Onshore Gain on Disposal of Equity Interests – Tax Certainty Enhancement Scheme

Subject to exclusions, the Scheme applies to any onshore gain derived by an eligible investor entity from a disposal of eligible equity interests in an eligible investee entity.

The Scheme is not applicable to onshore gains arising in or derived from a disposal of –

No. The Scheme is only applicable to onshore gains arising from the disposal of equity interests where the specified conditions are met. The nature of onshore losses arising from the disposal of equity interests would continue to be examined using the “badges of trade” approach under the existing normal tax rules.

Whether a disposal gain in relation to equity interests is sourced in or outside Hong Kong depends on the facts and circumstances of the case. It is not a matter for which a taxpayer can elect.

No. Offshore income that is deemed as onshore income under the Foreign-sourced Income Exemption (FSIE) regime would not be eligible for the Scheme. All offshore disposal gains, whether revenue or capital in nature, should fall within the scope of the FSIE regime.

The onshore gain of $800,000 derived from the first disposal would be regarded as capital in nature and not chargeable to profits tax if the conditions specified in the Scheme are met. As regards the tax treatment of the onshore loss of $500,000 arising from the second disposal, the existing tax rules, i.e. the “badges of trade” approach, will continue to apply to determine the nature of the disposal loss.

The Scheme applies to any investor entity which is a legal person or an arrangement that prepares separate financial accounts, such as a partnership, a trust and a fund, but excluding an investor entity which is a natural person or an insurer.

There is no resident or listing requirement on the investor entity. As such, other than the above excluded investor entities, the Scheme applies to all investor entities irrespective of whether they are Hong Kong resident or non-Hong Kong resident, whether they are incorporated or established in Hong Kong or outside Hong Kong, or whether they are listed or non-listed entities.

Similar to an investor entity, an investee entity must be a legal person (not including a natural person) or an arrangement that prepares separate financial accounts, such as a partnership, a trust and a fund.

The Scheme is not applicable to non-listed equity interests in investee entities engaging in property-related businesses which do not satisfy the exception conditions. Other than that, the Scheme applies to all investee entities irrespective of whether they are Hong Kong resident or non-Hong Kong resident, whether they are incorporated or established in Hong Kong or outside Hong Kong, or whether they are listed or non-listed entities.

An investment fund or a trust can be an investor entity or an investee entity under the Scheme if it prepares separate financial accounts.

An equity interest in an investee entity means an interest that carries rights to the profits, capital or reserves of the investee entity and is accounted for as equity in the books of the investee entity under applicable accounting principles.

Hence, the Scheme may apply to onshore disposal gains arising from disposal of different forms of equity interest, such as ordinary shares, preference shares and partnership interests, provided that the equity interest carries rights to the profits, capital or reserves of the investee entity and is regarded as equity from the perspective of the investee entity under applicable accounting principles.

Applicable accounting principles in general refer to the accounting standards required to be adopted by an entity in the preparation of its financial accounts. In determining whether a financial instrument, from the perspective of an investee entity, should be classified as an equity instrument or a financial liability, Hong Kong Accounting Standard 32 (HKAS 32) and International Accounting Standard 32 (IAS 32) have provided detailed guidance on this aspect. In case the investee entity is not required to comply with any specified accounting standard for preparing its financial accounts, the applicable accounting principles should be the International Financial Reporting Standards.

Preference shares can be regarded as equity interests if they are accounted for as equity in the financial accounts of the investee entity under applicable accounting principles. If preference shares are regarded as financial liability in the financial accounts of the investee entity, such shares would fall outside the scope of the Scheme.

HKAS 32/IAS 32 provides detailed guidance on whether a preference share is an equity instrument or a financial liability.

Convertible securities can be regarded as equity interests if they carry rights to the profits, capital or reserves of the investee entity and are accounted for as equity in the financial accounts of the investee entity under applicable accounting principles. If the securities are not accounted for as equity in the financial accounts of the investee entity, the investor entity may only be eligible for the Scheme upon the conversion of the securities into equity interests. The holding of convertible securities up to their conversion into equity interests would not be taken into account in determining whether the equity holding conditions are met.

Units in a REIT can be regarded as equity interests if they carry rights to the profits, capital or reserves of the REIT and are accounted for as equity in the financial accounts of the REIT under applicable accounting principles.

However, even if units in a REIT are equity interests, disposal gains in relation to the units would not be benefitted from the Scheme if the REIT is a non-listed entity that carries on an activity of holding immovable properties and does not satisfy the exception condition.

The investor entity must meet the equity holding conditions in relation to the holding period and holding percentage of the equity interests in an investee entity for the subject disposal of the subject interests. Specifically, the investor entity must have held the subject interests, or the subject interests together with certain other equity interests in the investee entity throughout the continuous period of 24 months immediately before the date of disposal of the subject interests (i.e. reference period) and those equity interests having been held throughout the reference period must amount to at least 15% of equity interests (i.e. qualifying interests) in the investee entity.

The 15% holding threshold can be met on a standalone basis (i.e. the investor entity alone has held at least 15% of equity interests, inclusive of the subject disposed interests, in the investee entity throughout the reference period) or a group basis (i.e. the investor entity, together with its closely related entity/entities, have held at least 15% of equity interests, inclusive of the subject disposed interests, in the investee entity throughout the reference period). In determining whether the 15% holding threshold is met, one should look into whether the rights that are carried by the equity interests held by the investor entity (or together with its closely related entity/entities), in aggregate, would entitle the holder to at least 15% share of the profits, capital or reserves of the investee entity.

For example, Investee Entity X issued equity instruments of two classes, Class A units which only carry rights to participate in dividends of Investee Entity X and Class B units which only carry rights to participate in the distribution of assets of Investee Entity X upon liquidation. Assume an investor entity holds 10 Class A units out of the total 100 issued Class A units and 10 Class B units out of the total 100 issued Class B units which entitle it to the following percentage of profits and capital of Investee Entity X:

The investor entity would not be regarded as having met the 15% holding threshold as its entitlements to profits and capital of Investee Entity X are both below 15%.

In another example, Investee Entity Y issued equity instruments of two classes, Class C units and Class D units. Class D units rank pari passu with Class C units with respect to the rights to participate in dividends of Investee Entity Y, but Class D units rank no priority and no claim on the nominal amount of their holding with respect to the distribution of assets of Investee Entity Y upon liquidation. Assume an investor entity holds 20 Class C units out of the total 100 issued Class C units and 5 Class D units out of the total 100 issued Class D units which entitle it to the following percentage of profits and capital of Investee Entity Y:

The investor entity would be regarded as having met the 15% holding threshold in the above example as it is entitled to over 15% of the capital of Investee Entity Y through holding Class C units.

An entity is a closely related entity of another entity if one of them has control over the other; or both of them are under the control of the same entity.

An entity (entity A) has control over another entity (entity B) if entity A has more than 50% of direct or indirect beneficial interest in, or in relation to, entity B; or entity A is directly or indirectly entitled to exercise, or control the exercise of, more than 50% of voting rights in, or in relation to, entity B.

The extent of the beneficial interest of entity A in entity B is determined as follows:

If entity A has an indirect beneficial interest in, or is indirectly entitled to exercise or control the exercise of voting rights in, entity B through another entity (interposed entity), the extent of the indirect beneficial interest or voting rights of entity A in entity B is determined as follows:

For example, if entity A holds 80% of the issued share capital of an interposed entity which owns 70% of the issued share capital of entity B, entity A would be regarded as holding 56% of indirect beneficial interest in entity B (i.e. 80% x 70% = 56%). In the circumstances, entity B is a closely related entity of entity A.

In case there is more than one interposed entity in between entity A and entity B, for example, entity A holds 80% of the issued share capital of an interposed entity C which owns 70% of the issued share capital of an interposed entity D. Interposed entity D owns 85% of the issued share capital of entity B. Entity A would be regarded as holding 47.6% of indirect beneficial interest in entity B (i.e. 80% x 70% x 85% = 47.6%). In the circumstances, entity B is not a closely related entity of entity A.

If the amalgamation is a qualifying amalgamation under section 680 or 681 of the Companies Ordinance and Company A elects for Schedule 17J to the IRO to apply, Company A will be treated for profits tax purposes as having continued to carry on the trade, profession or business of Company B by way of succession on the date of amalgamation. Any equity interests previously acquired by Company B would be regarded as being held by Company A since the date of acquisition by Company B. As such, in case Company A subsequently disposes of those equity interests, the holding period of those equity interests would be counted from the relevant date of acquisition by Company B to the date immediately before the date of disposal by Company A.

In case the amalgamation constitutes a sale of assets, a disposal of assets which includes a disposal of the equity interests in the investee entity, for valuable consideration would be regarded as taken place between Company A and Company B. The provisions relating to the sale of assets under the IRO will be applicable to such amalgamation to assess any deemed trading receipts and to make balancing adjustments. If the conditions specified under the Scheme are met, the onshore gains arising from the disposal of the equity interests by Company B would still be regarded as capital in nature and not chargeable to profits tax.

In case the amalgamation constitutes a sale of assets, any assets, including the equity interests, held by Company B prior to the amalgamation would be regarded as having been disposed of by Company B while acquired by Company A upon amalgamation. As such, if Company A subsequently disposes of the relevant equity interests, the holding period would be counted from the effective date of amalgamation (i.e. the date of acquisition of the equity interests by Company A) to the date immediately before the date of disposal by Company A.

If the equity holding conditions are met for the disposal of a tranche of the equity interests, disposal of the remaining tranches can still be covered by the Scheme even if the subsequent disposals cannot meet the equity holding conditions, but subject to a 24-month restriction (i.e. subsequent disposals have to be made within 24 months from the disposal of the tranche for which the investor entity has last met the equity holding conditions).

For example, on 1 January 2022, Investor Entity A held 26% equity interests in Investee Entity B. On 31 August 2024, Investor Entity A disposes of 16% equity interests in Investee Entity B. The Scheme is applicable to the onshore gains arising from the subsequent disposals of the left-over interests of 10% provided that the disposals are made on or before 31 August 2026.

Long-held left-over equity interests arise where:

In the above circumstances, the onshore gains from disposal of the long-held left-over equity interests will still be treated as capital in nature if they are disposed of (in tranches or otherwise) within 24 months after the earlier disposal. If there are more than one earlier disposal, the 24-month period will run from the last earlier disposal that is a section 5(2) disposal. Since the earlier disposal concerned must be a section 5(2) disposal to which section 5(1) applies, it has to occur on or after 1 January 2024.

As the earlier disposal occurred before 1 January 2024, it could not be a section 5(2) disposal as explained in Question 24. Therefore, Entity A is not entitled to elect for the Scheme in respect of the onshore disposal gain of $1 million in relation to the 12% of equity interests.

The Scheme is applicable to the disposal of the left-over equity interests provided that Company A has elected for Schedule 17J to the IRO to apply and that the subject left-overs had been held by Company B throughout the reference period in relation to Company B’s earlier disposal and constituted a part of the qualifying interests in the investee entity in relation to Company B’s earlier disposal.

An investor entity is an insurer being excluded from the Scheme if its assessable profits for the year of assessment are ascertained under Subdivision 1 of Division 11 of Part 4 of the IRO. Other entities within the group that are not chargeable to profits tax in accordance with the relevant provisions would not be excluded from the Scheme.

The period during which the equity interests are regarded as trading stock is to be disregarded for the purposes of the Scheme (i.e. disregarded period), i.e. not to constitute any part of the relevant period or the qualifying interests for meeting the equity holding conditions.

A specified equity interest will be regarded as trading stock if any fair value adjustment or disposal gain or loss in respect of the specified equity interest or any of the other equity interests acquired by the holding entity on the same occasion (other equity interests) has been brought into account for tax purposes. The commencement of the "disregarded period" differs for cases of fair value adjustments and actual disposals:

Fair value adjustments

In the case where

the disregarded period is counted from the first day of the basis period for that year of assessment.

Actual disposals

Where any of the other equity interests has been disposed of and any profit, gain or loss arising from the disposal has been brought into account under an assessment or loss statement for a year of assessment, the disregarded period is counted from the date of disposal of those other equity interests.

In both cases, the disregarded period will end on the date of appropriation if there is a change of intention and the specified equity interest is appropriated for a non-trade purpose, subject to certain conditions.

A gain, profit or loss in respect of an equity interest is regarded as “has been brought into account for tax purposes” for a year of assessment if any unrealised fair value gain or loss arising from, or provision for diminution in value of, or disposal gain or loss in relation to the equity interest, has been included or taken into account for computing the holding entity’s assessable profits or losses for the year of assessment under

As the unrealised losses of $200 and $100 in respect of the 1,000 shares have been brought into account for computing Entity A’s assessable profits or losses for Year 2 and Year 3, the 1,000 shares are regarded as trading stock and are excluded from the Scheme.

Given that the 200 shares and the 800 shares were acquired by Entity B on the same occasion and the gain arising from the disposal of the 800 shares has been brought into account in computing Entity B’s assessable profits, the remaining 200 shares are regarded as trading stock and are excluded from the Scheme.

The equity interests will cease to be regarded as trading stock and the Scheme will apply to the appropriated equity interests provided that the following conditions are met:

In considering whether the equity holding conditions are met for the disposal of the appropriated equity interests, the period during which the equity interests are regarded as trading stock should be disregarded. In other words, the equity holding conditions can only be met if the disposal occurs 24 months or later after the date of appropriation.

For the purposes of the Scheme, property trading refers to acquisition and sale of immovable properties, situated in Hong Kong or elsewhere, unless the acquisition and sale of immovable properties is incidental to the undertaking of any property development (i.e. construction of buildings). It does not include a one-off property trading transaction which is an adventure in the nature of trade carried out by an investee entity that engages in a regular business other than property trading.

Property development means construction or causing the construction of any building or part of a building, and includes acquisition of any land or building or part of a building for such construction and sale of any building or part of a building after such construction. It excludes works for the renovation or refurbishment of a building with a view to maintaining the commercial value of the building.

Property holding covers an activity of holding immovable properties other than those which fall within the scope of property trading or property development.

See the section on "Excluded equity interests – non-listed equity interests in property-related entities" under “Onshore Gain on Disposal of Equity Interests – Tax Certainty Enhancement Scheme” for the definitions of the terms such as “immovable property”, “construction” and more details on the three property-related businesses.

Both direct and indirect ownership of property will be taken into account in determining whether the 50% property holding threshold is exceeded.

An investee entity’s immovable property holding is calculated by a formula where the numerator is the value of immovable properties held by the investee entity and the denominator is the value of the investee entity’s total assets. However, if immovable properties are used by the entity that directly holds the immovable properties for carrying on its own trade or business (including its business of letting immovable properties) and are not for sale, the value of such immovable properties is to be carved out from the numerator in determining the relevant percentage.

Value of immovable properties held by the investee entity means the aggregate value of:

For determination of the extent of direct or indirect beneficial interest or voting rights to calculate the value of immovable properties, see Questions 18 and 19.

To determine whether the 50% property holding threshold is exceeded, the yearly average value (i.e. average of the opening and closing value) will be adopted. To allow flexibility for any disposal of equity interests occurring during the basis period of the investee entity, the closing value can be taken on either the end day of the relevant basis period or the date of the disposal of the equity interests provided that the adopted value is supported by evidence.

The investee entity will be regarded as carrying on a business of letting immovable properties if the letting arrangement between the entities is determined at an arm’s length rent.

Yes, taxpayers have the choice. The Scheme is an alternative to the “badges of trade” approach. As such, if a taxpayer does not elect for the Scheme, the nature of the onshore gains arising from the disposal of equity interests would continue to be examined using the “badges of trade” approach under the existing normal tax rules.

The disposal gain in relation to the 800 shares was not regarded as having been brought into account for tax purposes under section 9(5) of Schedule 17K to the IRO at this stage since the assessment under which the gain was included as assessable profits (relevant assessment) is still under objection or appeal. Having said that, depending on the final outcome of the objection or appeal, the gain could be so regarded and in turn rendering the 200 shares, which were acquired together with the 800 shares on the same occasion, become trading stock under section 9(2)(c) of Schedule 17K to the IRO. In such circumstances and to avoid uncertainty, the IRD considers it appropriate to defer the consideration of whether the 200 shares should be excluded from the Scheme until the relevant assessment becomes final and conclusive. If necessary, protective assessment may be raised in respect of the disposal gain in relation to the 200 shares.