Update on tax certainty for onshore disposal gains and refined foreign-sourced income exemption (FSIE) regime

The Inland Revenue Department (IRD) recently conducted several engagement sessions for certain stakeholders including business chambers, professional bodies as well as professional services firms on its latest thoughts on the design of (i) the “tax certainty enhancement scheme” for onshore disposal gains on equity interests (TCES); and (ii) the “refinements to Hong Kong’s FSIE regime for passive income” that will extend disposal gains to beyond equity interests.

Under the consultation paper on item (i) issued earlier, the basic conditions qualifying for the TCES would be that the equity interests were 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 interests, subject to certain exceptions. That means once these basic conditions are satisfied, the disposal gains would be deemed to be non-taxable capital gains in Hong Kong, no “badges of trade” analysis being required. 

The consultation paper on item (ii) sought views on certain issues including (a) whether Hong Kong should adopt a definitive or a non-exhaustive list of assets to be covered, otwithstanding the European Union (EU)’s initial indication that the list would need to be non-exhaustive; and (b) the design and feasibility of certain proposed relief measures that mitigate the tax liabilities of the disposal gains.