July 2022 - Proposed changes to the offshore regime for passive income in Hong Kong

To address harmful tax competition, the European Union (“EU”) has been requiring its Member States to refrain from introducing any new harmful tax measures and amend any laws or practices that are deemed to be harmful. With regard to non-EU jurisdictions, the EU has also been evaluating their tax regimes against international tax standards and put in place a list of non-cooperative jurisdictions for tax purposes (“EU List”). In October 2021, the EU placed Hong Kong on the watchlist of the EU List in view of the possible risks of double non-taxation arising from the tax exemption for offshore passive income in the absence of any requirement for recipient companies to have a substantial economic presence in Hong Kong. The EU’s main concern is the possible exploitation of the tax arrangement by shell companies for tax benefits.