP disposal gains derived from, or incidental to, the business of a trader or a regulated financial entity, or the profit-producing activities of a taxpayer benefitting from an existing preferential tax regime will fall outside the scope of the refined FSIE regime. To ease the compliance burden of covered taxpayers and facilitate corporate restructuring, a new intra-group transfer relief applicable to disposal gains will be introduced through the Bill. Any tax charged on disposal gains will be deferred if the asset concerned is transferred between associated entities, subject to specific anti-abuse rules. In addition, double taxation relief will continue to be available under the refined FSIE regime to mitigate possible double taxation. The Government will continue to provide a series of business-facilitating measures, including simplified reporting procedures, availability of advance rulings, administrative guidance and technical support from the Inland Revenue Department to facilitate tax compliance, with a view to reducing compliance burden, enhancing tax certainty and ensuring tax transparency.

Source: www.ird.gov.hk