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Following on from our previous news flashes, the highly anticipated tax certainty enhancement scheme (Enhancement Scheme) has taken a further step towards implementation, with the Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Bill 2023 (Bill) gazetted on 20 October 2023. The Bill proposes to amend the Inland Revenue Ordinance (IRO) by adding a new section 40AX and Schedule 17K to the IRO to provide for the tax treatment in relation to gains covered by the Enhancement Scheme.
Under the Enhancement Scheme, onshore equity disposal gains that satisfy all the prescribed conditions, including, inter alia, that the investor entity has held at least 15% of the equity interests in the investee entity for a continuous period of at least 24 months immediately prior to the date of disposal of such interests, will be regarded as capital in nature and not chargeable to profits tax.
In welcome news, the Government has adopted the following major recommendations raised by stakeholders (including PwC): (i) equity interests held by an investor entity and its closely related entity/entities can be aggregated for meeting the 15% holding threshold; and (ii) in the case of disposal in tranches, gains from a subsequent disposal of left-overs from a previously qualifying disposal will not be required to satisfy the 15% holding threshold provided that the subsequent disposal occurs within 24 months after that previous disposal.
Subject to the passage of the Bill by the Legislative Council, the Enhancement Scheme will apply if (i) the eligible equity disposal occurs on or after 1 January 2024, and (ii) the gains accrue in or after the year of assessment 2023/24.
This news flash outlines the key requirements under the Enhancement Scheme and its major differences from prior consultations and clarifications made in the IRD Guidance, followed by our take on the Enhancement Scheme.