Committee stage amendments to the proposed refined FSIE regime

Investment funds and other entities subject to the preferential tax treatments under the existing provisions of the Inland Revenue Ordinance (IRO) will now not be carved out as excluded entities not subject to the proposed refined FSIE regime. Instead, only the foreign-sourced non-IP income derived by them from, or incidental to, their activities that produce the tax exempt or preferential income under the existing provisions of the IRO will now be outside the scope of the proposed refined FSIE regime. 

Shortly after the amendment bill implementing the proposed foreign-sourced income exemption (FSIE) regime (the Bill) was tabled to the Legislative Council on 2 November 2022, the HKSAR government (the government) received a reply from the European Union (EU). The EU opposed to the government’s approach of excluding MNE entities that qualify as “excluded entities” from the scope of the proposed refined FSIE regime. The EU considered that granting such a blanket exclusion may give rise to abuse and undermine the objective of subjecting the MNE entities receiving foreign-sourced passive income to the economic substance requirements (ESR). The EU also stated that no other jurisdiction has ever included such exclusion in a FSIE regime that has been considered acceptable by the EU.

This alert summarizes the CSAs to the Bill recently submitted by the government to address the latest EU concerns and their implications. 

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