Hong Kong’s FSIE Amendment Bill: the Intra-group Transfer Relief

Hong Kong’s Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023, which amends the foreign-sourced income exemption (FSIE) regime in line with the latest requirements of the EU, was gazetted on 13 October and will come into force on 1 January 2024, writes Mingson Chi, Client Accounting Manager at Sovereign Trust (Hong Kong) Ltd.

Last December the HKSAR government enacted the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 to establish a new FSIE regime for foreign-sourced dividend, interest, intellectual property income and disposal gain in relation to shares or equity interests received in Hong Kong by multinational enterprise (MNE) entities.

However, the EU subsequently updated its Guidance on FSIE Regimes to explicitly require capital gains, as a general class of income covered by an FSIE regime, to also be subject to the economic substance requirement. It therefore requested Hong Kong to further amend its FSIE legislation by the end of 2023.

In the Amendment Bill, the scope of the disposal gain is expanded to cover gains or profits derived from the disposal of any property – movable or immovable – rather than just the disposal of equity interest. Immovable property covers land and buildings while movable property covers every other category, including equity interests and intellectual property (IP).

An MNE entity will be exempt if the entity carries out, or arranges to carry out, substantial economic activities with regard to the relevant income (i.e., specified economic activities) in Hong Kong.

Further, a new intra-group transfer relief is provided for property transfers between associated entities, subject to specific anti-abuse rules, in addition to the existing exception requirements on disposal gains. ‘Associated’ means that either one of the entities has at least a 75% beneficial interest in the other entity, or a third entity holds at least a 75% beneficial interest in each of the two entities.

The relief provides that any tax that would have been charged on foreign-sourced disposal gains derived from intra-group transfer between associated entities can effectively be deferred. The selling entity such is deemed to have sold the property at consideration with no gain or loss, while the acquiring entity is deemed to have acquired the property at the same cost and on the same date as the transferor.

The acquiring entity is also able to claim expense deductions/capital allowances/tax credits on the property acquired as if it were the selling entity.

For example, Company A sells a foreign property that cost HKD100,000) to its associated entity Company B for HKD130,000. If intra-group transfer relief applies, there is deemed to be no disposal gain for Company A while the acquisition cost for Company B remains at HKD100,000.

The Bill contains specific anti-abuse measures such that intra-group transfer relief will not apply if:

• • Either Company A or Company B ceases to be chargeable to Profits Tax in Hong Kong.
  • Company A and Company B cease to be associated with each other.

Additionally, the foreign-sourced disposal gains on non-IP assets derived by a trader are to be excluded from the refined FSIE regime. A trader is defined as an entity that sells, or offers to sell, property in the entity’s ordinary course of business.