A Hong Kong holding company no longer receives foreign dividends tax-free by default.

Since 1 January 2023 a Hong Kong company that belongs to a multinational group and receives a dividend from abroad is taxed on it at 16.5% when the money reaches Hong Kong, unless it meets one of two statutory tests. For a pure holding company the first test opens with a sentence written for the Companies Registry: every applicable registration and filing requirement, complied with in the year the dividend accrues.

What changed

Hong Kong taxes profits arising in or derived from Hong Kong; a foreign dividend received by a Hong Kong parent sat outside that charge.

The 2022 amendment ordinance, in force since 1 January 2023, inserted a deeming rule: under section 15I of the Inland Revenue Ordinance, specified foreign-sourced income received in Hong Kong by an MNE entity carrying on business in Hong Kong is regarded as arising in Hong Kong, and as not arising from the sale of capital assets even where it does. It covers interest, dividends, IP income and gains on the disposal of equity interests and, since 1 January 2024, gains on the disposal of any other property.

An MNE entity belongs to a group with at least one member or permanent establishment outside the jurisdiction of its ultimate parent (section 15H). Under the same section’s definition of entity, which excludes a natural person, a company held directly by an individual is outside the regime. A sum is received in Hong Kong when it is remitted or brought there, used to settle a debt of a Hong Kong business, or used to buy movable property brought into Hong Kong (section 15H(5)).

The regime is Hong Kong’s answer to the European Union, which placed it on the watchlist on tax co-operation on 5 October 2021 and removed it on 20 February 2024 (note 1).

What it means for your holding company

Section 15K gives the first exit, the economic substance requirement, in a lighter form for a pure equity-holding entity: one that only holds equity interests in other entities and only earns dividends, disposal gains and income incidental to them. It has three limbs, measured in the basis period in which the income accrues:

the entity complies with every applicable registration and filing requirement under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the Limited Partnerships Ordinance (Cap. 37), the Business Registration Ordinance (Cap. 310) and the Companies Ordinance (Cap. 622);
the holding and managing of its equity participations is carried out in Hong Kong by the entity, or arranged by the entity to be carried out in Hong Kong;
in the Commissioner’s opinion, the entity has adequate human resources and premises for that activity.

The first limb moves a company-secretarial question into the tax computation. The annual return of a private company is due within 42 days after each anniversary of incorporation (section 662 of the Companies Ordinance). A late return costs HK$870 to HK$3,480 instead of HK$105 and is an offence carrying up to HK$50,000 and HK$1,000 a day. Section 15K(2)(a)(i) asks whether the requirement was complied with, not how large a breach was; whether a return delivered late but within the basis period counts as compliance is written neither in the Ordinance nor in the IRD’s guidance. The same applies to the notices of change of director, secretary and registered office, due within 15 days, and to the business registration renewal.

The significant controllers register is a separate duty, in force since 1 March 2018. Every Hong Kong-incorporated company other than a listed one records the persons who hold, directly or indirectly, more than 25% of its shares or voting rights, or otherwise control it; keeps it in Hong Kong with a designated representative; enters particulars within 7 days; and opens it to law enforcement officers on demand. The fine is at level 4, HK$25,000, plus HK$700 a day. Neither the IRD’s FAQ nor its examples say whether keeping this register counts under section 15K, and there is no practice note on the regime.

The IRD’s illustrative examples test the second and third limbs; in both, the company already has a provider for its filings under the two Ordinances. A holding company with one nominee director, whose decisions on its participations are taken by shareholders and directors outside Hong Kong, fails (Example 24). One that outsources the holding and managing of its participations to a Hong Kong provider and can show it monitors the provider passes (Example 25); an outsourcing agreement that sets out the activities and the monitoring is accepted as the record (FAQ 23 and 27). The IRD sets no minimum number of staff or floor area: adequacy is the Commissioner’s opinion.

Section 15M gives the second exit, the participation requirement, which does not depend on substance: the Hong Kong company has continuously held not less than 5% of the equity interests in the investee for not less than 12 months immediately before the dividend accrues. Section 15N attaches three conditions. The dividend, or the profits out of which it is paid, must be subject in the source territory to a tax of substantially the same nature as profits tax, or to a qualified domestic minimum top-up tax, and the highest rate of that tax must reach the reference rate of 15%, which the Secretary for Financial Services and the Treasury may change by notice (section 15N(2) and (6) to (8)); the test reads the rate, not the tax actually paid, so a 10% withholding in a jurisdiction with a 20% corporate rate passes (Example 36), as does the Mainland’s 25% enterprise income tax, while a top-up tax collected elsewhere under an income inclusion or undertaxed profits rule does not count. The dividend must not be deductible, to any extent, in computing the tax on the subsidiary’s profits (section 15N(3)). And obtaining a tax benefit must not be the main purpose, or one of the main purposes, of the arrangement (section 15N(4)). Where any of the three takes the exemption away, the similar tax payable in the source territory on the dividend and on its underlying profits may be allowed, in accordance with sections 50, 50AAA and 50AAAB, as a credit against the Hong Kong tax (section 15N(5)).

What to do, and when

First, the holding company’s Companies Registry file for the current basis period: the annual return and its delivery date, the notices filed, the business registration certificate, the significant controllers register and its designated representative. If a filing is late, the substance route is at risk for that year and the participation route is the one that matters.

Next, a written record of where the decisions on the participations are taken and by whom and, if by a Hong Kong service provider, of what the agreement says about monitoring. The IRD’s examples turn on that document, not on headcount.

Last, the advance ruling on the economic substance requirement, on form IR1297: up to five years of assessment and, once granted, no tracking of the receipt of each dividend (FAQ 37 and 38). The income is reported in supplementary form S19 with the profits tax return; a company not yet issued with a return notifies the Commissioner within four months after the end of the basis period in which the income is received (section 15J).

A holding company incorporated elsewhere can, since 23 May 2025, re-domicile into Hong Kong under Part 17A of the Companies Ordinance, and arrives under these obligations from the re-domiciliation date.

For a pure holding company, the substance test begins with the filings, not with the staff.

In brief

Since 1 January 2023 foreign dividends, interest and equity disposal gains received in Hong Kong by a group company are taxable unless the substance or the participation test is met; since 1 January 2024 the gain on any asset.

For a pure equity-holding entity the substance test requires every applicable filing under the Companies and Business Registration Ordinances, the activity carried out or arranged in Hong Kong, and adequate people and premises; one nominee director fails, a monitored Hong Kong service provider passes.

The participation test needs 5% held for 12 months and a headline tax of at least 15% on the dividend or its underlying profits. An advance ruling on substance covers up to 5 years of assessment.

Sources. Inland Revenue Ordinance (Cap. 112), Part 4, Division 3A, as inserted by the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (Ord. No. 17 of 2022), in force 1 January 2023, and amended by the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 (Ord. No. 32 of 2023), in force 1 January 2024, and by Ord. No. 21 of 2025 (section 15N(6) and (9)): sections 15H(5), 15I, 15J, 15K, 15M and 15N, read in the consolidated text. Inland Revenue Department, Foreign-sourced Income Exemption: FAQ 19, 23, 27, 37 and 38; Illustrative Examples 24, 25 and 36; Advance Ruling on Compliance with the Economic Substance Requirement (form IR1297); Notes and Instructions for Form BIR51, item 9.19 (supplementary form S19). Companies Ordinance (Cap. 622): section 662 (annual return) and Part 12, Division 2A (significant controllers register), in force 1 March 2018; Part 17A (re-domiciled companies), in force 23 May 2025. Companies Registry, Guideline on the Keeping of Significant Controllers Registers by Companies, paragraphs 2.7.2, 5.2.2 and 9.1.1; Filing Requirements of a Local Limited Company after Incorporation (PAM 5E, May 2025); Company Re-domiciliation Regime, Frequently Asked Questions (2025). Enterprise Income Tax Law of the People’s Republic of China, as amended 29 December 2018, article 4. Government of the HKSAR, press releases of 5 October 2021 and 20 February 2024 on the EU watchlist on tax co-operation. Term: pure equity-holding entity (純股權持有實體).

Note 1. Why the rule is written the way it is. The European Union placed Hong Kong on its watchlist on tax co-operation on 5 October 2021, and the Government undertook the same day to amend the Inland Revenue Ordinance by the end of 2022 while keeping the territorial source principle. The first amendment took effect on 1 January 2023, the second, on disposal gains, on 1 January 2024, and the EU removed Hong Kong on 20 February 2024, recording that the regime met its requirements. Source: press releases of the Government of the HKSAR, 5 October 2021 and 20 February 2024.

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This article is general information, not legal advice; it reflects the law as at the date shown.