The three exemptions

The three exemptions

(1) Economic substance (interest/dividends/disposal gains): an entity other than a pure equity-holding entity must carry on adequate specified economic activities in Hong Kong — adequate employees and operating expenditure, and the making of necessary strategic decisions; a pure equity-holding entity faces a reduced test (compliance and accounting, plus adequate human resources and premises in Hong Kong). (2) Participation exemption (dividends and equity disposal gains): a holding of at least 5%, with the investee’s passive income not exceeding 50% of total income; equity disposal gains additionally require a holding of at least 5% for a continuous period of 24 months before disposal. (3) Nexus (IP income): the nexus-fraction test, with more-than-de-minimis non-related income taking the claim outside the exemption.