The European Union (EU) has always been committed to promote good tax governance standards in relation to tax transparency, fair taxation and anti-BEPS measures. The EU published a list of non-cooperative jurisdictions in October 2021, with the aim to encourage positive change in their tax legislation and practices.

Following this, the Hong Kong government launched a consultation on a proposal to refine the Hong Kong Foreign Source Income Exemption (FSIE) regime for passive income. The proposed refined FSIE regime were discussed at the meeting of the Panel on Financial Affairs of the Legislative Council (LegCo) on July 4, 2022. An amendment bill is planned to be introduced into the LegCo in October 2022 with a view to bringing the proposed refined FSIE regime into force effective January 1, 2023, with no grandfathering arrangement.

Under the proposed refined FSIE regime, four types of offshore passive income – interest; income from intellectual properties (IP); dividends, and disposal gains in relation to shares or equity interest  – may be deemed to be sourced from Hong Kong and subject to Hong Kong profits tax if such income is received by a constituent of a multinational enterprise (MNE) in Hong Kong and such constituent fails to meet the economic substance requirements (for non-IP passive income), the nexus approach (for IP income) or the participation exemption (for dividends and equity disposal gains) and chargeable to profits tax under certain circumstances.