Hong Kong Foreign-Sourced Income Exemption (FSIE) Advance Rulings No. 68 and 69

Starting from January 1, 2023, Hong Kong companies that are part of multinational enterprises (MNEs) can continue to enjoy tax exemptions on foreign-sourced dividends, interest, and disposal gains under the Foreign-Sourced Income Exemption (FSIE) regime, provided they meet the substantial activities requirement. This requirement mandates that Hong Kong companies must conduct strategic decision-making and assume risks in Hong Kong, supported by adequate staff and operating expenditures. However, the tax law does not provide detailed guidance, leaving taxpayers uncertain about whether their businesses meet the FSIE’s economic substance requirements.

To improve tax certainty for taxpayers, the Hong Kong Inland Revenue Department (IRD) has been publishing advance ruling cases on its website, offering insights into its stance on specific scenarios. An advance ruling allows a taxpayer to seek the IRD’s opinion on a tax matter before filing, essentially saying:

"Dear IRD, I’m not entirely sure how to interpret the tax implications of this situation. Here’s my case, my interpretation of the tax implications, and the supporting arguments. Could you let me know if you agree?"

If the IRD agrees with the taxpayer’s interpretation, it will issue an advance ruling, which binds the IRD for the next five tax years unless there are changes in tax law or the taxpayer’s circumstances deviate from those described in the application. When the IRD considers a case particularly representative, it may choose to publish the ruling to guide other taxpayers. Taxpayers facing similar circumstances can then anticipate a similar ruling from the IRD.

The IRD has published two FSIE-related advance rulings, numbered 68 and 69. Let’s take a closer look at these cases.