IRD provides further guidance on FSIE issues

The four new questions posted on the website of the Inland Revenue Department (IRD) as frequently asked questions (FAQs) in relation to the foreign-sourced income exemption (FSIE) regime have clarified that:

• Share of profits of an associate recognized by an investor under the equity method of accounting would not render the investor earning any of the profits as dividend before the associate actually declares the profits as dividend.
• Direct costs incurred for earning a taxable “disposal gain” would generally be tax deductible. However, indirect costs that are capital in nature would still be disallowable under section 17(1)(c) of the Inland Revenue Ordinance (IRO).
• While (i) redemption of bonds and (ii) conversion of convertible bonds into equity interest would not be regarded as a “sale” and therefore not a “disposal gain”, the difference between the redemption price and the cost of a zero-rated bond issued at a discount would be “interest”.
• In-kind dividend in the form of shares in an overseas subsidiary that has no economic nexus with Hong Kong generally would not be regarded as the taxpayer having “received” the dividend by way of the shares being brought into Hong Kong.

While these new FAQs provide further guidance on how the relevant FSIE issues are to be addressed, their application to other factual situations may still be complicated. Clients who have any questions on any of the provisions of the FSIE regime should contact their tax executive.