Hong Kong: Planned amendments to foreign-sourced income exemption regime

Hong Kong will further refine the current foreign-sourced income exemption regime with regard to foreign-sourced capital gains

Planned amendments to foreign-sourced income exemption regime

The government issued a press release on 15 February 2023 to announce that in light of the EU's updated guidance on the foreign sourced-income exemption (FSIE) regimes, it will further refine the current FSIE regime with regard to foreign-sourced capital gains.


In response to the EU's initial inclusion in October 2021 of Hong Kong in Annex II of its list of non-cooperative jurisdictions (the so-called “grey list”), and to comply with the EU’s guidance on FSIE regimes originally published in 2019, Hong Kong has implemented the revised FSIE regime for dividends, interest, equity disposal gains and intellectual property income since 1 January 2023. Read TaxNewsFlash

During the technical examination of the FSIE reforms of various jurisdictions, the EU’s Code of Conduct Group updated its guidance on the FSIE regimes in respect of treatment of foreign-sourced capital gains. In December 2022, the EU updated the guidance to explicitly require capital gains, as a general class of income covered by an FSIE regime, to be subject to the economic substance requirement.

Hong Kong must make further legislative amendments with regard to the treatment of foreign-sourced capital gains in order to comply with the updated guidance on FSIE regimes. The EU Council on 14 February 2023 adopted conclusions on the list of non-cooperative jurisdictions, pursuant to which Hong Kong remained on the grey list. Read EuroTaxFlash

The government thus announced further legislative amendments to Hong Kong’s current tax treatment of foreign-sourced capital gains which are expected to take effect 1 January 2024. According to the government’s press release, under the to-be-formulated refined FSIE regime, foreign-sourced capital gains in relation to assets, regardless of their financial or non-financial nature, received by multinational entities in Hong Kong would remain exempt from tax provided that the economic substance requirement is complied with. The government will launch a consultation on the proposed amendments to the FSIE regime and aims to effect the necessary legislative amendments by the end of 2023.

Separately, the government announced in another press release issued on 13 February 2023 that it will propose an initiative to enhance tax certainty of onshore gains on disposal of equity interests. It will launch a trade consultation on the initiative in mid-March this year. 

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com


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