What is FSIE in Hong Kong
FSIE is the framework that lets certain foreign‑sourced income be excluded from Hong Kong profits tax. It covers four main income types:
- Dividends from foreign subsidiaries
- Interest from cross‑border lending or treasury activities
- IP income such as royalties and licensing fees
- Disposal gains from selling foreign assets or shareholdings
FSIE isn’t automatic. You must show where the income came from, how it was produced, and which category test applies.
Offshore profits tax claims: what they cover
An offshore profits tax claim says that specific profits were generated outside Hong Kong and therefore should not be taxed in Hong Kong. Tax authorities look at:
- Where the profit‑generating activities happened (core income‑generating activities, CIGAs)
- Who made the key decisions and where they took place
- Where contracts were negotiated and executed
- Whether the company actually had staff, premises, and spending that match the claimed activities
FSIE adds category‑based tests on top of these source questions, so the factual record matters.
What changed in 2025: the three tests
Economic substance test
- Core activities must be carried out where the claiming entity operates.
- You need real people, premises, and recorded operations that match revenue and risk.
- Outsourced functions are allowed if they’re properly documented and supervised.
Participation requirement (dividends and disposal gains)
- Requires a meaningful ownership stake and a holding period that shows investment intent.
- Short‑term trading or artificial arrangements will likely fail this test.
Nexus requirement (IP income)
- The exemption is linked to qualifying R&D spend.
- The greater the qualifying R&D relative to total IP costs, the stronger the nexus claim.
- Acquired IP and passive ownership without R&D will reduce exemption scope.
Practical note
Advance rulings are used more often for certainty in complex cases, and banks and auditors are checking for consistency across documents.
Common scenarios: taxable vs exempt
|
Scenario |
Likely outcome |
Quick checklist |
|
Dividend from overseas subsidiary |
Possibly exempt |
Shareholding threshold; holding period; substance of oversight |
|
Interest from loans managed overseas |
Possibly exempt |
Offshore credit approvals; loan docs; risk management evidence |
|
Disposal gain on foreign subsidiary |
Possibly exempt |
Transaction decisions outside HK; participation evidence |
|
Royalties for software licensing |
Partly exempt |
Nexus: R&D ledger and qualifying spend |
|
Disposal of offshore real estate |
Mixed |
Source analysis; asset management substance |
|
Management fees billed to affiliates |
Mixed |
Where services are performed; people and records |
Use these as directional outcomes; actual result depends on documentation and facts.
Compliance checklist: what to keep in your FSIE dossier
Create a live FSIE dossier that maps each income stream to supporting evidence.
Corporate governance
- Board minutes and resolutions showing where decisions were made
- Attendance records and decision logs
Substance evidence
- Employment contracts, payroll, and time records for staff performing CIGAs
- Leases, utility bills, and premises photos or invoices
- Org charts and job descriptions tying staff to CIGAs
Transactional records
- Contracts, invoices, and client correspondence proving offshore performance
- Bank statements showing foreign receipts and payment trails
- Deal memos, valuations, and closing documents for disposals
Participation and nexus support
- Share registers, share purchase records, and proof of holding periods
- R&D ledgers, supplier invoices, source code records, and time sheets for IP work
- IP assignment and licence agreements with cost breakdowns
Tax and transfer pricing
- Transfer pricing reports for intra‑group charges
- Copies of any advance ruling applications and replies
- Local filings or tax payments in relevant foreign jurisdictions
Timestamp everything and keep a simple index mapping documents to the specific FSIE test they support.
Practical examples (short and realistic)
- Dividend exemption for a holding company
A HK holding company has a documented multi‑year investment policy, board minutes showing oversight and investment decisions, and a small local team reviewing investments. Dividend receipt may qualify under participation and substance tests. - Disposal gain on a foreign trading subsidiary
A sale negotiated and executed by a deal team outside HK, with funds received overseas and board approvals recorded offshore. If the participation test and substance are present, the gain could be treated as foreign. - IP royalties for a software company
The company keeps an R&D ledger that separates qualifying development from purchased code. Royalties are eligible in proportion to qualifying R&D spend under the nexus rule.
Risks and common mistakes
- Weak or inconsistent documentation across tax, audit, and bank onboarding files
- Nominal substance (addresses or staff that don’t match operational scale)
- Not mapping specific documents to each income category/test
- Ignoring transfer pricing or mispricing intra‑group services
- Using circular or artificial structures purely for tax advantage
Mitigate these by keeping a single, consistent FSIE narrative and getting early rulings for borderline cases.
Strategic steps to strengthen claims
- Build genuine operations where you claim activity—hire people, establish premises, and record real expenditure.
- Split roles across entities so holding, treasury, and IP activities match real functions.
- Keep a central FSIE dossier that every adviser (auditor, banker, tax counsel) can reference.
- Apply for advance rulings for complex or high‑value transactions.
- Align bank KYC, audited accounts, and tax positions to the same facts.
- Track substance KPIs: headcount, R&D spend ratio, office days, and decision logs.
FAQ
Q: Do offshore profits remain tax‑exempt in Hong Kong in 2025?
A: They can be exempt if they meet FSIE criteria and source rules; exemption depends on substance, participation, or nexus tests and supporting documents.
Q: What documents are needed for an FSIE claim?
A: Board minutes, employment and payroll records, leases and utility bills, contracts and invoices, bank statements, share registers, R&D ledgers, transfer pricing reports, and any advance ruling correspondence.
Q: How does the participation exemption work?
A: It requires meaningful ownership and a holding period that shows investment intent; short holding periods or engineered share transfers can fail the test.
Q: What is the nexus requirement for IP income?
A: The nexus rule links exemption to qualifying R&D spend; exemption is often proportionate to the qualifying R&D relative to total IP costs.
Q: Can disposal gains be exempt under FSIE?
A: Yes, if participation and substance tests are met and transaction decisions and receipts are clearly located outside Hong Kong.
Q: Are advance rulings necessary?
A: Not required, but they provide certainty for complex or high‑value cases and reduce audit risk.
Q: How do I prove economic substance for FSIE?
A: Show real people performing CIGAs, premises and operating costs, decision logs outside Hong Kong, and execution of transactions offshore.
Key takeaways
- FSIE in 2025 rests on three pillars: economic substance, participation, and nexus.
- Real activity and consistent documentation matter more than ever.
- Build a live FSIE dossier aligned across tax, audit, and banking to reduce risk.
- Advance rulings and early planning improve certainty for complex cases.
Related Hong Kong Business Guides
Contact us for an FSIE compliance review, a tailored documentation checklist, or help preparing an advance ruling application.