29 Feb 2024
Currently, there is no capital gain tax in Hong Kong. Hence, gains or profits, arising in or derived from Hong Kong, on disposal of equity interests that are of capital nature are not subject to profits tax. The Inland Revenue Department (IRD) adopts a “badges of trade” approach to determine the nature of onshore disposal gains. With the Tax Certainty Enhancement Scheme (the Scheme) for onshore gain on disposal of equity interest comes into effect on January 1, 2024, the gains made by an investor entity will be treated as capital in nature and not chargeable to tax if the investor entity has held certain equity interests in the investee entity throughout the continuous period of 24 months immediately before the date of disposal and those equity interests having been held amount to at least 15% of the total equity interests in the investee entity, subject to certain conditions imposed. This obviates the need for assessing the taxability of such gains based on the “badges of trade” approach.
Key feature of the Scheme
Eligible investor entity and investee entity | • must be a legal person (not including a natural person) or an arrangement that prepares separate financial accounts, such as a partnership, a trust and a fund.
• applies to all investor entities irrespective of whether they are Hong Kong resident or non-Hong Kong resident, whether they are incorporated or established in Hong Kong or outside Hong Kong, or whether they are listed or non-listed entities. |
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Eligible equity interest | • applies to onshore disposal gains arising from disposal of different forms of equity interests, such as ordinary shares, preference shares and partnership interests, provided that the equity interest carries rights to the profits, capital or reserves of the investee entity and is regarded as equity from the perspective of the investee entity under applicable accounting principles. | ||||||
Equity holding conditions | • the investor entity has held the equity interests throughout the continuous period of 24 months immediately before the date of disposal of such interests (reference period) ; and
• the investor entity has held the equity interests at least 15% of equity interests • allowing qualifying interests to be measured on a group basis. |
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Disposal of equity interests in tranches | • applies first-in first-out basis when determining whether the equity holding conditions are met for a specified disposal.
• after disposal of each tranche, the investor entity’s equity holding in an investee entity may fall below the 15% threshold such that the equity holding conditions for the subsequent disposals of the remainder of the long-held interests (long-held left-overs) cannot be met. To cater for such long-held left-overs, the Scheme provides for an exception to the equity holding conditions more earlier disposal(s) if: |
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Exclusions | • Excluded investor entity – does not apply to any equity interests disposed of by an investor entity which is an insurer. However, entities (e.g. subsidiaries of the insurers) that are not chargeable to profits tax in accordance with the relevant provisions would not be excluded from the Scheme. • Excluded equity interests |
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An investor entity can elect in writing by providing the requisite information in its profits tax return for the year of assessment in the basis period of which the disposal occurs.
For more information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk