Hong Kong: Gazettal of bill to implement the proposed changes to Hong Kong's foreign sourced income taxation regime

In brief

The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill 2022 (Bill) was gazetted on 28 October 2022. The Bill sets forth the legislative framework to implement the Government's proposed changes to Hong Kong's foreign sourced income taxation regime. To assist taxpayers to better understand how the new rules will operate, the Inland Revenue Department (IRD) also issued administrative guidance with illustrative examples on the same day. 

The Bill is largely in line with the proposals put forward by the Government in its June 2022 consultation paper, the key features of which were discussed in our Client Alert issued in July 2022. In this alert, we outline the key refinements to, and clarifications made in respect of the operation of the regime. 

Once the Bill is passed, the legislation will take effect in respect of all in-scope foreign sourced income accrued and received in Hong Kong on or after 1 January 2023, with no grandfathering arrangement.


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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