New Taxation Bill in Hong Kong to Combat Cross-Border Tax Avoidance

Hong Kong Introduces New Taxation Bill to Combat Cross-Border Tax Avoidance

Hong Kong’s new taxation bill will better address cross-border tax avoidance issues stemming from double non-taxation. The new bill comes into effect on 1 January 2023.

Hong Kong promised the European Union in 2021 that it would amend its tax law, hence the introduction of the new bill.

 

Inland Revenue (Amendment) (Taxation on Specified Foreign-Sourced Income Bill 2022

The new taxation bill has a new foreign-sourced income exemption regime (FSIE). This will be applied to all passive income earned in Hong Kong.

The FSIE maintains Hong Kong’s competitiveness and supports the territorial source principle of taxation.

 

What Happens Under the New Taxation Bill?

If a multinational company has significant economic presence in Hong Kong, it can claim tax exemption under the FSIE. This applies to only specific foreign-sourced income like dividends, interests, and disposal gains.

If nexus requirements are met, any qualifying intellectual property earned in Hong Kong is exempted from foreign intellectual property income. The FSIE does not affect local companies and individual companies. The Organisation for Economic Cooperation and Development (OECD) adopted the Nexus approach in 2015. It is part of the Action 5 plan to address the issue of base erosion and profit sharing (BEPS Action 5 Report).

Under the FSIE, nexus and economic substance requirements will stop possible exploitation of the tax system in Hong Kong by shell companies. A dedicated team by the Inland Revenue Department will provide technical assistance to taxpayers who are affected. A series of measures will also be implemented that will comply with the FSIE regime.