Hong Kong: Procedure for confirming economic substance under revised exemption regime

The Inland Revenue Department (IRD) announced that it will introduce a procedure that allows taxpayers to seek an opinion from the Commissioner of Inland Revenue (CIR) on their compliance with the economic substance requirements under the revised foreign-sourced income exemption regime. 

The Hong Kong government has announced its intention to introduce a revised foreign-sourced income exemption regime effective from 1 January 2023.

To help businesses in Hong Kong better prepare for the changes brought by the revised exemption regime before it becomes effective, the IRD is going to introduce an interim arrangement under which taxpayers can seek the CIR’s opinion on whether they are in compliance with the economic substance requirements under the revised exemption regime once the relevant tax bill is published, which is expected to occur in late October or early November of 2022. 

The key features of the procedure are expected to include:

• The IRD would request certain information from the taxpayer to process the application, such as (1) the details of specified economic activities carried out in Hong Kong, (2) the number of qualified employees, (3) the amount of operating expenditures incurred, (4) the amounts of turnover and profits and (5) the details of any outsourcing arrangements.  
• The CIR will give an opinion on the taxpayer’s compliance with the economic substance requirements based on the draft legislation in the tax bill and the information provided, normally within one month after the application and complete information are received.  
• The CIR’s opinion would not constitute an advance ruling made under Section 88A of the Inland Revenue Ordinance. The CIR will, however, apply the enacted economic substance requirements according to its opinion provided that the arrangements and parameters stated in the opinion are adhered to and the enacted economic substance requirements are substantially the same as those proposed in the tax bill. The taxpayer may rely on the opinion to report on its compliance with the enacted economic substance requirements in its tax return.
• Applications may be made to the IRD during the period between the publication of the tax bill and the effective date of the corresponding ordinance. After the law becomes effective, the interim arrangement will no longer be available, and taxpayers can apply for an advance ruling on their compliance with the enacted economic substance requirements if necessary. 
• The application procedures and the detailed information required will be announced on the IRD’s website when the tax bill of the revised exemption regime is published.  
• Taxpayers can contact the IRD with any questions about this new interim procedure.

For more information, contact a KPMG tax professional:

David Ling | davidxling@kpmg.com