Update: a tax review before the CIS exit or distribution

For principals and funds moving capital out of CIS jurisdictions (the Commonwealth of Independent States – the former Soviet states spanning Central Asia, the Caucasus and Eastern Europe) through a Hong Kong holding or intermediate structure, a single question now precedes every exit or distribution: has the source and substance position been reviewed under Hong Kong's territorial system? The answer drives the tax outcome at every layer of the structure.

A tax review before a CIS exit or distribution should assess, under the Inland Revenue Ordinance, whether the relevant profits are Hong Kong-sourced or foreign-sourced, whether economic-substance conditions under the FSIE regime (the foreign-sourced income exemption – Hong Kong's participation-exemption regime in force from 1 January 2023) are satisfied, and whether the Pillar Two minimum tax applies to any in-scope group entity. The review governs both the timing and the structure of the distribution.

This briefing covers what has sharpened this trigger, who it affects across the Hong Kong–CIS corridor, and the immediate steps that follow.

What changed – and why this corridor is in focus now

Two developments have converged to make a pre-exit review essential for any group with a CIS asset base held through Hong Kong.

First, the FSIE regime – which requires genuine economic substance in Hong Kong as a condition of exempting foreign-sourced dividends, interest, royalties and disposal gains from Hong Kong profits tax – has been in force since 1 January 2023 and the Inland Revenue Department has moved from implementation to active review. Groups that structured quickly on transition, relying on a light substance footprint, now face scrutiny as the first assessment cycles run. A CIS exit that crystallises a disposal gain or triggers an upstream dividend is precisely the moment at which that scrutiny lands.

Second, the Pillar Two minimum top-up tax (Hong Kong's implementation of the OECD global minimum tax) applies to fiscal years beginning on or after 1 January 2025 for in-scope multinational enterprise groups with consolidated revenue of at least EUR 750 million. For larger groups channelling CIS returns through a Hong Kong intermediate entity, the question of whether a top-up charge arises on a low-taxed CIS jurisdiction – and how it interacts with the existing structure – must be assessed before, not after, the exit is executed.

Neither development is new in isolation. Together, and at a CIS exit or distribution event, they create a material enforcement-risk window.

Who this affects across the Hong Kong–CIS corridor

The immediate audience is any group, fund or family office that holds CIS-origin assets – Mainland Chinese, Central Asian, Eastern European or Caucasus-based operating companies, real property, or natural-resource interests – through a Hong Kong holding, treasury or intermediate entity. That covers a wider population than the headline suggests.

In our cross-border practice, we regularly see structures where a BVI or Cayman vehicle sits at the top, a Hong Kong company acts as the intermediate or treasury entity, and the operating assets sit in Russia, Kazakhstan, Uzbekistan, Ukraine, Armenia, or Georgia. The Hong Kong layer's tax position is often assumed rather than confirmed. A CIS exit – whether a trade sale, a secondary transfer, a recapitalisation, or a distribution up the chain – forces confirmation.

The review also applies to funds with CIS portfolio exposure making distributions to non-Hong Kong limited partners. The source of those distributions, and the FSIE conditions at the Hong Kong fund entity level, bear directly on withholding obligations and on the fund's own Hong Kong tax filing position. Hong Kong imposes no withholding tax on dividends or interest as a general matter, but that position does not displace the analysis of whether the underlying income was correctly characterised and exempted in the first place.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost.

For a structured assessment of your Hong Kong tax position ahead of a CIS exit or distribution, write to us at info@lockhartyip.com.

The immediate action

Three steps now, before the exit or distribution is executed.

First, confirm the source characterisation of the relevant income or gain under the Inland Revenue Ordinance. Hong Kong taxes profits on a territorial basis – only Hong Kong-sourced profits fall within the charge. For a Hong Kong intermediate entity holding a CIS asset, the source analysis turns on where the operations generating the income were performed, not where the asset is registered. That analysis is often neither straightforward nor well-documented in existing group files.

Second, verify FSIE substance conditions. Where the income is foreign-sourced, the exemption under the FSIE regime requires that the Hong Kong entity meet economic-substance requirements – for dividends and disposal gains, this involves a participation condition and, where applicable, a nexus or substance test. Groups relying on a holding-company substance carve-out should verify that the carve-out applies to their specific income type and that the documentary record supports it.

Third, assess Pillar Two exposure for in-scope groups. Where the CIS jurisdiction imposes tax at an effective rate below the global minimum, the top-up charge at the Hong Kong or parent level must be quantified. This affects distribution timing, intercompany pricing, and the structure of any sale proceeds allocation. Counsel on our desk assess Pillar Two exposure as part of any pre-exit tax review for groups meeting the revenue threshold – see our analysis of the Hong Kong minimum top-up tax at Pillar Two: Hong Kong minimum top-up tax.

For the source and territorial position in detail, the governing analysis is set out at Hong Kong source and territorial position: a guide for foreign groups. Our Tax Positions practice covers the full range of structuring, filing and cross-border substance work.

If an earlier filing or structure produced an uncertain or adverse position, a second read can identify the error and the routes still open.

To discuss how the FSIE regime and the territorial system apply to your Hong Kong–CIS position before the exit, contact info@lockhartyip.com.

Speak with Lockhart & Yip

For a scoped view of your matter, contact info@lockhartyip.com. Discuss your matter →

Related

• Tax Positions
• Pillar Two Hong Kong Minimum Top Up Tax 7
• Hong Kong Source Territorial Position Foreign Group Guide

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