Overview of the proposed changes
Under Hong Kong's existing tax rules, a person is only liable to pay profits tax in Hong Kong if it carries on a trade, profession or business in Hong Kong and derives income arising in or derived from Hong Kong (i.e. Hong Kong sourced income) from such a trade, profession or business. Foreign sourced income, at present, is not subject to tax in Hong Kong.
The Bill seeks to regard certain types of foreign sourced income, that is received in Hong Kong by MNE entities carrying on a trade, profession or business in Hong Kong, to be Hong Kong sourced income, except in certain circumstances. This would have the effect of bringing all such foreign sourced income within the Hong Kong profits tax charge. The rule would however not apply if either the economic substance requirement is met (with respect to non-intellectual property (IP) income), the nexus approach is complied with (with respect to IP income), or the participation exemption otherwise applies (with respect to dividend income and disposal gains). Where none of the above exclusions or exemptions are applicable, the foreign sourced income will be regarded as taxable in the year of assessment in which it is received in Hong Kong.
As application of the new rules can result in double taxation, a foreign tax credit will be available under the new regime in certain circumstances.
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