Hong Kong announced on 5 October 2021 its commitments to the European Union (EU) to amend the Inland Revenue Ordinance (i.e., Hong Kong Tax Legislation) by the end of Year 2022 in response to the inclusion of Hong Kong to “Watchlist” of EU. The announcement states that the amended legislation would be implemented from 1 January 2023, while no grandfathering arrangements are expected.
Concerns expressed by the EU on Hong Kong Tax Regime focuses on the non-taxation of foreign sourced passive income in Hong Kong that might lead to situations of "double non-taxation". Such practice is identified as having “harmful features” in the local tax regime and not consistent with the international tax standards.
The Hong Kong Government is going to propose legislative amendments in year 2022 which would merely target corporations, particularly those with no substantial economic activity in Hong Kong while make use of offshore claim on passive income to evade tax across border. Thus, it is expected that Hong Kong companies receiving passive income (e.g., royalty and interest income) while claiming offshore under the territorial concept would be the first slot of targets of the local Tax Legislation.
Points to note
Hong Kong has long been adopting the territorial source principle of taxation. Such feature is regarded as a symbol of the local tax regime. Although outlines of the proposed amendments are not available yet; it is expected that lodging offshore claim on passive income would be extremely difficult under the situation of “double non-taxation” even when the requirements of offshore claim stated in the legislation have been largely satisfied.
Despite the fact that the new legislation is not expected to be enacted yet by the end of Year 2022, taxpayers with such tax arrangements should implement the changes now as very often the Hong Kong Inland Revenue Department would take a long time to review and approve the offshore claim and thus it is highly possible that its decision will be made after the enactment of new legislation. Operating group with such tax structure should be aware of such changes of the local Tax Legislation and sufficient provision should be provided for such tax liability. You are most welcome to contact your tax advisors for any enquiries in this regard.
It is also highlighted that the EU has also included Singapore into its “Watchlist” due to similar locality concept application in its tax regime. Observations on potential change in Singapore tax regime should be maintained.
See the Press Release by the Hong Kong Government at:
https://www.ird.gov.hk/eng/ppr/archives/21100501.htm
