Hong Kong has committed to updating its foreign-sourced income exemption (FSIE) regime by the end of 2023 to cover foreign-sourced gains from the disposal of assets other than shares and equity interests. The move is a response to the EU updating its guidance on FSIE regimes in late 2022 and explicitly requiring such regimes to cover gains from the disposal of all types of assets (disposal gains).
The expanded FSIE regime in Hong Kong is expected to take effect from January 1 2024.
Key changes proposed and views sought
The Hong Kong SAR government circulated a consultation document on April 6 2023 to set out the proposed changes to the FSIE regime and seek views from stakeholders on related issues. The document focuses on the expanded scope of assets in relation to foreign-sourced disposal gains.
The proposed changes are subject to negotiations with the EU and the other existing features of the FSIE regime would remain unchanged.
The key proposed changes and the issues raised for comments in the consultation document are summarised below.
Covered assets
The EU requires all disposal gains to be covered, regardless of whether they are capital or revenue in nature and whether the assets are financial or non-financial in nature.
Although the government has explored a positive listing approach covering the following additional types of assets – (1) debt instruments, (2) movable properties, (3) immovable properties, (4) intellectual properties and (5) foreign currencies – the EU requires a non-exhaustive list instead of a definite and exhaustive list of covered assets.
Views are sought on (1) the definition of covered assets and (2) whether the above five types of assets (or any other assets) should be cited as examples of covered assets in the domestic legislation.
Computation of disposal gains or losses
The government has taken up with the EU the possibility of rebasing the costs of assets to those as at the effective date of the FSIE regime when computing the taxable amount of disposal gains so that the taxation of foreign-sourced disposal gains would not be applied retrospectively. However, the EU has concerns about the grandfathering effect of such rebasing approach and advised that such approach has not been accepted by the EU for other jurisdictions.
The government will explore with the EU other means, such as taper relief (a mechanism by which the taxable amount of disposal gains is reduced according to how long the assets have been held), to reduce the impact on businesses if the rebasing approach is ultimately not accepted by the EU.
Views are sought on how disposal gains or losses should be computed.
Exemption or relief specific to disposal gains
The government proposes exploring with the EU the following relief measures:
Disposal gains from traders – foreign-sourced disposal gains derived by a trader of an asset in relation to the asset as part of its income derived from substantial activities in Hong Kong (for example, gains from the sale of immovable properties by property developers) are to be carved out from the expanded FSIE regime; and
Intra-group transfer relief – subject to certain anti-abuse measures, the taxation of foreign-sourced disposal gains from the transfer of assets between associated companies is to be deferred (i.e., no gain or loss arises upon the transfer for the transferor company and there is no step-up of the cost base of the asset transferred for the transferee company).
The transferor company and the transferee company are considered ‘associated’ if one is the beneficial owner of 75% or more of the issued share capital of the other, or a third company is the beneficial owner of 75% or more of the issued share capital of each of them.
Views are sought on the exemption or relief measures to be provided under the expanded FSIE regime.
For more details of other issues on which views are sought, other related issues being clarified in the consultation document and the implementation timeline, please refer to KPMG’s publication here.
KPMG observations
Unlike the legislative exercise conducted in 2022 for introducing the FSIE regime, the government has taken a slightly different approach this time; i.e., launching a consultation to seek views on a number of outstanding issues before it continues to negotiate with the EU.
This revised approach is welcomed and KPMG will provide comments/suggestions on a number of issues for the government’s consideration, including:
The types of assets to be excluded;
Justifications for the proposed rebasing approach;
Other measures for reducing the impact of the new taxation of foreign-sourced disposal gains on businesses; and
Better options than using ‘issued share capital’ to measure the degree of association for the purposes of intra-group asset transfer relief in light of the recent dispute in the John Wiley case (see KPMG’s article here for more details of the case).
