Hong Kong is proposing changes to its tax rules, under which constituent entities of multinational enterprise (MNE) groups would be subject to tax on foreign-sourced passive income received in Hong Kong. The draft legislation is set to be introduced into the Legislative Council in October this year, with the relevant measures expected to take effect from 1 January 2023, without any grandfathering arrangement.
MNE groups that currently have entities making an offshore claim with respect to their passive income should consider whether and how the revised foreign-sourced income exemption (FSIE) regime may apply. If additional tax exposure is anticipated under the refined FSIE regime, appropriate restructuring steps should be taken to mitigate the tax impact.
As the refined FSIE regime will take effect from 1 January 2023 and the impact can be material, MNE groups should start the review and seek advice on the implications arising from the proposed new rules as soon as possible.
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