As we commence May 2023, it’s essential to understand the changes to Hong Kong’s Foreign-Source Income Exemption (FSIE) regime. The FSIE regime is a key factor in Hong Kong’s economic growth and in attracting enterprises and talents. This article will provide a comprehensive cheat sheet on the new requirements to consider when applying for FSIE exemption.
Importance of having the cheat sheet on Hong Kong FSIE regime exemption
The Hong Kong FSIE regime refers to a tax exemption scheme that allows eligible taxpayers to receive tax relief on foreign-sourced income that is not already taxed in Hong Kong. This regime is designed to encourage and promote Hong Kong’s attractiveness as a global business hub by providing tax incentives to foreign investors and businesses.
A cheat sheet for the Hong Kong FSIE regime in 2023 would aim to summarize the key features and requirements of the scheme so that taxpayers can understand their eligibility and the steps they need to take to secure exemption from tax on their foreign-sourced income.
Some important things a cheat sheet on the above would cover include:
- Eligibility criteria for the FSIE regime, including the types of income that qualify and the conditions that must be met to claim the exemption.
- The application process for the FSIE regime, including the documentation required and the timeline for submission.
- The benefits of the FSIE regime for taxpayers include reduced tax liability and increased competitiveness in the global marketplace.
- Potential risks and pitfalls of the FSIE regime, including non-compliance with regulatory requirements and unintended consequences on tax planning.
- Best practices for managing tax affairs and complying with the FSIE regime, including engaging professional advisors, keeping accurate records, and monitoring changes in tax laws and regulations.
Overall, a cheat sheet would aim to provide a comprehensive overview of the FSIE regime and its implications for taxpayers in Hong Kong, so that they can make informed decisions about their tax planning and compliance obligations.
Who is subject to the Hong Kong FSIE regime?
The FSIE regime applies to only members of Multinational Entities groups who are subject to the new FSIE regime.
What is covered under the Hong Kong FSIE regime?
The covered income includes interest, dividend, disposal gain from the sale of equity interests in an entity and intellectual property income.
FSIE Exemption specifications
Several requirements must be satisfied to be eligible for the FSIE exemption. These requirements involve economic substance, nexus, and participation.
- Economic substance requirements for interest, dividends, and disposal gains
The first requirement to consider is the economic substance requirement. To satisfy this requirement, entities must demonstrate that they have adequate economic substance in Hong Kong.
- Pure equity-holding entity
If an entity is a pure equity-holding entity, it must:
- satisfy every applicable registration and filing requirement under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the Limited Partnerships Ordinance (Cap. 37), the Business Registration Ordinance (Cap. 310); and the Companies Ordinance (Cap. 622); and
- have adequate human resources and premises for carrying out the specified economic activities in Hong Kong
If the entity doesn’t satisfy these requirements, it will not be considered to have economic substance in Hong Kong, and it may not qualify for the FSIE exemption.
- Non-pure equity-holding entity
If an entity is a non-pure equity-holding entity, it must satisfy the following requirements:
- employ adequate number of employees with necessary qualifications to carry out the specified economic activities in Hong Kong; and
- incur adequate amount of operating expenditure for carrying out the specified economic activities in Hong Kong
If the entity doesn’t satisfy these requirements, it may not qualify for the FSIE exemption.
- Outsourcing to a third party or group company
If an entity outsources to a third party or group company, it must satisfy the following requirements:
- the economic activities are carried out by the outsourced entity in Hong Kong;
- the entity has exercised adequate monitoring and control on the carrying out of the economic activities by the outsourced entity;
- the outsourced entity is generally expected to charge the entity a fee for the specified economic activities performed subject to the application of transfer pricing rules;
- the number of qualified employees employed and the amount of operating expenditure incurred by the outsourced entity in Hong Kong are commensurate with the level of economic activities carried out by the outsourced entity; and
- there must be no double counting if the outsourced entity provides services to more than one entity.
Nexus requirement for IP income
The second requirement to consider is the nexus requirement. This requirement applies to intellectual property income (IP income). Entities must demonstrate that there’s a nexus between the Hong Kong operation and the intellectual property rights that generate the income.
Requirement for participation in dividends and disposal gains
The third requirement to consider is the participation requirement. To qualify for the FSIE exemption, entities must satisfy the participation requirements for dividends and disposal gains. The participation requirement applies to:
- Dividends received from a corporation outside of Hong Kong
- Disposal gain derived from the disposing of an equity interest in the corporation or entity outside of Hong Kong
Entities must satisfy the participation requirement by holding, directly or indirectly, a specific percentage of shares or capital in a foreign corporation.
The FSIE and advance ruling
The Hong Kong FSIE exemption has reference to the Advance Ruling mechanism, whereby taxpayers can seek guidance from the Hong Kong tax authorities on the interpretation and application of the tax laws to their business transactions. Taxpayers can apply for an advance ruling to the Hong Kong Inland Revenue Department (IRD) to clarify its tax position.
How Can We Help - Our Taxation Services
At SJH Global, we have a team of experienced tax professionals who can help you understand the FSIE regime, the new updates, and help you set up your business in Hong Kong. We offer a wide range of taxation services that help your business to comply with all the requirements.
Hong Kong FSIE regime – Frequently Asked Questions
The FSIE regime applies to only members of Multinational Entities groups are subject to the new FSIE regime.
The FSIE regime covers interest, dividend, disposal gain from the sale of equity interests in an entity and intellectual property income.
The requirements to be eligible for the FSIE exemption include economic substance, nexus, and participation.
Other taxes include Profits Tax, Stamp Duty, and the Capital Investment Entrant Scheme.In conclusion, the Hong Kong FSIE regime is a key factor in Hong Kong’s economic growth, and attracting enterprises and talents. As of January 2023, there are new requirements to consider when applying for FSIE exemption. Understanding these changes is critical to taking advantage of the exemption and ensuring compliance with the Hong Kong tax laws.