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May 9, 2023

Hong Kong launches consultation to revise foreign-sourced disposal gain rule

  • Hong Kong's refined foreign-sourced income exemption regime will be further revised to expand the scope of disposal gains in more asset classes.
  • Specific exemptions, intra-group relief and transitional measures are under consideration.
  • Multinational enterprises should review their Hong Kong asset profile to assess potential tax implications.

Executive summary

Hong Kong issued a consultation paper on the further revision of the foreign-sourced income exemption (FSIE) regime regarding disposal gains. The consultation paper proposes expanding the scope of covered assets, the conditions for tax exemption and relief measures to seek stakeholders' views for continued negotiation with the European Union (EU).

Detailed discussion

As requested by the EU, Hong Kong announced1 in February 2023 that it will further revise its FSIE regime to extend the scope of foreign-sourced disposal gains beyond shares or equity interest. Under the latest EU guidance, the scope of disposal gains should cover a non-exhaustive list of assets, whether they are financial or nonfinancial in nature. The Hong Kong government is seeking stakeholders' views on defining covered assets and whether a definite list of assets should be cited as examples, including: (1) debt instruments; (2) movable properties; (3) immovable properties; (4) intellectual property (IP); and (5) foreign currencies, or whether any other types of assets should be cited as examples in the domestic legislation and administrative guidance.

Regarding foreign-sourced disposal gains on covered assets, the proposed refined FSIE regime — like the existing FSIE regime — would exempt from tax in-scope multinational entities (MNEs) that satisfy the economic substance requirement for non-IP assets, or the nexus approach for IP assets. Specific exemption is proposed for foreign-sourced disposal gains that an MNE derives from its substantial business activities in Hong Kong as a trader of covered assets. Intra-group relief is also proposed that would defer any tax charged on foreign-sourced disposal gains derived from asset transfer between taxable associated companies until the transferee company transfers the asset to an external party. Appropriate safeguards and anti-avoidance measures will be put in place, including withdrawing relief if the associated relationship ends within a specified period.

Other features of the existing FSIE regime will be part of the proposed refined FSIE regime, including: the eligibility for unilateral or bilateral double-taxation relief, the treatment of disposal loss, the availability of business facilitating measures in the form of simplified reporting procedures, advance rulings, or Commissioner's Opinion, as a transitional measure, before the enactment of the proposed refined FSIE regime, and administrative guidance with illustrative examples.

As for transitional protection on the computation of disposal gains or losses, a specific "taper relief" will be explored under which the taxable amount of disposal gains will be reduced or "tapered" according to how long the assets have been held before the existing or the proposed refined FSIE regime was implemented.

The related legislative bill is planned to be introduced in October 2023 to implement the revised FSIE regime from January 2024, as required by the EU. Meanwhile, the Hong Kong government is negotiating with the EU regarding whether the implementation timeline for Hong Kong could also be aligned with those of other noncompliant jurisdictions (i.e., effective from 1 July 2024).


For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 See EY Global Tax Alert, Hong Kong to further revise its foreign source income exemption regime to expand scope of disposal gain, dated 20 February 2023.