Foreign Sourced Income Exemption (FSIE) Advisory and Advance Ruling Application to the IRD


Hong Kong's taxation system is based on the principle of territorial source, meaning that only profits derived from Hong Kong are subject to Hong Kong Profits Tax, while profits from foreign sources are generally exempted. However, in order to support international efforts in combating cross-border tax evasion and preventing double non-taxation, Hong Kong Inland Revenue Department (IRD) put in place the Foreign Sourced Income Exemption (FSIE) regime for foreign-sourced income.

Income covered under the FSIE regime

The FSIE regime cover the following specified foreign-sourced income:-

•    Interest income
•    Dividend income
•    Disposal gain on intellectual property (IP) assets and non-IP assets
•    General IP income (e.g. royalty)

Effective from 1 January 2024, FSIE covers disposal of all assets (both intellectual property (IP) assets and non-IP assets).

Covered taxpayers

Only members of multinational enterprise (MNE) groups will be subject to the FSIE regime, unless they satisfy certain exemption conditions.

Exceptions

Specified foreign-sourced income received in Hong Kong will be exempted if the MNE entity meets the exception requirements:-

•    Economic Substance requirement
•    Participation exemption requirement
•    Nexus requirement / Nexus approach
 

An intra-group transfer relief is available to defer charging of tax if the asset concerned is transferred between associated entities, subject to specific anti-abuse rules.

Advance Ruling Application to the Hong Kong Inland Revenue Department (IRD)

To provide tax certainty for taxpayers, the IRD offers the option of applying for an advance ruling on compliance with the economic substance requirement. This allows taxpayers to obtain a binding opinion from the IRD on whether they comply with the economic substance requirement in respect of foreign-sourced interest, dividend and non-IP disposal gain.

FSIE illustrative examples and FAQ (IRD Website)

FSIE illustrative examples: https://www.ird.gov.hk/eng/tax/fsie_example.htm 
FSIE FAQ: https://www.ird.gov.hk/eng/faq/fsie.htm

How our services can help

We offer comprehensive services to assist MNE entities in navigating the FSIE regime and ensuring compliance with Hong Kong's tax laws. Our services include:-

✓  Hong Kong Profits Tax return filing services. Please refer to Link for our Hong Kong Profits Tax return filing services.

✓  Preparing of FSIE Supplementary Form in Hon Kong Profits Tax return.

✓  Providing advice on the tax treatment of foreign-sourced income under the FSIE regime.

✓  Assisting taxpayers to building up economic substance in Hong Kong.

✓  Assisting taxpayers in applying for advance ruling application from the IRD. Please refer to Link for our Advance Ruling 
     advisory services.

✓  Representing taxpayers in any tax disputes or appeals related to the FSIE regime. Please refer to Link for our desk audit 
     advisory services.

✓  Providing ongoing tax compliance support and advice to ensure taxpayers remain compliant with Hong Kong Inland Revenue 
     Ordinance (IRO).