Hong Kong: Draft legislation on foreign-sourced income exemption regime passed

Revised foreign-sourced income exemption regime legislation passed by Legislative Council

Revised foreign-sourced income exemption regime legislation passed by Legislative Council

The draft legislation on the revised foreign-sourced income exemption (FSIE) regime and its subsequent amendments proposed by the government were passed by the Legislative Council on 14 December 2022.

Draft legislation for implementing the FSIE regime was initially published on 28 October 2022, and the government subsequently proposed two key amendments to the draft legislation. Read TaxNewsFlash

Major amendments to the bill

The major amendments to the Bill proposed by the government and passed by the Legislative Council are:

  • Deleting the definition of “excluded entity” (i.e., there will no longer be a list of excluded entities that are out of scope of the FSIE regime) and the consequential changes
  • Excluding the following income from “specified foreign-sourced income” by amending its definition (i.e., the excluded income approach):
    • Foreign-sourced interest, dividends and equity disposal gains derived from or incidental to the profit-producing activities as required under a preferential tax regime with a substantial activities requirement
    • Foreign-sourced interest, dividends and equity disposal gains accrued to an entity that has derived any exempt sums under the tax regime for ship-owner business
    • Minor textual changes to the Chinese version of the bill

The corresponding ordinance is expected to be gazetted on 23 December 2022. Upon gazettal of the ordinance, the FSIE regime will be effective from 1 January 2023.

KPMG observation

Despite the passage of the bill and the proposed amendments, there are open issues surrounding the practical interpretation and application of the FSIE regime. It is expected that the Inland Revenue Department (IRD) will update the existing administrative guidance and issue a Departmental Interpretation and Practice Note to provide more guidance and examples for illustrating how the FSIE regime will be applied and administered in practice. 

Given the effective date of the FSIE regime is fast approaching, affected business groups in Hong Kong need to proactively assess the implications of the FSIE regime on their businesses and explore possible options to mitigate the potential Hong Kong tax exposure. If they wish to obtain certainty on issues other than compliance with the economic substance requirements under the regime, they can consider applying for an advance ruling after the regime becomes effective (i.e., on or after 1 January 2023).

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com


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