Hong Kong plans tax changes in 2022 to get off EU’s ‘grey list’ of non-cooperative jurisdictions

Effective from October 5, Hong Kong SAR has been added to the EU’s ‘grey list’ of non-cooperative jurisdictions for tax purposes following a review of the foreign-source income exemption regimes. 

The EU considers certain aspects of Hong Kong SAR’s territorial tax system may facilitate tax avoidance or other tax practices they regard as harmful. In particular, the EU considers that corporations without substantial economic activity in Hong Kong SAR and that are not subject to Hong Kong SAR tax in respect of certain foreign sourced passive income (such as interest and royalties) could lead to situations of ‘double non-taxation’.

Indeed, the territorial concept looks at the location where the profits of a corporation are derived and profits which are foreign sourced are not taxed in Hong Kong SAR, regardless of the tax residency or place of incorporation of that corporation.

The EU has granted the affected jurisdictions until December 31 2022 to make the necessary changes. In a press release issued on October 6 2021, the Hong Kong SAR government has agreed to amend the relevant legislation by the end of 2022 and implement the relevant measures in 2023.

The legislative changes to be introduced will be tailored to target such corporations using passive income to avoid tax across borders, the government said – adding that it will continue to support a territorial and competitive taxation regime.

The government is actively engaging with the EU and will request to swiftly remove Hong Kong SAR from the ‘grey list’, planning to hold a consultation on the legislative changes with an aim to minimize compliance burdens. Our team in Hong Kong will keep a close eye on these coming tax amendments and provide updates in due time. If you have any questions regarding the tax regulations in Hong Kong, please do not hesitate to contact our experts at contact@orbis-alliance.com.