Oct 17, 2023
Acquisition and disposal of equity interests are common during the process of business expansion and restructuring. The Financial Secretary announced in the 2023-24 Budget Speech that the Government will put forward an enhancement proposal to provide greater upfront certainty of non-taxation of Onshore Disposal Gains that are of capital nature. The Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023 (the Amendment Bill) was gazetted on 20 October 2023 to provide for a tax certainty enhancement scheme for Onshore Disposal Gains. Under the Scheme, any Onshore Disposal Gain derived by an eligible investor entity meeting specified conditions is to be regarded as capital in nature and not chargeable to profits tax, and there is no need to conduct the “badges of trade” analysis.
The Scheme applies to Onshore Disposal Gains in relation to any disposal occurs on or after 1 January 2024 and accrues in the basis period for a year of assessment beginning on or after 1 April 2023.
The application of the Scheme is not compulsory and taxpayers can choose whether to apply or not. In the case where the Scheme does not apply to an Onshore Disposal Gain for the reason that the investor entity does not elect for the Scheme or that the Onshore Disposal Gain is excluded from the Scheme, the status quo will apply, i.e. whether the Onshore Disposal Gain is capital or revenue in nature will continue to be determined based on the “badges of trade” analysis.
In respect of onshore losses on disposal of equity interests, the Scheme will not affect the existing tax rule under which its nature is determined based on the “badges of trade” analysis.
More information can be obtained from the Inland Revenue Department website by clicking IRD WEBPAGE