Briefing: a tax-efficient holding route between the CIS and Hong Kong

For groups with assets or operating entities in the Commonwealth of Independent States corridor, the question of where to hold those assets above the operating layer is no longer simply about headline rates. It turns on source, substance, and the interaction between Hong Kong's territorial system and the tax rules of the relevant CIS jurisdiction. Structural complexity is the recurring trigger here – and the decisions principals defer tend to compound.

A holding structure on the CIS–Hong Kong corridor works, under Hong Kong's territorial profits-tax regime, when the income arising in Hong Kong is sourced here and the entity maintains genuine economic substance. The Inland Revenue Ordinance governs the source determination; the foreign-sourced income exemption (FSIE) regime – in force from 1 January 2023, as amended – applies to passive income that would otherwise escape the territorial net, subject to economic-substance conditions that groups on this corridor must now actively satisfy.

This briefing sets out what the FSIE reform means for CIS-origin holding structures, who it affects across the corridor, and the immediate action it calls for.

What the FSIE reform changed – and why CIS-corridor structures are directly in scope

Before the FSIE regime, a Hong Kong holdco receiving dividends or interest from a CIS operating entity could often rely on Hong Kong's territorial basis to treat that income as outside the charge – it arose offshore. The FSIE reform closed that position for covered passive income: dividends, interest, royalties and gains on disposal of equity interests received by a Hong Kong entity from an offshore source are now brought into the charge unless one of two conditions is met.

The first condition is the economic-substance requirement. The Hong Kong holding entity must have adequate employees and operating expenditure in Hong Kong relative to the activity it performs. The second is the participation-exemption route, available for dividends and disposal gains where the holding meets the statutory ownership and holding-period conditions under the Inland Revenue Ordinance.

For a CIS-origin group, the practical gap is often this: the Hong Kong holdco was incorporated for convenience and contract rather than for genuine activity. It has a registered address, a director in another time zone, and minimal payroll. Under the FSIE regime, that entity is exposed. The Inland Revenue Department's position on substance is active, not theoretical.

A second pressure on the corridor is the trajectory of CIS-side rules. Several CIS jurisdictions have tightened or are tightening their controlled-foreign-corporation regimes, their thin-capitalisation tests, and – in certain cases – their treaty positions. Where a Hong Kong entity sits in a structure that feeds upward into a CIS holding layer, the interaction between both sides' rules creates double-exposure if neither side is managed with the other in view. Our desk sees this pattern regularly.

The governing instruments on the Hong Kong side are the Inland Revenue Ordinance (territorial charge and FSIE conditions) and the Pillar Two framework – the Hong Kong minimum top-up tax and income-inclusion rule, effective for fiscal years beginning on or after 1 January 2025 – for in-scope multinational enterprise groups with consolidated revenue at or above EUR 750 million. Below that threshold, Pillar Two does not currently apply, but the FSIE conditions apply regardless of group size.

For further detail on the FSIE conditions and what the Inland Revenue Department looks for in a substance review, see our briefing at foreign-sourced income exemption: Hong Kong holdco briefing.

Who it affects and what to do now

The groups most directly affected are mid-market holding structures where a Hong Kong company receives dividends or interest from a CIS operating entity – typically a company in Kazakhstan, Uzbekistan, Azerbaijan, or another Commonwealth of Independent States jurisdiction – and where the Hong Kong entity has not been reviewed against the FSIE substance conditions since the regime took effect.

If the holding entity predates 1 January 2023, it was almost certainly designed under the old territorial assumption and has not been stress-tested against the FSIE conditions. The first profits tax return for a newly incorporated Hong Kong company is typically issued by the Inland Revenue Department around 18 months after incorporation; for an existing entity, the annual cycle is already running, and the FSIE position will be tested on each return.

The immediate action falls into three areas. First, review the source position of each income stream flowing into the Hong Kong holdco from the CIS layer. Not all income is covered; the characterisation matters. Second, assess the substance position of the Hong Kong entity against the Inland Revenue Ordinance conditions: employees, expenditure, decision-making location. Third, consider whether the participation-exemption route is available and whether the ownership and holding-period conditions are currently met.

Groups considering exit from an offshore structure – Cayman or BVI above the Hong Kong layer – should also consider the sequence of any restructuring against the stamp duty and distribution position. The interaction of that sequence with the CIS-side rules on deemed dividends or exit charges is a second order of analysis that cannot be separated from the holding review. Our analysis of that point is at tax review before Cayman Islands exit or distribution.

The broader picture for international counsel advising CIS-origin principals is that Hong Kong's value on this corridor sits in its territorial system, its absence of withholding tax on dividends and interest, its capital-gains-free environment, and its treaty and enforcement relationships – but those features are only available to a structure that genuinely qualifies. Structuring for the corridor without substance is not a tax position; it is a deferred exposure.

For a structured assessment of your holding position across the CIS–Hong Kong corridor, write to us at info@lockhartyip.com. Our Tax Positions practice handles source and substance reviews, FSIE analysis, and cross-border structuring on this corridor.

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Related

• Tax Positions
• Foreign Sourced Income Exemption Hong Kong Holdco Briefing
• Tax Review Before Cayman Islands Exit Or Distribution

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.