Earlier this month, the European Union (EU) announced that Hong Kong had been added to Annex II of its revised list of non-cooperative jurisdictions for tax purposes (“the grey list”) as it considered that the non-taxation of certain foreign sourced passive income in Hong Kong might lead to situations of "double non-taxation".
The EU will monitor the situation and consider moving Hong Kong to a blacklist if the identified harmful aspect of Hong Kong’s tax system is not changed. Blacklisted jurisdictions may be sanctioned in a variety of ways, including the denial of deduction for payments made, increased withholding taxes, taxation of dividends and additional administrative measures. To the extent that Hong Kong introduces amendments acceptable to the EU, Hong Kong will be moved off the grey list.
In commenting on the EU announcement, a Government of the Hong Kong Special Administrative Region (HKSAR) spokesperson said, “the EU is concerned that corporates with no substantial economic activity in Hong Kong are not subject to tax in respect of certain offshore passive income (such as interest and royalties), leading to circumstances of "double non-taxation". As an international financial centre, Hong Kong has all along been actively participating in and supportive of international tax co-operation. Over the years, Hong Kong has adopted the territorial source principle of taxation, whereby offshore profits are generally not subject to profits tax in Hong Kong."
While the HKSAR Government has agreed to co-operate with the EU and to amend its tax legislation in Hong Kong by the end of 2022 and implement relevant measures in 2023, it was stressed by the Government spokesperson that, "Hong Kong will continue to adopt the territorial source principle of taxation. The Government will endeavour to uphold our simple, certain and low-tax regime with a view to maintaining the competitiveness of Hong Kong's business environment. 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."
The HKSAR Government advised that they would consult stakeholders on the specific contents of the legislative amendments and would work to minimise companies’ compliance burdens.
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