EU includes HK in tax cooperation watchlist

It looked into the non-taxation of certain foreign-sourced passive income.

The European Union (EU) announced the inclusion of Hong Kong in its watchlist on tax cooperation. It considered the non-taxation of certain foreign-sourced passive income in Hong Kong that might lead to situations of double non-taxation.

"As an international financial centre, Hong Kong has all along been actively participating in and supportive of international tax cooperation. 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," a government spokesperson responded.

The EU is concerned that corporations with no substantial economic activity are not subject to tax, hence leading to circumstances of double non-taxation. Under the premise of combating cross-border tax evasion, the HK Government commits to cooperate with the EU to amend the Inland Revenue Ordinance by the end of 2022 and implement relevant measures in 2023.

The spokesperson concludes, "Hong Kong enterprises will not be subject to defensive tax measures imposed by the EU as a result of being included in the watchlist on tax cooperation. HK will request the EU to remove it from the watchlist after amending the relevant tax arrangements."

The EU published the guidance on the foreign-sourced income exemption regime and commenced corresponding assessment on the tax arrangements on jurisdictions including Hong Kong in October 2019.