Proposed changes to Hong Kong’s offshore regime for passive income

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Proposed changes to Hong Kong’s offshore regime for passive income

Sponsored by

sponsored-firms-kpmg.png
Hong Kong Sea Ship

Lewis Lu and John Timpany of KPMG China discuss the implications of a proposed refined foreign source income regime in Hong Kong for constituent entities of multinational enterprises.

The Hong Kong SAR government recently proposed a refined foreign source income exemption regime as a response to the EU’s concerns about Hong Kong’s offshore regime for passive income. For further details, see this publication by KPMG in September 2021, and an update in March 2022.

Subject to the completion of the legislative process, the changes will take effect from January 1 2023 with no grandfathering arrangement and apply to multinational enterprise groups only.

Covered taxpayers and covered income

Only a constituent entity (CE) of a multinational enterprise (MNE) group, irrespective of the group’s revenue or asset size, will be in scope. The definitions of a CE and an MNE are the same as those under the Global Anti-Base Erosion (GloBE) model rules.

An MNE group means any group that includes at least one entity or permanent establishment that is not located in the jurisdiction of the ultimate parent entity. A CE effectively means an entity with financial results that are consolidated on a line-by-line basis in the group’s consolidated financial statements. As such, associates and joint venture entities within an MNE group that are not included in the group’s consolidated financial statements, standalone local companies and purely domestic groups without any offshore operations would not be affected.

Dividends, gains from the disposal of shares or an equity interest (equity disposal gains), interest and income from intellectual property with an offshore source will be classed as in-scope offshore passive income.

Offshore passive income

Under the proposed regime, a CE of an MNE group will need to determine whether the in-scope passive income is with an offshore source and then whether the income “is received in Hong Kong”.

In-scope offshore passive income that is “received in Hong Kong” by a CE of an MNE group will be deemed to be sourced from Hong Kong and taxable unless the economic substance requirement (for non-IP income), the nexus approach requirement (for IP income) or the participation exemption conditions (for dividends and equity disposal gains) are met.

Unilateral tax credit

A unilateral tax credit will provide double tax relief for in-scope offshore passive income that is subject to tax in Hong Kong and a foreign jurisdiction that does not have a double taxation agreement with Hong Kong.

Unilateral tax credit is only applicable to in-scope passive income and will not be available for other income, even though it may be subject to tax in Hong Kong and overseas.

Next steps

The Hong Kong SAR government plans to introduce a tax bill on the proposed foreign source income exemption (FSIE) regime in October 2022 and the regime will take effect from January 1 2023, subject to the completion of the legislative process.

The Inland Revenue Department will issue administrative guidance on the FSIE regime, including the factors that will be considered in determining whether the substance requirement is met, the rules relating to participating exemption regime and the application of the nexus approach.

KPMG observations

The refined FSIE regime for passive income represents a significant change to the long-established offshore regime in Hong Kong. In-scope companies that have been relying on an offshore claim for non-taxation of offshore passive income should monitor the developments in this area, particularly the detailed rules to be set out in the forthcoming tax bill.

They will also need to revisit their Hong Kong profits tax positions and consider if any changes to their holding structures or operating models are desirable.

For more comments on the proposed regime, and the critical points that in-scope taxpayers should consider when performing their assessment, please see KPMG’s publication here.

more across site & shared bottom lb ros

More from across our site

Heads of tax need to push their teams forward as strategic business advisers to add value across the organisation, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Australia’s conservative opposition will repeal controversial tax agent reporting rules if elected in the country’s May general election
Shapley would be the fourth person to hold the job this year; in other news, UK tax advisory firm MHA raised fewer funds than expected from its London IPO
The US needs to be involved in pillar one for there to be more international acceptance of the project, Michael Masciangelo says
The UK regulator is investigating EY’s auditing of the national postal service as it relates to the high-profile Horizon scandal, which saw hundreds wrongfully convicted
Gift this article