Hong Kong changes approach to taxing income from foreign sources

Hong Kong is rightfully considered a tax haven and one of the largest financial centers in the world, but in October 2021, the jurisdiction was added to the European Union’s “grey list” as a country that does not comply with the OECD requirements due to the lack of taxation of passive income received from abroad.

To rectify this situation, the Hong Kong government took appropriate measures, and in early November 2022, the Hong Kong tax office published the news that in order to support international efforts to combat cross-border tax evasion and prevent double non-taxation, Hong Kong has committed to amending the exemption from income from foreign sources (FSIE) for passive income in accordance with the requirements of the European Union.

The fact is that the latest international tax standards require, from a taxpayer enjoying a preferential tax regime in a jurisdiction, evidence of a significant economic presence in the jurisdiction and the establishment of a direct link between the relevant income and actual activity in this jurisdiction.

The Domestic Revenue (Amendment) (Taxation of Certain Foreign-Sourced Income) Bill, 2022 was published on October 28, 2022 and submitted to the Legislative Council on November 2, 2022. The purpose of the bill is to introduce a new framework for the Hong Kong FSIE regime, with the subsequent implementation of the regime from January 1, 2023.

Under the new regime, four types of passive income (dividends, interest, royalties, and capital gains) received in Hong Kong by an integral part of a multinational company, regardless of income or size of assets, will be considered taxable and subject to income tax in Hong Kong at a standard rate of 16, 5%. An exemption can only be obtained by satisfying the requirement of economic presence in the jurisdiction, and for this, in turn, it is necessary to comply with the regulations, and documents submitted during the registration of companies, hire an adequate number of qualified personnel and have a real office in Hong Kong.