The Hong Kong Special Administrative Region Government today welcomed the removal of Hong Kong from the European Union's (EU) watchlist on tax co-operation in recognition of the city’s efforts in ensuring that its foreign-sourced income exemption (FSIE) regime is in full compliance with the EU’s relevant requirements.

Secretary for Financial Services & the Treasury Christopher Hui said: “We are pleased to note that the EU has recognised our efforts in this regard and removed Hong Kong from the watchlist. Hong Kong will continue to comply with international tax standards while maintaining tax competitiveness.”

In response to the EU’s inclusion of Hong Kong in its watchlist in 2021, the Hong Kong SAR Government introduced in January 2023 a new FSIE regime, under which multinational enterprise entities receiving foreign-sourced dividend, interest, income derived from the use of intellectual properties and disposal gain in relation to shares or equity interests in Hong Kong must satisfy the economic substance requirement to enjoy tax exemption.

In December 2022, the EU also explicitly set out disposal gains as a general class of income covered by an FSIE regime, and subjected the taxpayers concerned to the economic substance requirement.

Jurisdictions with ongoing FSIE reforms, including Hong Kong which was pending completion of the necessary legislative amendments, were kept in the watchlist.

In this connection, the Hong Kong SAR Government enacted the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 last December to refine the FSIE regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover assets other than shares or equity interests.

The refined FSIE regime came into effect on January 1, 2024.

Mr Hui added that the Hong Kong SAR Government will continue to implement new policy initiatives to create impetus for sustainable market development.

He also expressed confidence that Hong Kong will maintain its favourable business environment and strengthen its status as an international business and trade centre.


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