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15 February 2022

Tax Alert – Hong Kong to amend its offshore income regime in 2022

The Council of the European Union published on 5 October 2021 its new list of “non-cooperative jurisdictions for tax purposes”, which now includes Hong Kong as a “grey list” jurisdiction. 

This decision was taken following the review of Hong Kong’s current foreign-source income exemption regime. While the European Union (the “EU”) does not consider territorial foreign source income exemption regimes to be problematic per se, it is concerned about the “double non-taxation” situations that may result.  

The EU blames Hong Kong for not taxing certain offshore passive income (such as interest and royalties). However, the EU’s concerns do not relate to offshore active income (trading and service income) as Hong Kong has already adopted the definitions of permanent establishment contained in the latest 2017 OECD Model Tax Convention in its domestic tax legislation. 

In response to these concerns, the Hong Kong government has committed to amend or impose additional conditions on passive offshore income by the end of 2022, with an expected implementation in the year 2023. 

In particular, the Hong Kong government has indicated that the proposed legislative amendments will specifically target companies with no substantial economic activity in Hong Kong that use passive income to evade tax across a border.  

If no measures are taken before 31 December 2022 or if they prove to be unsatisfactory, Hong Kong could be put on the EU “blacklist”, thus exposing itself to certain defensive measures that could be applied by member states (non-deductibility of costs, controlled foreign company rules, withholding tax measures, etc.).