Hong Kong: Proposal to clarify non-taxation of onshore gains from disposal of equity interests
Comments on the proposal will be accepted through 22 May 2023.
Comments on the proposal will be accepted through 22 May 2023.
The government on 23 March 2023 launched a consultation on a proposal to clarify the non-taxation of onshore gains from the disposal of equity interests in Hong Kong, which would become effective 1 January 2024. Comments on the proposal will be accepted through 22 May 2023.
The proposal was presented in responses to concerns about the revised foreign-sourced income exemption (FSIE) regime that became effective on 1 January 2023. Under the proposal, a bright-line safe harbor would be introduced for treating certain onshore equity disposal gains as capital in nature and non-taxable, without the need to conduct the “badges of trade” analysis. For investment funds, an additional alternative option for enjoying non-taxation of their onshore equity disposal gains is the tax exemption under the unified fund exemption regime, provided that the specified conditions under the regime are met.
Features of proposal
- Application of the safe harbor requires that the investor entity has held at least 15% of the total equity interest in the investee entity for a continuous period of at least 24 months ending on the date immediately prior to the date of disposal of such interest.
- Eligible investor entities include a legal person (other than a natural person) and an arrangement that prepares separate financial accounts such as a partnership and a trust, and can be a Hong Kong or non-Hong Kong resident. Insurers are not, however, eligible investor entities.
- Eligible equity interests include ordinary shares, preference shares and partnership interests, but not equity interests in certain investee entities engaged in property trading, property development and property holding.
KPMG observation
The following issues arising from the proposal need to be considered:
- Whether there will be a “beneficial ownership” requirement and if so, how to assess the beneficial owner status of the equity interests
- The interaction between the proposed tax exemption for onshore equity disposal gains and the global minimum tax under BEPS 2.0
For more information, contact a KPMG tax professional:
David Ling | davidxling@kpmg.com
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