Advance Ruling on Compliance with the Economic Substance Requirement (ESR) under the Foreign-sourced Income Exemption (FSIE) Regime
On 1 January 2023, the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022, which amended the provisions in relation to the FSIE regime under the Inland Revenue Ordinance (Cap. 112) (IRO), came into operation. Under the new FSIE regime, certain foreign-sourced income derived by a member of an MNE group (MNE entity) carrying on a trade, profession or business in Hong Kong is to be regarded as arising in or derived from Hong Kong and chargeable to profits tax when it is received in Hong Kong. Three types of specified foreign-sourced incomes, namely interest, dividend and gain or profit derived from the sale of equity interests in an entity (disposal gain), will continue to be exempt from profits tax if the recipient entity meets the ESR specified in section 15K of the IRO.
To obtain tax certainty and reduce compliance burden, MNE entities may apply to the Commissioner for advance rulings on their compliance with the ESR.
Information and procedures for the application of advance ruling on compliance with the ESR are as follows:
Who can Apply
You can apply for a ruling on compliance with the ESR if the following two conditions are met─
- you are an MNE entity carrying on a trade, profession or business in Hong Kong; and
- specified foreign-sourced interest, dividend or disposal gain accrues to you on or after 1 January 2023.
An application can be made─
- on an individual application basis by an MNE entity (the Applicant) for itself; or
- on a group application basis by an MNE entity (i.e. the Applicant) for itself and other entities of the same MNE group in Hong Kong (the Other MNE Entities) provided that all conditions for the group application are met.
Conditions for group application are as follows─
- the specified economic activities of the Applicant and the Other MNE Entities are outsourced to one outsourced entity under a single service agreement (the Service Agreement);
- the Applicant or its representative must have the written consents of the Other MNE Entities for the group application;
- a copy of the Service Agreement should be submitted together with the application; and
- the written consents must be supplied to the Commissioner on request.
When to Apply
You can make an application at any time. The application may cover a maximum of five years of assessment commencing from the year of assessment 2022/23 or any subsequent years.
How to Apply
- Application for Advance Ruling (IR1297)
- Data Form – Economic Substance Requirement of the Foreign-sourced Income Exemption Regime (IR1297B)
- Annex to IR1297B (Group Application) (if applicable)
Tips for completing forms and submitting documents for application for a ruling SOLELY on ESR─
- In relation to IR1297,
- tick “No” for the question “Is this a joint application?” in Part A even you intend to file an application on a group basis as described above or submit the application with those of other MNE entities in one bundle;
- tick Box 6 “Economic Substance Requirement of the Foreign-sourced Income Exemption (FSIE) Regime” in Part C; and
- a draft ruling is not required to be provided to the Commissioner.
- In relation to IR1297B, additional information required for completing the form includes─
- whether the specified economic activities are carried out in Hong Kong;
- whether the specified economic activities are outsourced to other entities in Hong Kong;
- if the specified economic activities are outsourced, whether the outsourced activities are carried out in Hong Kong and monitored by the MNE entity;
- total number of qualified employees who carry out the specified economic activities in Hong Kong;
- qualification of the employees who carry out the specified economic activities in Hong Kong; and
- amount of operating expenditures incurred for carrying out the specified economic activities in Hong Kong.
Documents to be included in an application─
|Documents||Individual application||Group application|
|Application form (IR1297)||✓||✓|
|Data form – Economic Substance Requirement of the FSIE regime (IR1297B)||✓||✓|
|Annex to IR1297B (Group Application)||N/A||✓|
|Copy of service agreement in respect of outsourced activities||✓
(for outsourcing case only)
An MNE group may submit applications in respect of all relevant MNE entities of the same MNE group in one bundle. The submission should be enclosed with a covering letter containing the following information:
- the name and Inland Revenue Department file number of each of the MNE Entities covered in the bundle; and
- the name of the MNE entity being designated as the lead applicant together with details of the contact person who will serve as the primary point of contact on behalf of all the MNE entities.
A set of IR1297, IR1297B and Annex to IR1297B (for group application only) should be completed by each of the MNE entities covered in the bundle.
You should send the completed application form, together with the required documents, to:
Deputy Commissioner of Inland Revenue (Technical)
15/F, Inland Revenue Centre
5 Concorde Road, Kai Tak, Kowloon, Hong Kong
It normally takes one month to process an application. Where the information available is not sufficient to issue a ruling, you will be requested to supply further particulars.
For further information on advance ruling, please refer to Departmental Interpretation and Practice Notes No. 31 – Advance Rulings.