Hong Kong Introduces Profits Tax Reforms (FSIE and TCES): Changes Effective From 2024
Thanks to its streamlined low-tax system and straightforward company setup procedures, Hong Kong has long served as an international operations hub for multinational enterprises (MNEs) from the European Union and the United States.
However, due to these lenient tax policies that indirectly led to non-competitive advantages, such as double non-taxation, the EU has "grey-listed" Hong Kong.
To address this and align with international standards, Hong Kong has been adopting a new set of legislation under the Foreign Source Income Exemption (FSIE) Regimes over the past few years. This article will cover the latest revisions gazetted on 15 December 2023.
Foreign Sourced Income Exemption (FSIE): What Changed
To better understand the FSIE and the recent changes, it is important to understand what instigated them.
Typically, the Hong Kong administration only taxes income sourced within the HKSAR. The Inland Revenue Department (IRD) has outlined certain principles to determine what profit was sourced within the HKSAR. If the profits are considered “sourced” in Hong Kong, the profit is taxable under the Hong Kong Profits Tax.
However, the situation is more complicated if the business is a multinational enterprise (MNE) with a presence in multiple countries, such as an EU-based company with a Hong Kong subsidiary. Some companies leveraged Hong Kong's tax laws to commit tax evasion and other fraudulent activities, which prompted the EU to take action.
Hong Kong's government committed to making changes to the FSIE, resulting in the 2022 Amendment Ordinance, which has been in effect since 1 January 2023. It defined a new system for handling income from abroad, like dividends, interest, and investment sales.
The new 2023 Inland Revenue Amendment Ordinance 2023 is effective starting 1 January 2024. The amendment expands the list of foreign-sourced disposal gains to encompass all types of properties:
Disposal gains of all assets (changed from disposal gain from equity interest)
Dividends
Interest
Intellectual property income
Note: Disposal gain refers to any profit or gain obtained from selling either intellectual property (IP disposal gain) or a property (non-IP disposal gain).
The established exception requirements remain unchanged.
With the refined FSIE bill, Hong Kong's government intends to request the EU to remove Hong Kong from the grey list and to continue cooperative efforts.
What actions should be taken?
MNEs should review and update their structures and perform tax planning to reduce the chances of a surprise when tax filing comes around.
To get a clear picture of the nature of your taxes, we also recommend taking a look at the Tax Certainty Enhancement Scheme (TCES) or ask us how your tax planning might be affected.
Is your income in more than one jurisdiction?
