In this course · 5 of 7
Course 4
Claim offshore and foreign income
7 lessons · 8 min
- 1How do I claim offshore profits tax exemption in Hong Kong?
- 2What happens when the IRD questions my offshore profits claim?
- 3Do overseas directors make a Hong Kong company's profits offshore?
- 4What is Hong Kong's foreign-sourced income exemption (FSIE) regime?
- 5What economic substance do I need for FSIE exemption in Hong Kong?
- 6How does the FSIE participation exemption work for foreign dividends?
- 7Does the FSIE regime apply to my small Hong Kong company?
The short answer
A multinational enterprise (MNE) group entity must show adequate substance in Hong Kong in the year income accrues to keep foreign-sourced income exempt under the foreign-sourced income exemption (FSIE) rules. A pure equity-holding entity needs adequate human resources and premises and must meet filing duties. Other entities need an adequate number of qualified employees and operating expenditure. The Inland Revenue Department (IRD) sets no minimum numbers.
The economic substance requirement applies to foreign-sourced interest, dividends and non-IP disposal gains received in Hong Kong by an MNE entity.
Pure equity-holding entity (only holds shares and earns dividends, share disposal gains and incidental income):
- Meets all registration and filing requirements under the Companies Ordinance, Business Registration Ordinance and related laws; and
- Has adequate human resources and premises in Hong Kong to hold and manage its equity participations.
Any other entity:
It must employ an adequate number of suitably qualified employees in Hong Kong and incur adequate operating expenditure in Hong Kong, in order to make strategic decisions about its assets and manage and bear the principal risks.
Adequacy. The Inland Revenue Department (IRD) says no minimum thresholds can be set; it looks at employee numbers and qualifications, full or part-time status, the quality of management, and whether the premises are used and adequate.
Outsourcing is allowed if the work is done in Hong Kong by the provider, you monitor it, the provider charges a fee, and its staff and spending are proportionate. Outsourcing cannot be used to get around the requirement.
You can ask the IRD for an advance ruling on whether you meet the test. The requirement is tested for the year of assessment in which the income accrues.
Legal basis and sources
The law
- Inland Revenue Ordinance (Cap. 112), s.15K
Official sources
General information for business owners, not legal, tax or professional advice. Rules change, so check the sources or ask a licensed professional before you act.
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