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6 March 20242 minute read

Hong Kong Removed from the EU's Watchlist of Non-cooperative Jurisdictions for Tax Purposes

After Hong Kong was added to the EU’s list of non-cooperative jurisdictions for tax purposes, commonly known as the EU Watchlist, in 2021, the Hong Kong government introduced a new foreign-sourced income exemption regime in relation to certain types of passive income (FSIE Regime) with an aim to have Hong Kong removed from the list as soon as possible. We are pleased to confirm that on 20 February 2024 Hong Kong was officially removed from the EU Watchlist.

In response to the EU’s inclusion of Hong Kong in the EU Watchlist, in January 2023 the Hong Kong Government introduced the new FSIE Regime, under which in-scope MNE entities carrying on business in Hong Kong may claim profits tax exemption for foreign-sourced dividend, interest, income derived from the use of IP and disposal gain in relation to equity interests received in Hong Kong only if they satisfy the relevant economic substance requirements (for dividend, interest and disposal gain in relation to equity interests), nexus requirements (for IP income) or participation requirements (for dividend and disposal gain in relation to equity interests). In light of the updated Guidance on Foreign-sourced Income Exemption Regimes which provides that adequate substance requirements should be implemented in respect of all types of passive income concerned introduced by the EU in December 2022, the Hong Kong government further refined the FSIE Regime to expand the scope of disposal gain to cover gains arising from disposal of all other types of assets received by MNE entities in Hong Kong. Such refined FSIE Regime came into effect on 1 January this year.

Following the implementation of the refined FSIE Regime, the EU conducted a review and determined that Hong Kong has fully satisfied its commitments by amending its tax regime relating to foreign-sourced passive income to align with international tax standards, and therefore removed Hong Kong from the EU Watchlist on 20 February 2024.

We are pleased to see that Hong Kong has finally been removed from the EU Watchlist and we will continue to track the developments of the FSIE Regime and bring you more updates.