Hong Kong’s Passes Inland Revenue (Amendment) Bill 2023 To Enhance Tax Certainty

The Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023 was officially published in the Gazette on December 25, 2023.

In this article, we aim to provide the overview of the bill, its key provision, and eligibility criteria.

Overview of the Bill

The Bill gives effect to the Tax Certainty Enhancement Scheme (the Scheme) for Onshore Disposal Gains.

Under certain conditions outlined in the Scheme, onshore disposal gains earned by eligible investor entities meeting specified conditions can be treated as capital in nature and are exempt from taxation in Hong Kong.

Scope of the Scheme

The TCES applies to Onshore Disposal Gains related to disposals occurring on or after January 1, 2024. It also covers gains earned during the basis period starting on or after April 1, 2023.

Participation of the Scheme

Taxpayers have the choice to opt for the TCES or continue using the traditional “badges of trade” approach as per their decision or if they do not meet the specified conditions.

Eligibility criteria for the Scheme

To qualify for the TCES and have onshore disposal gains treated as “capital in nature” and not chargeable to tax, investor entity must meet all criteria below:

• The investor entity must be a legal entity (not an individual) or an arrangement maintaining separate financial accounts, including partnerships, trusts, and funds.
• The onshore disposal gains must result from transactions occurring on or after January 1, 2024, or be earned during the basis period for the year of assessment starting on or after April 1, 2023.
• The investor entity must have maintained a minimum of 15% equity interest in the investee entity, referred to as the “15% ownership threshold,” for a continuous period of 24 months leading up to the disposal date (the reference period).

The bill also introduces flexible measures, such as allowing the aggregation of equity interests held by the investor entity and its closely related entities to meet the 15% threshold. Additionally, it permits the disposal of equity interests in multiple tranches.

For more comprehensive information, please refer to the Notification and the Tax Certainty Enhancement Scheme available on the IRD’s website.