Hong Kong: Advance rulings under foreign-sourced income exemption regime

The Inland Revenue Department published two advance ruling cases and updated its illustrative examples on the FSIE regime.

Advance rulings under foreign-sourced income exemption regime

Article Posted date 20 June 2023

The Hong Kong Inland Revenue Department (IRD) published two advance ruling cases and updated its illustrative examples on the foreign-sourced income exemption (FSIE) regime.

Advance Ruling Case No. 68 and Advance Ruling Case No. 69 concern compliance with the economic substance (ES) requirements under the FSIE regime and are the first two advance ruling cases on the application of the FSIE regime published by the IRD. In both cases, a favorable ruling was granted by the IRD. 

The notable points of the two published advance ruling cases are:

  • Both cases concerned a multinational enterprise (MNE) entity that is not a pure equity holding entity and will derive foreign-sourced dividend income.
  • Both applicants have several directors and employees in Hong Kong to manage and support their business operations but outsource the legal and business support activities to a non-associated service provider in Hong Kong. 
  • In both cases, the specified economic activities under the FSIE regime will be carried out in Hong Kong. Apparently, both applicants will outsource some of these activities to the non-associated service provider in Hong Kong and undertake adequate monitoring of the outsourced activities. 
  • The estimated amount of foreign-sourced dividend income, the planned number of employees in Hong Kong and the planned amount of annual operating expenditure incurred in Hong Kong are not disclosed in both cases.
  • In Advance Ruling Case No. 69, it was mentioned that the applicant has also advanced two interest-free loans to its related parties in Hong Kong and that minimal activities are required by the applicant to manage the loans. The relevant activities in relation to overseeing the loans are carried out by the applicant’s director in Hong Kong. 

Updated illustrative examples on the FSIE regime

The IRD also updated Example 6 and added Example 9 on its webpage for illustrative examples on the FSIE regime, which both deal with the interpretation of “received in Hong Kong.”

  • Example 6 clarifies that foreign-sourced dividends received by an MNE entity in its overseas bank account and not remitted to Hong Kong but used to acquire an overseas immovable property that is related to a trade, profession or business carried on in Hong Kong (e.g., the overseas property is used by the MNE entity as a showroom or warehouse) is regarded as received in Hong Kong and subject to the FSIE regime. This is because the use of dividends to pay the purchase cost of the immovable property would amount to satisfying a debt incurred in respect of a trade, profession or business carried on in Hong Kong.  
  • Example 9 confirms that foreign-sourced dividends received by an MNE entity in its overseas bank account which is used to pay dividends directly into its shareholder’s Hong Kong bank account is not regarded as income received in Hong Kong.


For more information contact a KPMG tax professional:

David Ling | davidxling@kpmg.com

 

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