Interest Income from Foreign Debt Instruments

A:

Foreign debt instruments refer to the debt instruments issued by entities located outside Hong Kong (e.g. sovereign bonds issued by foreign jurisdictions and corporate bonds issued by foreign companies).

Generally, such instruments involve simple loans of money with the provision of credit provided outside Hong Kong.  If that is the case, interest income from the instruments should be sourced from outside Hong Kong.

If a fund, FIHV or its SPE derives such foreign-sourced interest, the interest income would be exempt from profits tax under the following circumstances:

• the fund, FIHV or SPE does not belong to a multinational enterprise (MNE) group (i.e. a group that is required to prepare consolidated financial statements and includes at least one entity or permanent establishment outside Hong Kong);
• if the fund, FIHV or SPE belongs to an MNE group,
  • the fund is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571);
  • the fund meets the economic substance requirement under the foreign-sourced income exemption regime (i.e. the investment business activities relating to the fund’s investments are conducted by the fund manager in Hong Kong); or
  • the interest income is derived from, or incidental to, the activity of the fund or FIHV that produces the profits exempted under the unified tax exemption regime for funds or the FIHV regime (i.e. commonly known as the family office regime).

For more information about the tax treatment of interest income, please refer to Departmental Interpretation and Practice Notes No. 13 (Revised) Taxation of Interest Received.