5 measures investors and businesses must be aware of in 2024

One of the measures will exempt onshore disposal gains from profits tax.

Collaborating with lawyers from top firms in the city, Hong Kong Business has curated a list of critical measures which are likely to impact business and investors alike in 2024.

First on the list is the “Inland Revenue (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023,” an amendment which exempts onshore disposal gains from profit taxes under three conditions.

Pan Tsang, a partner at Robertsons, said the bill is important for companies in Hong Kong that are undergoing expansions and restructuring since acquisitions and disposal of equity interests are a crucial aspect of these strategic moves.

“These businesses should carefully consider whether the three specified conditions set out under the bill can be fulfilled, and thus whether they can benefit from the non-taxation treatment under the scheme,” Tsang told Hong Kong Business.

The Inland Revenue Bill

The measure provides that disposal gains shall be exempted from profit tax automatically under the following conditions: if the investor’s entity is an eligible entity; if the subject matter disposed of is an eligible equity interest in an eligible investee entity; and if equity holding conditions are met, or the exception to equity holding conditions for long-held leftovers is satisfied.

Eligible entities are either a legal person, a partnership, trust or a fund, with the exception of insurers.

Explaining the second condition, Tsang said “equity interest in an eligible investee entity” refers to “an interest that carries rights to 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.”

“It does not apply to equity interests that are regarded as trading stock for tax purposes and to certain non-listed equity interests in property-related entities which engage in property trading, property development or property holding,” Tsang said.

Equity holding conditions set by the bill include the investor entity holding at least 15% of the equity interests in the investee entity for 24 consecutive months before the date of disposal of the interest. 

“The scheme will also apply if the investor disposes of the equity interests in tranches in a way in which the investor’s equity holding will fall below 15% after earlier tranche or tranches, so long as the subsequent disposal is made within 24 months from the latest earlier disposal for which the investor meets the 15% equity interest requirement,” Tsang said.

“For example, an investor entity owns 30% equity interest in an investee entity as of July 2023. This investor entity proposes to dispose of its equity interests in two tranches, say 18% in August 2023 and 12% August 2024. In this regard, despite falling out of the 15% equity interest requirement, the second disposal gain dated August 2024 would still be exempted from profits tax,” he added.

Type 13 SFO-Regulated Activity

Still on the financial regulation and investment management space, another bill that business should take note of is the introduction of the Type 13 Regulated Activity (RA13) to the Securities and Futures Ordinance, and the consequential changes to its subsidiary legislation and various SFC codes and guidelines.

Katherine Liu, head of fintech and financial services at Stephenson Harwood, said the bill was gazetted and the licensing regime is anticipated to take effect on 2 October 2024.

Under RA13, top-level depositaries of collective investment scheme (CIS) authorised by the Securities and Futures Commission (SFC) will be required to get a licence or be registered with the statutory body, unless exempted.

“A depositary’s delegates will be exempted from the licensing regime, as will any depositary providing depositary services to any registered mandatory provident fund scheme (MPF scheme) or a constituent fund of such MPF scheme or any approved pooled investment fund not offered to retail investors,” Liu explained.

HKMA proposals

Apart from the SFC, another institution that has proposed a licensing regime is the Hong Kong Monetary Authority (HKMA), but for stablecoin players.

HKMA’s proposal is that anyone who conducts or actively markets the following activities will require a licence: establishment and maintenance of the rules governing an in-scope stablecoin arrangement; issuance, creation and destruction of in-scope stablecoins; stabilisation and reserve management arrangements of in-scope stablecoins; and provision of services that allow storage of the users' cryptographic keys which enable access to the users’ holdings and management of in-scope stablecoins.

Another proposal from the HKMA which Liu believes will affect business is the amendment to the three-tiered banking system.

HKMA intends to simplify the four-decade old system into a two-tiered system instead with Licensed Banks (LB) being “first-tier institutions” and Restricted Licensed Banks (RLB) and Deposit-taking Companies (DTC) categorised as “second-tier institutions.”

HKMA also intends to provide a five-year transition period for existing DTCs to upgrade to RLBs or LBs. “HKMA will actively encourage or facilitate DTCs to upgrade so that they can carry out business with their own strategies whilst minimising the potential impact on existing customers,” Liu said.

Going sustainable

The next set of bills will affect a wider breadth of industries, but more so the food and beverage industry and hospitality industry.

On 22 April 2024, Hong Kong will carry out the first phase of the implementation of the Product Eco-responsibility Bill 2023, an amendment which aims to regulate the sale and provision of disposable plastic tableware for takeaway and dine-in customers, as well as the sale and provision of other plastic products.

The bill categorises plastics into two: disposable plastic tableware and other plastic products. Disposable plastic tableware includes expanded polystyrene tableware, straws, stirrers, cutlery, plates which fall under Sub-Category 1.

Disposable plastic tableware under Sub-Category 2 include those in small size and difficult to recycle or to which there are mature alternatives like cups, cup lids, food containers and food container covers.

“In the first phase regulation, vendors are prohibited to sell Sub-Category 1 to end customers, to provide Sub-Category 1 to both takeaway and dine-in customers, and to provide Sub-Category 2 for dine-in customers,” Tsang explained.

Tsang said the adoption of the bill banning plastic sale and use will not only improve their reputation and appeal to ESG conscious consumers and investors, but also reduce waste bills.

In relation to waste bills, Hong Kong will also implement a bill that aims to push sectors to manage their waste better.

The Waste Disposal (Charging for Municipal Solid Waste) Bill 2018, another amendment, is set for implementation on 1 April 2024. It introduces a charging scheme for municipal solid waste (MSW) to promote waste reduction and recycling.

The bill proposes two charging modes for MSW: by quantity through designated bags and labels and by weight through “gate-fee.”

“The first charging mode applies to MSW collected by the Food and Environmental Hygiene Department through refuse collection vehicles, refuse collection points, and bin sites; and MSW collected by private waste collectors using refuse collection vehicles with rear compactors,” said Tsang.

Under this charging model, businesses need to use pre-paid designated bags, which will be of nine different sizes from 3-litre up to 100-litre to cater.

Should the designated bags be oversized, members of the public must affix a designated label on each piece of oversized waste before disposal, and a uniform rate of $11 per designated label will be charged.

“Similar to the analysis above under the Product Eco-responsibility (Amendment) Bill 2023, charging for waste encourages the ‘waste less, pay less’ principle which helps businesses to positively contribute to their ESG goals and enhance their performance in this respect,” Tsang said.