How does the FSIE participation exemption work for foreign dividends?

The participation requirement is an alternative to the economic substance test for foreign-sourced dividends and equity interest disposal gains.

Conditions

• The recipient is a Hong Kong resident entity, or a non-resident with a Hong Kong permanent establishment to which the income is attributable; and
• It has continuously held not less than 5% of the equity interests in the investee for not less than 12 months immediately before the dividend or gain accrues.

Anti-abuse (subject-to-tax) rule. For a dividend, the exemption applies only if the dividend, or the profits out of which it is paid, is subject to a qualifying similar tax abroad at an applicable rate of at least 15%. For an equity disposal gain, the gain must be subject to a qualifying similar tax outside Hong Kong.

If the tax test fails. The full exemption switches to a tax credit: the income stays in profits tax but foreign tax paid on it is deducted from the Hong Kong tax.

Who can use it. Only MNE entities are in the regime at all. Entities that are not part of an MNE group are outside the foreign-sourced income exemption (FSIE) rules, so they do not need to rely on the exemption.

The Inland Revenue Department's (IRD's) FSIE page has worked examples of when the 15% condition is met.