HK Added To Eu’S Tax Watchlist
On 5 October the European Union announced Hong Kong’s inclusion on its “grey list” on non-cooperative tax jurisdictions. Hong Kong does not tax foreign-sourced passive income, which allows enterprises receiving such income (such as rent, dividends, royalties derived from elsewhere) to avoid tax completely if they do not have any significant economic activity in the territory. The EU sees this as potentially creating situations of “double non-taxation”.
In response, Hong Kong has agreed to implement measures in 2023 to target enterprises that make use of passive income to evade tax elsewhere, particularly those without substantial economic activity in the territory (mainly offshore shelf companies). Companies that use structures in Hong Kong to declare active income (meaning trading, manufacturing or service income) are unlikely to be affected.
Notwithstanding this effort to be removed from the EU’s watchlist, the Hong Kong government has stressed that it intends to maintain the principle of taxation based on territorial source and will endeavour to uphold its simple, low-tax regime in order to maintain the competitiveness of Hong Kong’s business environment.