Hong Kong recognised for tax co-operation efforts as it is removed from EU’s watchlist

Christopher Hui

20th February 2024 – (Hong Kong) The Hong Kong Special Administrative Region (HKSAR) Government has welcomed the European Union’s (EU) decision to remove Hong Kong from its watchlist on tax co-operation. This recognition comes as a result of Hong Kong’s diligent efforts in ensuring that its foreign-sourced income exemption (FSIE) regime fully complies with the EU’s requirements.

Mr Christopher Hui, the Secretary for Financial Services and the Treasury, emphasized Hong Kong’s commitment to international co-operation in combating cross-border tax avoidance. The refined FSIE regime, which came into effect on January 1, 2024, has been acknowledged by the EU. Mr Hui stated that Hong Kong will continue to adhere to international tax standards while maintaining its tax competitiveness as an international financial centre.

In response to Hong Kong’s inclusion in the EU’s watchlist in 2021, the HKSAR Government introduced a new FSIE regime in January 2023. Under this regime, multinational enterprise entities must meet the economic substance requirement to enjoy tax exemption on foreign-sourced dividends, interest, income from intellectual properties, and disposal gains related to shares or equity interests in Hong Kong. The EU’s updated Guidance on FSIE Regimes, issued in December 2022, explicitly included disposal gains as a class of income covered by an FSIE regime and subject to the economic substance requirement. Jurisdictions like Hong Kong, undergoing FSIE reforms, were placed on the watchlist until the necessary legislative amendments were completed.

To refine the FSIE regime, the HKSAR Government enacted the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 last December. This amendment expanded the scope of assets eligible for tax exemption to include assets other than shares or equity interests. The refined FSIE regime has been in effect since January 1, 2024.

Mr Hui expressed confidence in Hong Kong’s future, stating that the government will continue implementing new policy initiatives to drive sustainable market development. Hong Kong’s resilience and competitiveness as an international financial centre remain strong, supported by advantages such as a simple tax regime, regulatory alignment with major overseas markets, free flow of capital and information, and a diverse talent pool. Hong Kong’s unique position as a convergence of global advantage and China advantage allows it to serve as China’s gateway to the world’s financial markets and investors.

With a thriving financial market, Hong Kong is home to numerous international banks and insurers. The asset and wealth management business in Hong Kong reached $30.5 trillion by the end of 2022, with a significant portion sourced from non-Hong Kong investors. Moreover, the financial industry has seen substantial growth, including a 215% increase in the net fund inflows of Hong Kong-domiciled funds in the first three quarters of 2023 compared to the same period in 2022.

Furthermore, the Central People’s Government and the HKSAR Government jointly announced six new measures on January 24, 2024, to deepen financial co-operation between the Mainland and Hong Kong. These measures enhance mutual access to financial markets and better serve international investors’ liquidity management needs in the Mainland bond market. This further solidifies Hong Kong’s status as an international financial centre and a global offshore Renminbi business hub.