Hong Kong FSIE: What Does It Cover?

Hong Kong's Foreign-Sourced Income Exemption (FSIE) regime applies to specified foreign-sourced income received in Hong Kong by qualifying multinational enterprise (MNE) entities.

The regime commenced on 1 January 2023, initially covering foreign-sourced interest, dividends, intellectual property income, and equity-interest disposal gains. From 1 January 2024, the scope of foreign-sourced disposal gains was expanded to cover all types of property, not just equity interests.

🇭🇰 1️⃣ What Income Does FSIE Cover?

The regime covers specified foreign-sourced income including:

• Interest
• Dividends
• Intellectual property income
• Disposal gains

From 1 January 2024, the disposal-gain rules were expanded beyond equity interests to cover gains from the disposal of other property as well.

🏢 2️⃣ Who Is Covered?

The FSIE regime is relevant to an MNE entity carrying on a trade, profession or business in Hong Kong.

This is important because the regime is not a general tax on foreign income received by every person in Hong Kong.

Individuals are generally outside the FSIE regime.

💰 3️⃣ How Does the Deeming Rule Work?

Where specified foreign-sourced income is received in Hong Kong by an in-scope MNE entity, the income can be deemed to be Hong Kong-sourced and chargeable to Profits Tax.

However, the income may remain exempt where the entity satisfies the applicable statutory exception.

The main exceptions are:

• Economic substance requirement
• Participation requirement
• Nexus requirement for qualifying IP income
• Intra-group transfer relief for qualifying disposal gains

🏭 4️⃣ Economic Substance Requirement

The economic substance requirement can apply to foreign-sourced:

• Interest
• Dividends
• Non-IP disposal gains

A pure equity-holding entity is subject to a reduced economic substance requirement, including appropriate Hong Kong filing compliance and adequate human resources and premises for its specified activities.

Other entities generally need adequate qualified employees and operating expenditure in Hong Kong for the relevant specified economic activities.

📈 5️⃣ Participation Requirement

For foreign-sourced dividends and equity-interest disposal gains, an MNE entity may potentially rely on the participation requirement instead of the economic substance requirement.

Broadly, the entity must generally:

• Be a Hong Kong resident person, or have a relevant Hong Kong permanent establishment; and
• Have continuously held at least 5% of the equity interests in the investee entity for at least 12 months immediately before the relevant income accrues.

Additional anti-abuse and subject-to-tax conditions can apply.

🧬 6️⃣ IP Income Is Subject to the Nexus Requirement

Qualifying intellectual property income is subject to the nexus requirement, which links the amount of exempt IP income to qualifying R&D expenditure.

This prevents taxpayers from obtaining full exemption simply by locating IP ownership in Hong Kong without a corresponding connection to qualifying R&D activities.

📅 7️⃣ Why 2024 Matters

The original FSIE regime applied from:

1 January 2023

At that stage, disposal gains covered by the regime were focused on equity-interest disposal gains.

Following the 2023 amendment, effective:

1 January 2024