Foreign gains to be subject to Hong Kong Profits Tax (Part 3) – further refinement to the foreign sourced income exemption (FSIE) regime in Hong Kong

18 October 2023 | Applicable law: Hong Kong | 4 minute read


The existing foreign-sourced income exemption ("FSIE") regime, which came into effect on 1 January 2023, already deems certain foreign-sourced income (previously not subject to profits tax in Hong Kong under the territorial principle) that accrues to specific entities (referred to as multinational enterprises, or MNE entities) which carries on trade or business in Hong Kong to be taxable as if they were Hong Kong sourced income, unless certain exceptions are met. 

The refined FSIE regime, being introduced through the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 (which was published on 13 October 2023) (the "Bill") and which just went through the first reading at the Legislative Council today (18 October 2023) will expand the scope of foreign-sourced income which may be subject to profits tax to include disposal gains from different types of property and not just equity interest. Similar to the existing FSIE regime, the refined regime is in response to updated EU guidance that all foreign disposal gains should be subject to the regime. The Bill, if passed, is intended to take effect from 1 January 2024. 

Note the term "exemption" can be confusing for taxpayers in Hong Kong. The "exemption" refers to the previous regime where Hong Kong did not generally impose tax on non-Hong Kong sourced trading or capital gains, nor on non-Hong Kong sourced passive income. The FSIE regime is a set of rules that impose further tax (by limiting the scope of such exemption), rather than a set of rules allowing an exemption from tax.  

Please refer to our previous client alerts (part 1 and part 2) on the FSIE regime, which is already in effect.  

Expanded scope of foreign sourced gains - any IP or non-IP disposal gains

The existing FISE regime imposes profits tax on certain types of in-scope income, namely, dividends, interest, disposal gains from equity interest and IP income which arise in or are derived from outside Hong Kong, if such income is received in Hong Kong by an MNE entity which carries on trade or business in Hong Kong, and there are no applicable exceptions for it to avail itself of.

The proposed Bill intends to expand the types of disposal gains subject to the regime, including non-IP disposal gains and IP disposal gains. Non-IP disposal gains are 'gains or profits derived from sale of property' (other than IP), including movables and immovables. Previously, only disposal gains from equity interest, that is from sale of interest that 'carries rights to the profits, capital or reserves of the [investee entity] and is accounted for as equity under general accounting principles' would be subject to the regime.

Carve outs and exceptions  

To mitigate the compliance burden under the refined regime, the existing carve-out provisions will be expanded such that foreign "non-IP disposal gains" accruing to certain entities should not be treated as in-scope income subject to the regime. These include such gains derived from, or are incidental to, the activities of entities whose profits are subject to concessionary tax treatment under certain provisions of the IRO. Examples include funds entities subject to the funds tax exemption; regulated financial entities (including banks and authorized insurers); and eligible family investment holding vehicles ("FIHVs") managed by eligible single-family offices in Hong Kong. Additionally, non-IP disposal gains which accrue to "traders" and are derived from or incidental to the business of such traders will also be outside the scope of the refined regime. In this context, "traders" refer to those entities which sell or offer to sell properties in their ordinary course of business and include those carrying on securities trading business e.g. those who actively acquire and dispose of foreign shares through a foreign stock exchange at a gain.1 

The existing "substantive economic substance" exceptions shall continue to apply and, if the MNE entity has non-IP disposal gains received in Hong Kong which are not gains from disposal of equity interest, they will have to fulfil the enhanced criteria for "non-pure equity holding entity" for such gains to be exempt from profits tax. The existing "participation exception" will, however only apply to disposal gains arising from equity interest (but not from other types of non-IP properties).

A new intra-group transfer exception is intended to be added such that if an MNE entity receives foreign-sourced non-IP or IP disposal gains from an associated company (for example, the selling entity holds at least 75% of the beneficial interest or voting rights in the acquiring company), such disposal gains will also be exempted from profits tax under the refined regime. This is subject to specific anti-abuse measures, such as the affiliate relationship must continue for two more years after the transfer. 


With the refined FSIE regime covering disposal gains even of immovables and movables, and the uncertainties of whether family investment holding vehicles may be treated as MNE entities subject to the FSIE regime (or fall within the definition of "trader" which is now outside the scope of the FSIE regime), there is increased incentive for family investment holding vehicles to consider some restructuring and coming within the framework of the family office tax concession (see our earlier alert) to obtain certainty that their disposal gains will not be subject to profits tax in Hong Kong under the refined regime that will come into effect.  

Should you have any questions, please feel free to reach out to Daniel Tang or Deirdre Fu for a consultation.

1 In the IRD website (on exclusion relating to traders) 

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


Related experience

As a full-service law firm, we are able to provide advice and information about a wide range of other issues. Here are some related areas.

Join the club

We have lots more news and information that you'll find informative and useful. Let us know what you're interested in and we'll keep you up to date on the issues that matter to you.