Foreign Source Income Exemption (FSIE) Regime for Passive Income - Deloitte

Foreign Source Income Exemption (FSIE) Regime for Passive Income

7 July 2022

Our Speakers

Raymond Tang

Deputy Managing Partner Tax and Business Advisory Services Southern China Tel: +852 2852 6661 Email: raytang@.hk

Nicolas Malkin

Director Mergers and Acquisitions Services Tel: +852 2238 7648 Email: nmalkin@.hk

? 2022. For information, contact Deloitte China.

Kwan Yu

Partner International Tax Services Tel: +852 2852 1037 Email: kwanyu@.hk

Sarah Chan

Partner Global Business Tax Services Tel: +852 2852 1628 Email: sarahchan@.hk

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Agenda

1 Background 2 Overview of the FSIE regime 3 Scope 4 Economic substance requirement 5 Participation exemption

6 Nexus approach 7 Unilateral tax credit 8 Compliance requirements 9 Way forward 10 Summary

? 2022. For information, contact Deloitte China.

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Background

5 Oct 2021

? EU completed the review of Hong Kong's

territorial source tax regime ? EU included Hong Kong in its "watchlist"

June 2022

? A consultation paper on the proposed

refinement to the FSIE regime for passive income was issued by HK government to stakeholders

? In-scope offshore passive income

would be deemed taxable if certain conditions are not met

? 2022. For information, contact Deloitte China.

Oct 2021

Hong Kong responded that it would

amend its tax law by 31 Dec 2022

with the revised rules taking effect on 1 Jan 2023

? territorial source principle of taxation will continue

? limited target (no substantial economic activity in HK that receive passive income not chargeable to tax in HK)

Oct 2022 (target)

Introduce

draft legislation

1 Jan 2023 (target)

Effective

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Overview of the FSIE regime

Covered offshore `passive' income ? Interest ? Dividends ? Disposal gains in relation to

shares or equity interests ? Income from intellectual

properties (IP) Received in HK

Offshore passive income

MNE group

Economic substance requirement

for dividends / disposal gains /

interest

Participation exemption

second chance for dividends / disposal

gains

The proposed refinements to FSIE regime will only affect multinational enterprise (MNE) groups as defined by the GloBE Rules.

Nexus Rule

for IP Income Intellectual property income ? Specific rule for income from IP

received in HK ? Exemption based direct IP expenses

in HK over total IP expenses

? 2022. For information, contact Deloitte China.

Dividends / disposal gains ? Dividends / disposal gains that are

remitted and do not qualify for substance based exemption may qualify for participation exemption

Unilateral tax credit

Applies where FSIE does not apply ? applicable to passive income

from non-CDTA jurisdictions

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