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    ARTICLE - Hong Kong

    Hong Kong Removed from EU Watchlist Following Tax Regime Amendments

    21 Mar

    Hong Kong Removed from EU Watchlist - Introduction

    Hong Kong has been officially removed from the European Union's list of non-cooperative jurisdictions for tax purposes, commonly referred to as the EU Watchlist. This took place with effect from the 20 February 2024. The development comes after the Hong Kong government introduced the Foreign-Sourced Income Exemption (FSIE) regime in January 2023. This is aimed at addressing the EU's concerns over tax cooperation and aligning with international tax standards.

    Background of the FSIE Regime

    The FSIE regime was established in response to Hong Kong's inclusion on the EU Watchlist in 2021, marking a concerted effort by the local government to ensure the jurisdiction's compliance with global tax norms. The regime applies to certain types of passive income, including dividends, interest, income derived from intellectual property (IP), and disposal gains related to equity interests. To benefit from the profits tax exemption under the FSIE regime, multinational enterprises (MNEs) operating in Hong Kong must meet specific economic substance, nexus, and participation requirements relevant to each income type.

    Refinements and Compliance with EU Standards

    Following the EU's updated Guidance on Foreign-sourced Income Exemption Regimes in December 2022, which called for adequate substance requirements for all passive income types, the Hong Kong government expanded the FSIE regime. This expansion included broadening the scope of disposal gains to encompass gains from the disposal of all asset types received by MNE entities in Hong Kong. These adjustments, which took effect on 1 January 2024, played a crucial role in demonstrating Hong Kong's commitment to adhering to international tax standards.

    EU's Decision to Remove Hong Kong from the Watchlist

    The EU's decision to remove Hong Kong from the Watchlist was based on a comprehensive review of the amendments made to the territory's tax regime concerning foreign-sourced passive income. By fully aligning with the EU's requirements and international tax standards, Hong Kong has successfully addressed the concerns that led to its initial inclusion on the Watchlist.

    Implications and Future Developments

    Hong Kong's removal from the EU Watchlist is a positive development for the region, enhancing its reputation as a cooperative jurisdiction in tax matters and potentially improving its attractiveness as a business and investment destination. Stakeholders in Hong Kong and international businesses operating within the territory will benefit from the clarity and stability this resolution provides.

    Hong Kong Removed from EU Watchlist - Conclusion

    As Hong Kong continues to implement and refine the FSIE regime, further updates and guidance are expected to ensure that the territory remains in compliance with evolving international tax standards. This proactive approach underscores Hong Kong's dedication to fostering a transparent and cooperative tax environment on the global stage.

    Final thoughts

    If you have any queries about this article on 'Hong Kong Removed from EU Watchlist', or tax matters in Hong Kong more generally, then please get in touch.
    Transparency

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