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Hong Kong removed from EU watchlist following changes in regulations on foreign-sourced income
The European Union has removed Hong Kong from its watchlist of non-cooperative tax jurisdictions after the city made changes to its foreign-sourced income exemption regime.
The amendments require multinational enterprises that don’t meet certain requirements to pay tax on certain types of foreign-sourced passive income.
Key Takeaways
- Hong Kong has been removed from the EU watchlist of non-cooperative tax jurisdictions after amending its foreign-sourced income exemption (FSIE) regime, demonstrating its commitment to international tax standards.
- The new FSIE regime in Hong Kong requires multinational enterprises (MNEs) that lack substantial presence in the region to pay profits tax on certain types of foreign-sourced passive income, impacting MNEs that do not meet substance requirements.
- Despite the changes, Hong Kong continues to implement a territorial source principle of taxation, allowing companies with operations in the city to still enjoy a favorable low-tax regime while demonstrating its commitment to international compliance.
This move addresses concerns about double non-taxation of passive income and demonstrates Hong Kong’s commitment to complying with international tax standards. The city’s proactive approach reassures businesses of its robust tax regulations while maintaining its appeal as a global financial hub.
On February 20, 2024, the EU Council decided to remove Hong Kong from its list of “non-cooperative jurisdictions” due to unfair tax legislation enabling tax evasion. Hong Kong was previously added to the ‘grey list’ of non-cooperative tax jurisdictions on October 5, 2021. The Council had listed Hong Kong under Annex II, indicating that it had not fully complied with international tax standards but had committed to reform.
Changes to Hong Kong’s FSIE regime
In response to the EU Council’s recommendations, Hong Kong has amended its FSIE regime for passive income so that MNEs that do not have a sufficiently substantive presence in Hong Kong will be required to pay profits tax on certain types of foreign-sourced passive income.
In effect, this will mean that MNEs that are incorporated in Hong Kong purely for tax purposes and that do not have actual operations in the region will be required to pay profits tax on this type of income, while companies with actual operations in Hong Kong can continue to enjoy the exemption.
Read More : Hong Kong FSIE Change Results in City’s Removal from EU Watchlist (china-briefing.com)
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