Hong Kong: Added to EU “grey list” for tax purposes

The European Union (EU) has decided to add Hong Kong to Annex II of its list on non-cooperative jurisdictions for tax purposes.

The European Union (EU) has decided to add Hong Kong to Annex II.

Hong Kong will be added to the European Union’s “grey list” on non-cooperative jurisdictions for tax purposes, effective 5 October 2021.

Following a review of foreign-source income exemption regimes, the European Union (EU) has decided to add Hong Kong to Annex II of its list on non-cooperative jurisdictions for tax purposes, effective 5 October 2021. This means that the EU considers that aspects of Hong Kong’s territorial tax system may facilitate tax avoidance or other tax practices regarded as harmful. It also means that Hong Kong has agreed to make changes to the relevant legislation. The EU has granted the affected jurisdictions until 31 December 2022 to make necessary changes.

Annex II is effectively a watchlist—the EU will further monitor the situation and consider moving Hong Kong to a “blacklist” if the identified harmful aspects of its tax system do not change. Punitive measures against blacklisted jurisdictions include denial of deduction of payments made, increased withholding taxes, application of controlled foreign company rules, taxation of dividends, and administrative measures.

Changes to the territorial system in Hong Kong will be one of the most significant changes to Hong Kong profits tax for many years and will have a fundamental effect on the tax profiles of many companies operating.
 

For more information contact a KPMG tax professional:

Rodney Lawrence | +1 312 665 5137 | rlawrence@kpmg.com

 

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