Hong Kong to abolish the territorial tax system

After significant pressure from the EU the government of Hong Kong has adopted Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Bill 2022.

These amendments amounts to the most significant changes in the taxation system of Hong Kong for the last 40 years. From now on dividends and capital gains arising from the disposal of equity interests will be taxable when received in Hong Kong. The same is applicable to interest and royalties.

The mentioned changes restrict possibilities for the Multinational Companies to use Hong Kong as a headquarter jurisdiction to receive untaxable passive income.

It is worth to mention that the new regime does not apply to Honk Kong companies that satisfies the ‘economic substance’ requirements. It is significantly easier to have necessary substance for the pure equity holding companies. Generally, only a minimal presence is required for such companies to satisfy the economic substance requirements.

According to STEP, the entity is not a pure equity-holding company if its activities include the making of strategic decisions when dealing with its assets and the assumption of corresponding risks.

The Hong Kong Inland Revenue Department will issue legally binding opinions, free of charge, on whether the economic substance requirement is met in any particular case.