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

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

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

If the Reform leader becomes UK prime minister then he may follow the direction of the US in at least one significant way
Trump declared a new national emergency in issuing the order; in other news, Grant Thornton Germany is up for sale and the subject of interest from both its UK and US counterparts
The judgment, which saw Denmark's Supreme Court rely on OECD TP guidance, sets aside more than 15 years of consistent administrative practice, experts have told ITR
Belgium’s new coalition government has gone ahead with a new exit tax regime that could land it in the courts
Brazil’s government has not officially framed the bill as a countermeasure amid trade tensions with the US, but the move is being considered as part of Brazil’s strategic response, one expert tells ITR
Understanding India’s income tax landscape can help charities ensure compliance, optimise tax benefits, and enhance their impact, writes Raghav Bajaj of Khaitan & Co
Tax advisers in Brazil are rising above the country’s notoriously complex tax system to deliver high-quality advisory services, ITR’s exclusive in-house data reveals
ITR’s data has highlighted the US firm’s ambition to become America’s ‘premier’ tax player via a concerted partner recruitment strategy
Jaap Zwaan’s arrival continues a recent streak of A&M Tax investing in the region; in other news, the US and Japan struck a deal that significantly lowered tariff rates
In a world where international tax concepts rely on human activity, Leonard Wagenaar poses existential questions about the future of such ideas when AI is ever-present
Gift this article