EU Includes Hong Kong in Its Watchlist on Tax Cooperation

The European Union (EU) announced the inclusion of Hong Kong in its watchlist on tax cooperation effective from 5 October 2021.  The EU considered that the non-taxation of certain foreign-sourced passive income in Hong Kong might lead to situations of “double non-taxation”; in particular, the EU was concerned that corporates with no substantial economic activity in Hong Kong are not subject to tax in respect of certain offshore passive income, e.g. interest and royalties, which would lead to circumstances of double non-taxation.

The Hong Kong Government has responded to media enquires on this announcement.  The response is summarized as follows:

  • Hong Kong has adopted the territorial source principle of taxation over the years, whereby offshore profits are generally not subject to profits tax in Hong Kong.  Hong Kong will continue to adopt this taxation basis.
  • The Government agrees to co-operate with and has committed to the EU to amend the Inland Revenue Ordinance (Chapter 112 of the Hong Kong laws) by the end of 2022 and implement relevant measures in 2023.
  • The proposed legislative amendments will merely target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income to evade tax across a border. Individual taxpayers will not be affected.
  • Hong Kong enterprises would not be subject to defensive tax measures imposed by the EU as a result of being included in the watchlist on tax co-operation. The Government will request the EU to swiftly remove Hong Kong from the watchlist after amending the relevant tax arrangements.
  • The Government will endeavour to uphold the simple, certain and low-tax regime in Hong Kong with a view to maintaining the competitiveness of Hong Kong’s business environment.
  • The Government will consult the stakeholders on the specific contents of the legislative amendments and strive to minimise the compliance burden of corporates.

If you have any questions or would like to understand more of the implications of the above on your business, please feel free to contact us.

Marzio Morgante
Chartered Accountant, LL.M.
Managing Partner
Tel: (852) 3102 1995

Kei Lam
Senior Tax Manager
Tel: (852) 3102 1995

Rooms 501-2, Wilson House
19-27 Wyndham Street
Central, Hong Kong

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