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EU’s removal of Hong Kong from watchlist on tax co-operation

On 20 February 2024, the European Union (EU) made an announcement regarding the updates of the list of non-cooperative tax jurisdictions.  Hong Kong was removed from the EU watchlist on tax cooperation and was added to the “white” list.  This removal suggests that Hong Kong has taken significant steps to address the EU’s concerns and improve its tax cooperation framework to comply with international tax standards.

In 2021, the EU included Hong Kong in its watchlist on tax cooperation due to concerns regarding the potential “double non-taxation”  arising from the non-taxation of certain foreign-sourced passive income (FSIE) in Hong Kong.  To address the concerns raised by the EU,  Hong Kong implemented a new FSIE regime in January 2023.  Under this regime, multinational enterprise entities that receive foreign-sourced dividend, interest, income derived from the use of intellectual properties and disposal gain in relation to shares or equity interests in Hong Kong must meet the economic substance requirement in order to qualify for tax exemption. On 1 January 2024, Hong Kong implemented further refinements to its FSIE regime.  These refinements expanded the scope of assets in relation to foreign-sourced disposal gains to cover assets other than shares or equity interests.  Following the implementation of these refinements,  EU conducted a review and determined that Hong Kong has fulfilled its commitment by amending the tax regime.  Recognising Hong Kong’s effect and progress in address the concerns raised, the EU moved Hong Kong from its tax cooperation watchlist to the “white” list on 20 February 2024.

Please click on this link for an overview of the latest FSIE regime in Hong Kong.

 

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