Hong Kong’s midshore status plays an important role in its economic prosperity. Hong Kong tax law has long treated offshore income as foreign income. Hong Kong-registered companies doing business outside the country effectively did not pay taxes.
In modern realities, it has become more difficult to use tax-free territories and midshores for tax optimization. Hong Kong authorities were forced to reconsider their attitude towards offshore income.
The tax exemption remains in the legislation, but the conditions for applying the benefit have become stricter. The main requirement is a real economic presence in Hong Kong (substance).
On 26 June 2023, the Hong Kong Inland Revenue Authority issued a ruling – the Internal Revenue Ordinance. It was possible to clarify and specify the legal interpretation of the most important provisions of the new tax exemption regime on income from foreign sources.
There was actually the introduction of tax obligations on offshore passive income.
Now, in most cases, such income will be treated as internal, as a result of which the companies receiving it will have tax obligations. It is important to clarify that the innovation in its current version applies only to entities of transnational corporations.