How does the participation exemption work for foreign dividends under the FSIE rules?
A Hong Kong resident group entity (or a non-resident with a Hong Kong permanent establishment) can keep a foreign dividend or share disposal gain exempt if it has continuously held at least 5% of the investee for at least 12 months before the income accrues. A subject-to-tax condition applies, or tax relief switches to a credit.
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 FSIE rules, so they do not need to rely on the exemption.
The IRD's FSIE page has worked examples of when the 15% condition is met.
Legal basis
- Inland Revenue Ordinance (Cap. 112), s.15L
Sources
Applies to YA 2025/26 · Last reviewed 29 October 2026
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.
Related questions
- Does a Hong Kong company pay tax on profits earned overseas?Generally no. Profits sourced outside Hong Kong are outside the profits tax charge, even if the company is incorporated here. The exceptions are certain foreign-sourced passive income received in Hong Kong by members of multinational groups under the FSIE regime, and any profits the IRD finds are actually sourced in Hong Kong.
- How does an offshore profits claim work in Hong Kong?An offshore claim says that some or all profits did not arise in or derive from Hong Kong, so they are outside profits tax. You exclude them in the tax computation and report them in the return. The IRD can then make enquiries, and it is up to the taxpayer to prove the source with documents.
- Does it matter where a Hong Kong company's directors make decisions when claiming offshore profits?It is a factor but usually not the deciding one. The IRD and the courts look first at the operations that actually earned the profit and where they took place. The place where day-to-day investment or business decisions are taken is only one factor, so directors abroad do not by themselves make profits offshore.
- What is Hong Kong's FSIE regime for foreign-sourced income?The FSIE regime can tax four types of foreign-sourced passive income when received in Hong Kong by members of multinational groups: dividends, interest, disposal gains and IP income. It started on 1 January 2023, with disposal gains on non-equity assets added from 1 January 2024. Exceptions such as economic substance can keep the income exempt.
- What economic substance do I need to keep foreign dividends or interest exempt under the FSIE rules?A multinational group entity must show adequate substance in Hong Kong in the year the income accrues. 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 IRD sets no minimum numbers.