On October 5, 2021, Hong Kong Government has issued a statement committing to amend its tax law with regards the tax exemption for foreign source passive income from 2023, to ensure the territory does not end up placed on the EU's tax blacklist of non-cooperative territories.
The Hong Kong Government said: "As an international financial center, Hong Kong has all along been actively participating in and supportive of international tax co-operation. 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."
"The EU is concerned that corporates with no substantial economic activity in Hong Kong are not subject to tax in respect of certain offshore passive income (such as interest and royalties), hence leading to circumstances of 'double non-taxation.”
"Hong Kong will continue to adopt the territorial source principle of taxation. The Government will endeavor to uphold our simple, certain and low-tax regime with a view to maintaining the competitiveness of Hong Kong's business environment."
"The proposed legislative amendments will merely target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income to evade tax across a border. Individual taxpayers will not be affected. As to financial institutions, their offshore interest income is already subject to profits tax under the Inland Revenue Ordinance at present, and hence the legislative amendments will not increase their tax burden."
The Government concluded: "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 co-operation. The HKSAR Government will request the EU to swiftly remove Hong Kong from the watchlist after amending the relevant tax arrangements."
