Eligible investor entity and investee entity

• must be a legal person (not including a natural person) or an arrangement that prepares separate financial accounts, such as a partnership, a trust and a fund. 
• applies to all investor entities irrespective of whether they are Hong Kong resident or non-Hong Kong resident, whether they are incorporated or established in Hong Kong or outside Hong Kong, or whether they are listed or non-listed entities.

Eligible equity interest

• applies to onshore disposal gains arising from disposal of different forms of equity interests, such as ordinary shares, preference shares and partnership interests, provided that the equity interest carries rights to the profits, capital or reserves of the investee entity and is regarded as equity from the perspective of the investee entity under applicable accounting principles.

Equity holding conditions

• the investor entity has held the equity interests throughout the continuous period of 24 months immediately before the date of disposal of such interests (reference period) ; and
• the investor entity has held the equity interests at least 15% of equity interests (qualifying interests) in the investee entity.
• allowing qualifying interests to be measured on a group basis.

Disposal of equity interests in tranches

• applies first-in first-out basis when determining whether the equity holding conditions are met for a specified disposal.
• after disposal of each tranche, the investor entity’s equity holding in an investee entity may fall below the 15% threshold such that the equity holding conditions for the subsequent disposals of the remainder of the long-held interests (long-held left-overs) cannot be met.  To cater for such long-held left-overs, the Scheme provides for an exception to the equity holding conditions more earlier disposal(s) if:

1. 1. before disposal of the long-held left-overs in an investee entity, the investor entity has certain equity interests in the investee entity of which, partly were disposed of by the investor entity (earlier disposal);
   2. the equity holding conditions are met for the earlier disposal and that the long-held left-overs constituted a part of the qualifying interests; and
   3. the disposal of the long-held left-overs occurs within 24 months after the earlier disposal.

Exclusions

Excluded investor entity

• does not apply to any equity interests disposed of by an investor entity which is an insurer. However, entities (e.g. subsidiaries of the insurers) that are not chargeable to profits tax in accordance with the relevant provisions would not be excluded from the Scheme.

Excluded equity interests

1. trading stock
   • equity interests (specified equity interests) held by a holding entity are “regarded as trading stock” if any unrealised fair value gain or loss arising from, or provision for diminution in value of, the specified equity interests has been brought into account for tax purposes.
2. non-listed equity interests in property-related entities, such as property trading, property development or property holding^(Note). However, disposals of listed equity interests in investee entities engaging in property-related businesses are not excluded. 

Note:

Property trading

• an entity carries on a business of property trading if it carries on a business of acquisition and sale of immovable properties, situated in Hong Kong or elsewhere, unless the acquisition and sale of immovable properties is incidental to the undertaking of any property development.
• an investee entity that engages in a regular business other than property trading but has carried out a one-off property trading transaction would not be regarded as an excluded entity.

Property development

• means construction or causing the construction of any building or part of a building, and includes acquisition of any land or building or part of a building for such construction and sale of any building or part of a building after such construction.
• an investee entity is not an excluded entity if it has not undertaken property development for at least a continuous period of 60 months before the relevant disposal and the immovable properties held by it are used by it to carry on its trade or business (including used for its letting business) and none of the immovable properties held by it is for sale.

Property holding

• an investee entity is an excluded entity if it holds any immovable properties situated in Hong Kong or elsewhere, directly or indirectly, in the relevant basis period and the percentage of value of such immovable properties out of the entity’s total assets in that basis period exceeds 50%. 
• if certain immovable properties are used by the entity that directly holds the immovable properties for carrying on its own trade or business (including its business of letting immovable properties) but are not for sale, the value of such immovable properties is to be carved out from the numerator in determining the relevant percentage.