October 6 2021

Hong Kong Government Responds to Inclusion in EU’s Watchlist on Tax Co-Operation

Source: IBFD Tax Research Platform News

The Hong Kong government announced on 5 October 2021 that it will amend the Inland Revenue Ordinance by the end of 2022 and implement relevant measures in 2023 to help combat cross-border evasion. The announcement was made in a response to the inclusion of Hong Kong in the European Union (EU) watchlist on tax co-operation due to concerns about double non-taxation of certain foreign sourced passive income (such as interest and royalties) under Hong Kong's territorial tax system.

According to the announcement, the proposed legislative amendments will target corporations, particularly those with no substantial economic activity in Hong Kong, but individual taxpayers will not be affected. The proposed amendments will also not affect financial institutions whose offshore interest income is already subject to tax in Hong Kong.

The government reiterated its participation in and support of international tax cooperation efforts. At the same time, it stated that Hong Kong will continue to adopt the territorial source principle of taxation and uphold a simple, certain and low-tax regime with a view to maintaining the competitiveness of Hong Kong's business environment.

The government will request the EU to remove Hong Kong from the watchlist after the relevant tax arrangements have been amended.

Hong Kong was previously listed on the watchlist in December 2017 and subsequently removed in March 2019 after making tax reforms in areas such as transparency and fair taxation.