The offshore claim is the oldest habit in Hong Kong tax practice. A company carries on business in Hong Kong, earns profits that it says arose elsewhere, and files on the basis that those profits fall outside the charge. For decades this worked or failed on a single question, which was where the profit-producing operations were carried out.
That question has not gone away. What has changed is that it is no longer the only question. Since 2023 a second regime sits on top of the territorial principle and can bring foreign-sourced income into charge even where the source analysis is sound. It applies only to members of multinational groups, which is precisely what a Hong Kong company with a Dutch parent is, by definition and regardless of size.
What the offshore claim still is
The basic charge is unchanged. Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits arising in or derived from Hong Kong, excluding profits from the sale of capital assets. There is no distinction between residents and non-residents. Profits derived from abroad by a resident escape the charge, and a non-resident remains taxable on profits sourced in Hong Kong.
The rates are two-tiered. For corporations, 8.25 per cent applies to assessable profits up to 2,000,000 Hong Kong dollars and 16.5 per cent to the excess. For unincorporated businesses the equivalent figures are 7.5 and 15 per cent. Those are the rates that make the source question worth arguing.
The Inland Revenue Department has been explicit that the new regime does not disturb this analysis. The determination of the source of profits is not affected by the economic substance requirement introduced alongside it. The two are considered in separate contexts, source continuing to be determined by the ordinance and by judicial precedent. A group that treats them as one exercise will get both wrong.
What the FSIE regime added
The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 was enacted on 23 December 2022 and took effect from 1 January 2023. It created a deeming provision for four categories of specified foreign-sourced income accrued to and received in Hong Kong by a member of a multinational group: dividends, interest, income derived from the use of intellectual property, and gains on the sale of equity interests in an entity other than partnership interests.
The Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 was enacted on 8 December 2023 and took effect from 1 January 2024. It expanded the scope of assets in relation to foreign-sourced disposal gains to cover all types of property. The exception requirements were left unchanged, and a new intra-group transfer relief was introduced to defer the charge where property is transferred between associated entities, subject to specific anti-abuse rules.
The mechanics matter as much as the scope. Where the income falls within a category and the recipient does not meet the applicable exception, the income is deemed to be sourced from Hong Kong and chargeable to profits tax, irrespective of the entity’s revenue or asset size. The exception is tested in the year the income accrues; the charge, if the exception fails, arises in the year the income is received. Income is regarded as received in Hong Kong when it is remitted to or brought into Hong Kong, when it is used to satisfy a debt incurred in respect of a trade, profession or business carried on in Hong Kong, or when it is used to buy movable property that is then brought into Hong Kong.
Why a Dutch parent is the trigger
The regime applies only to members of multinational groups, on the stated reasoning that such groups carry the higher base erosion and profit shifting risk. The definitions in the ordinance are wide. A multinational group is a group that includes at least one entity or permanent establishment not located or established in the jurisdiction of the group’s ultimate parent entity. An entity is a legal person other than a natural person, or an arrangement that prepares separate financial accounts, such as a partnership or a trust.
Read together, this catches the ordinary case. A Hong Kong company owned by a Dutch holding company is a member of a group whose ultimate parent is not in Hong Kong, so it is a covered entity. There is no turnover threshold, no asset threshold and no minimum group size. The same Hong Kong company owned directly by Hong Kong resident individuals, with no foreign entity in the structure, is not.
This is why the change is felt asymmetrically. Locally owned Hong Kong businesses continue in the world they knew. Hong Kong companies sitting under a European holding structure moved into a new regime because of the shape of the ownership chain above them rather than anything they did.
What substance now means for a holding entity
For interest, dividends and non-intellectual-property disposal gains, the exception is the economic substance requirement, and the ordinance distinguishes two cases. A pure equity-holding entity is one that only holds equity interests in other entities and earns dividends, equity interest disposal gains and income incidental to acquiring, holding or selling those interests. It must satisfy every applicable registration and filing requirement under the relevant Hong Kong ordinances, and have adequate human resources and premises in Hong Kong for carrying out its specified economic activities, which for such an entity means holding and managing its equity participations.
An entity that is not a pure equity-holding entity faces a higher standard. It must employ an adequate number of employees with the necessary qualifications to carry out the specified economic activities in Hong Kong, and incur an adequate amount of operating expenditure there. Its specified economic activities are making the necessary strategic decisions in respect of assets it acquires, holds or disposes of, and managing and bearing the principal risks in respect of those assets.
Outsourcing is permitted, to third parties or to group entities, but on conditions. The entity must exercise adequate monitoring and control over the activities performed, the outsourced entity is generally expected to charge a fee subject to transfer pricing rules, and there must be no double counting where the outsourced entity serves more than one group company. A shared service arrangement in which the same handful of people are counted as the substance of several entities does not satisfy the test.
The participation exemption and its two anti-abuse rules
For foreign dividends and equity interest disposal gains there is a second route. The participation requirement is met where the entity has continuously held not less than 5 per cent of the equity interests in the investee entity for a period of not less than 12 months immediately before the income accrues.
Two rules cut it back. The first is the switch-over rule, a subject to tax condition requiring that the applicable rate on the relevant sum be at least 15 per cent. The applicable rate generally refers to the headline rate, meaning the highest corporate tax rate of the jurisdiction where the specified income, the underlying profits or the related downstream income is taxed. The headline rate need not be the rate actually imposed on the income. Where a lower rate applies under special legislation and is not an incentive for substantive activities, the highest rate stipulated in that special legislation is taken.
The second is a main purpose rule. Where the Commissioner is of the opinion that the main purpose, or one of the main purposes, of entering into an arrangement was to obtain a tax benefit in relation to profits tax, the participation exemption does not apply. The wording is deliberate: obtaining the benefit need not be the sole or dominant purpose, and an arrangement may have more than one main purpose. Groups that restructured a Hong Kong holding tier in 2022 or 2023 in response to the new regime should expect that restructuring to be examined in exactly these terms.
What the Dutch side does, and does not, do
From the Netherlands the analysis is separate and, in the ordinary case, less alarming than groups expect. Dutch corporate income tax stands at 19 per cent on the first 200,000 euro of taxable amount and 25.8 per cent above it. Where the Dutch participation exemption is tested against a levy reasonable by Dutch standards, the benchmark in the statute is a levy at a rate of at least 10 per cent on a taxable profit determined by Dutch standards.
The controlled foreign company rules and the conditional withholding tax both operate by reference to a designation list. A low-tax jurisdiction for those purposes is a state designated by ministerial regulation which, at 1 October of the preceding year, does not tax bodies on profits or does so at a rate below 9 per cent, or which appears on the European list of non-cooperative jurisdictions. In the version of that regulation in force from 1 January 2026, Hong Kong is not designated under either limb. The conditional withholding tax, charged at the highest rate in the corporate income tax table, therefore does not reach payments to a Hong Kong entity on that basis.
The conclusion is not that the Dutch side is irrelevant. It is that the Dutch machinery does not fire mechanically, which means the work is analytical rather than procedural: establishing that the Hong Kong company is held as an extension of the group’s business rather than as passive capital, and holding evidence of what it actually does.
The claim after the regime
What the offshore claim is worth now depends on facts the group either has or does not have. Trading and service profits genuinely earned outside Hong Kong remain outside the charge on ordinary source principles, and the new regime does not touch that. Passive income streams held in a Hong Kong company under a foreign parent are inside a regime that asks where the decisions are made and who makes them, and answers that used to be sufficient are not.
The practical test is simple to state. Take the Hong Kong entity’s income for the year, split it between the categories the regime names and everything else, and for each category identify which exception is being relied on and what evidence exists for it in that year. Where the answer for a pure equity-holding entity is a registered office address and a company secretary, the exception is not met. Where the answer for an operating entity is a group service agreement under which the same people also serve four other subsidiaries, the outsourcing conditions need to be looked at closely.
A Hong Kong company under a Dutch parent is still a workable structure. It is no longer a structure that documents itself. The regime moved the burden from arguing about where a profit arose to demonstrating what an entity does, and demonstration is a matter of records made contemporaneously rather than positions taken on a return.