Enhancing Tax Certainty for Business Facilitation

Hong Kong is a metropolis ideal for investors and businesses thanks to its long-standing low, simple and transparent tax regime, which creates a favourable environment for investment and business activities such as business expansion, restructuring and listing.  The gazettal of the Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023 (the Bill) on 20 October marks a further step in enhancing Hong Kong’s advantage in tax certainty and, in turn, providing facilitation to enterprises intending to do business and invest here.

The Bill will introduce a tax certainty enhancement scheme (the Scheme), whereby onshore gains on disposal of equity interests will be regarded as non-taxable if they satisfy the specified criteria.  Such gains will therefore not be subject to the current approach, under which taxability is determined by the Inland Revenue Department (IRD) after considering the relevant facts and circumstances of the case.

Specifically, the gains will be treated as capital in nature and not chargeable to profits tax if the investor entity concerned has held certain equity interests in the investee entity throughout the continuous period of 24 months immediately before the date of disposal and those interests amount to at least 15% of the total equity interests in the investee entity.

The Scheme will apply to the gains accrued in the basis period for a year of assessment beginning on or after 1 April this year and where the disposal of equity interests occurs on or after 1 January next year.

As compared to similar schemes in other tax jurisdictions, the tax certainty enhancement scheme in Hong Kong has the following four comparative advantages –

First, a wide range of businesses and equity interests is covered.  In respect of the investor entity disposing of equity interests, regardless of whether it is a company, a partnership or a trust, the Scheme applies if it is a legal person (not including a natural person) or an arrangement that prepares separate financial accounts.  The Scheme also covers different forms of equity interests, such as ordinary shares, preference shares, and partnership interests.

Second, the threshold of the Scheme is low.  The primary threshold of the Scheme is met if the investor entity has held at least 15% of the equity interests in an investee entity throughout the period of 24 months before disposal.

Third, flexible arrangements are in place.  The Scheme applies if the total equity holding percentage of 15% is met by aggregating the interests held by the investor entity and its closely related entity/entities.  Moreover, the Scheme allows disposal of equity interests in tranches and covers disposal in tranches within a 24-month period.

Fourth, the Scheme has no expiry date, providing the greatest tax certainty for enterprises.

The Scheme, characterised by its clear and simple rules, will enhance tax certainty, reduce tax risks, lower compliance cost and expedite tax determination for current and potential investors, thereby increasing Hong Kong’s tax competitiveness.  The Scheme will also tie in with the forthcoming company re-domiciliation regime introduced by our Bureau.  By enabling companies to expand or restructure their business through disposal of equity interests, the Scheme will facilitate the re-domiciliation of companies incorporated overseas to Hong Kong, hence the enhancement of Hong Kong’s position as an international business and investment hub.

The Financial Secretary announced in the Budget Speech this February that the Government would put forward an enhancement proposal regarding the taxability of onshore gains on disposal of equity interests.  Thereafter, the Financial Services and the Treasury Bureau, along with the IRD, devised a proposed scheme for enhancing tax certainty, and actively consulted the industry, including over 80 business associations and industry organisations.  Thanks to the valuable feedback from stakeholders, we have formulated the Scheme to further improve Hong Kong’s business environment, and drawn up the Bill which was introduced into the Legislative Council for First and Second Readings on 1 November.  I hope that the Bill will have the support of Members, so as to allow early implementation of this business-friendly taxation measure.

1 Nov 2023