Proposed changes to taxation of certain foreign sourced income in Hong Kong

Multinational groups of companies with Hong Kong (HK) holding companies (TopCos or intermediate HoldCos) should be aware of the proposed changes that will affect the tax treatment of offshore income that they derive which may currently be exempt from HK tax. This may no longer be the case under the new regime if legislated.

It has been proposed that with effect from 1 January 2023, four types of offshore passive income – interest, income from intellectual properties (IP); dividends, and disposal gains in relation to shares or equity interest would be deemed sourced from Hong Kong and chargeable to HK profits tax if:

1. the income is received by HK companies or arrangements (such as partnerships, trusts) of multinational enterprise (MNE) group (covered taxpayers); and

2. the covered taxpayers fail to meet the economic substance requirement (for non-IP income) or fail to comply with the nexus approach (for IP income).

The proposed economic substance requirements require taxpayers to satisfy certain adequacy tests such as employing adequate number of qualified employees and incurring adequate level of operating expenditures in HK in relation to the relevant activities. A reduced substantial activities test applies to pure equity holding companies.

Notwithstanding the above, a participation exemption regime is proposed to apply to offshore dividends and disposal gains where these would be exempt from HK tax if certain conditions can be met regardless of whether the economic substance requirement is met. The participation exemption regime will, however, be subject to specific anti-abuse rules.

How Mazars can help

MNEs with HK HoldCos will need to assess how the proposed rule changes if and when legislated will affect their income profile. We can assist in your assessment and if required, advise how you can structure or restructure your existing group of companies’ tax efficiently.