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What you need to know about HK’s bill on tax certainty enhancement

The bill was gazetted on 20 October.

The Hong Kong government has gazetted a bill that will provide for a tax for non-taxation of onshore disposal gains of equity interests.

Currently, the determination of whether an onshore disposal gain is considered capital or revenue in nature is generally based on the established “badges of trade” principles derived from case law,” according to BDO Hong Kong.

“Factors such as the frequency of similar trades, holding period, reasons for purchase or sale, and circumstances leading to the sale are taken into account during the analysis. If the onshore disposal gain is determined to be capital in nature based on the ‘badges of trade’ analysis, it is not subject to profits tax in Hong Kong,” the firm further explained.

With the enactment of the bill, “any eligible onshore disposal gain derived by an eligible investor entity on or after 1 January 2024 and accrues in or after the year of assessment 2023/24 will be regarded as capital in nature and not chargeable to profits tax.”

For an onshore disposal gain to be exempted from profits tax  it should meet three conditions:

1. The investor entity is an eligible investor entity.

  • According to the bill, the investor entity must be a legal person, not including a natural person, or an arrangement that prepares separate financial accounts, such as a partnership, a trust and a fund. Insurers are not considered an investor entity. 

2. The subject matter disposed of is an eligible equity interest in an eligible investee entity.

  • “An equity interest in an investee entity means an interest that carries rights to the profits, capital or reserves of the investee entity; and is accounted for as equity in the books of the investee entity under applicable accounting principles," BDO Hong Kong said. "Same as an investor entity, an investee entity must be a legal person (not including a natural person) or an arrangement that prepares separate financial accounts, such as a partnership, a trust and a fund. The Scheme will not apply to equity interests that are regarded as trading stock for tax purposes and certain non-listed equity interests in property-related entities," it added.

3. The equity holding conditions are met, or the exception to equity holding conditions for long-held left-overs is satisfied.

  • The investor entity should have held at least 15% of the equity interests in the investee entity for 24 consecutive months before the date of disposal of such interests. The 15% equity interest requirement can be measured on a group basis.For example, the threshold is satisfied if the investor entity and its closely related entities have collectively held at least 15% of the equity interests in the investee entity throughout the reference period. 

    “Where an investor entity disposes of its long-held equity interests in tranches such that the equity holding in an investee entity may fall below 15% after earlier tranche(s), the scheme will apply to subsequent disposal/disposals if such subsequent disposal/disposals of left-over interests are made within 24 months from the latest earlier disposal for which the investor entity has last met the equity holding conditions," the firm said.

Meanwhile, BDO Hong Kong underscored that the scheme does not apply to foreign-sourced disposal gains on equity interests.

“Such gains will be exempted from profits tax if either the economic substance requirement or the participation requirement under the Foreign-sourced Income Exemption regime is met,” the firm explained.

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