On 20th February 2024, the European Union (EU) issued an update regarding the classification of non-cooperative tax jurisdictions. Hong Kong was removed from the EU’s tax cooperation watchlist and placed on the “white” list. This removal indicates that Hong Kong has taken significant measures to tackle the EU’s apprehensions and enhance its tax cooperation framework to adhere to international tax standards.
In 2021, the EU included Hong Kong in its tax cooperation watchlist due to concerns about potential instances of “double non-taxation” stemming from certain foreign-sourced passive income (FSIE) not being taxed in Hong Kong. In response to these concerns, Hong Kong introduced a new FSIE regime in January 2023. Under this regime, multinational enterprise entities receiving foreign-sourced dividends, interest, income from intellectual property usage, and gains from the disposal of shares or equity interests in Hong Kong must meet economic substance requirements to qualify for tax exemption.
On 1st January 2024, Hong Kong made further adjustments to its FSIE regime, broadening the range of assets related to foreign-sourced disposal gains to encompass assets beyond shares or equity interests. Subsequent to implementing these refinements, the EU conducted an assessment and concluded that Hong Kong had honored its commitment by amending the tax regime.
Acknowledging Hong Kong’s efforts and progress in addressing the concerns raised, the EU transferred Hong Kong from its tax cooperation watchlist to the “white” list on 20th February 2024.This signifies a significant step forward for Hong Kong, demonstrating its commitment to addressing concerns raised by the EU and its dedication to aligning with international tax standards.
Addressing EU Concerns and Implementing Change
In 2021, the EU expressed concerns regarding potential “double non-taxation” arising from certain foreign-sourced passive income (FSIE) not being subject to taxation in Hong Kong. In response, Hong Kong proactively implemented a new FSIE regime in January 2023. This regime requires multinational enterprises receiving qualifying foreign-sourced income, including dividends, interest, intellectual property income, and gains from the disposal of shares or equity interests in Hong Kong, to meet specific economic substance requirements to benefit from tax exemption.
Further demonstrating its commitment, Hong Kong expanded the scope of its FSIE regime on 1st January 2024 to encompass foreign-sourced disposal gains from assets beyond shares or equity interests. Following these improvements, the EU acknowledged Hong Kong’s efforts and reclassified its status, signifying its satisfaction with the implemented changes.
Looking Ahead: Navigating Complexities
Although the EU’s removal of Hong Kong from the watchlist is a positive development, challenges remain. Hong Kong needs to navigate a complex landscape to fully regain its position as a premier financial and business hub. Reassuring international investors and markets of its long-term stability will be crucial in this endeavor.
Balancing Priorities and Building Confidence
While Hong Kong enjoys a strong reputation for rule of law in the business sphere and maintains independence from mainland China, concerns regarding political freedoms persist. Addressing these concerns transparently and effectively will be essential in building international confidence and fostering a thriving business environment.
Ultimately, Hong Kong’s success lies in its ability to strike a balance between its unique position and the evolving global landscape. By demonstrating its commitment to international tax standards, upholding the rule of law, and addressing all areas of international concern, Hong Kong can solidify its position as a leading financial and business center.