PRESS RELEASE

HKSAR Government continues to refine regime against cross-border tax avoidance 

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      The Hong Kong Special Administrative Region (HKSAR) Government welcomes the European Union (EU)'s positive feedback yesterday (February 14) on the efforts made by Hong Kong in putting in place a new foreign-sourced income exemption (FSIE) regime with effect from January 1, 2023.

      At the same time, the HKSAR Government will continue to refine the FSIE regime with regard to foreign-sourced disposal gain in relation to assets other than shares or equity interests in the light of the EU's recent update to its Guidance on Foreign Source Income Exemption Regimes.

      A Government spokesman said, "Hong Kong has all along been supporting international tax co-operation and anti-money laundering, and working with the EU and other international organisations in various initiatives, including the countering of cross-border tax avoidance."
  
      In response to the EU's inclusion of Hong Kong in its watchlist on tax co-operation in 2021, the HKSAR Government enacted the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 last December to put in place 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.

      "This regime has come into effect on January 1 this year. It seeks to address possible exploitation of Hong Kong's tax arrangement by multinational enterprise entities (MNE entities) without substantial economic substance in Hong Kong to bring about 'double non-taxation' of such income. We are pleased to note that the EU welcomes this positive development and confirms that Hong Kong's FSIE regime is fully in compliance with its Guidance on FSIE Regimes originally published in 2019 with regard to dividend, interest and intellectual property income," a spokesman said.

      In December last year, the EU promulgated another Guidance, explicitly requiring capital gains, as a general class of income covered by an FSIE regime, to be subject to the economic substance requirement. Jurisdictions with ongoing FSIE reforms, such as Hong Kong, will therefore be kept in the watchlist by the EU until necessary legislative amendments are made by these jurisdictions with regard to the treatment of foreign-sourced capital gains by the end of this year for implementation with effect from January next year.

      From time to time, the EU issues or updates its guidance on different aspects of tax issues. It has all along been Hong Kong's position that if and when new or updated guidance is formally promulgated by the EU and consistently applied to all relevant jurisdictions for implementation at the same timing, Hong Kong will stand ready to explore further legislative amendments and consult stakeholders with a view to demonstrating that Hong Kong is a co-operative player in international taxation while safeguarding Hong Kong's tax competitiveness. The retention of Hong Kong on the watchlist will not result in any adverse impact on Hong Kong enterprises.

      "In formulating the refined FSIE regime, Hong Kong will observe several key principles, i.e. the territorial source principle of taxation will be maintained, while due regard will be given to Hong Kong's tax competitiveness and minimisation of the compliance burden," the spokesman said.

      "Under the to-be-formulated refined regime, foreign-sourced capital gains in relation to assets, regardless of their financial or non-financial nature, received by MNE entities in Hong Kong will remain exempt from tax provided that the economic substance requirement is complied with.

      "Individuals, standalone local companies and purely local groups will not be affected."

      The spokesman said, "We have already communicated with the EU to ascertain the specific requirements entailed by the Updated Guidance and explore options to refine the FSIE regime with regard to the treatment of foreign-sourced capital gains.

      "The Government will conduct a consultation exercise to seek stakeholders' comments on the proposed refinements to the FSIE regime. We will request the EU to swiftly remove Hong Kong from the watchlist after making the necessary legislative amendments." 

Ends/Wednesday, February 15, 2023 
Issued at HKT 18:23 

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