IRD explained various tax issues under the foreign-sourced income exemption (FSIE) regime in the recently published minutes of its 2024 annual meeting with the HKICPA

• including (i) any gain derived by an investor from (a) liquidation of an investee entity; (b) reduction of capital through cancellation of shares by an investee entity; (c) redemption of shares by an investee entity; and (d) reduction of capital through repurchase of shares by an investee entity for cancellation generally would not constitute “equity interest disposal gain” as defined under the regime;
  
  
• (ii) where specified foreign-sourced income (SFSI) under the regime was used to purchase an overseas property for the use of a trade, profession or business carried on in Hong Kong, the SFSI would be deemed “received in Hong Kong”. An exception would be if the SFSI was used by a company which carried on an investment holding business in Hong Kong to make a capital injection into an overseas investee entity by subscribing for the shares issued by the investee entity;
  
  
•  (iii) where SFSI was used to acquire an overseas property that was not for the use of a trade, profession or business carried on in Hong Kong, the SFSI would not be so deemed. However, if the exemption conditions for the SFSI were not satisfied and the property acquired was an overseas movable property, then the SFSI now in the form of the overseas movable property would need to be traced;
  
  
• (iv) where SFSI was used to purchase shares in an overseas entity or intellectual properties (IP), when such overseas movable property would be regarded as “brought into Hong Kong” is a complicated issue that could only be determined based on the specific facts of each case. The IRD welcomed taxpayers making advance ruling applications on this issue. In any case, the mere physical presence of the share certificates in Hong Kong of an overseas entity would not be regarded as the shares being “brought into Hong Kong”.

The views expressed by the Inland Revenue Department (IRD) on the issues only represent how the IRD would interpret the various provisions of the Inland Revenue Ordinance (IRO) as applied to the specific facts provided in the questions raised by the Hong Kong Institute of Certified Public Accountants (HKICPA).

While such views provide some guidance on how the provisions would generally be construed, the application of the provisions to certain other factual situations could be different.

Clients who have any questions on how the provisions would apply to their situations should contact their tax executives.