The EU updates tax ‘grey-list’ as Hong Kong SAR plans for tax law changes

On February 24 2022, the EU announced the conclusion on the latest round of review of its list of non-cooperative jurisdictions for tax purposes. 

Following the latest revision, the EU decided to add, among other jurisdictions, Bermuda and the BVI to the grey list (i.e. Annex II of its list of non-cooperative jurisdictions for tax purposes). Hong Kong SAR remains on the grey list. No jurisdictions were added to or removed from the blacklist (i.e. Annex I of its list of non-cooperative jurisdictions for tax purposes). 

Based on the EU Code of Conduct Group report dated February 2 2022, Bermuda and the BVI have been added to the grey list because: (i) Bermuda has yet to address the issues identified by the OECD Forum on Harmful Tax Practices (FHTP) with respect to the implementation of the economic substance regime; and (ii) the BVI has yet to implement a recommendation made by the OECD Inclusive Framework on BEPS (IF) in relation to the implementation of the minimum standard for country-by-country reporting (CbCR) under Action 13 of the BEPS Action Plan. 

Both jurisdictions have made a high-level commitment to implement the recommendations of the EU and/or the OECD. 

Thailand and Vietnam are also on the grey list as they have yet to implement the IF’s recommendations on implementing the CbCR minimum standard and activate the CbCR exchange relationships with all EU Member States.

The next revision of the EU list of non-cooperative jurisdictions is scheduled in October 2022. 

KPMG observations

The EU will continue to monitor the progress of the grey-listed jurisdictions in implementing the recommendations of the EU and/or the OECD, and consider any necessary updates in the next round of review of non-cooperative jurisdictions in October 2022.  

Businesses in Hong Kong SAR with operations in or transactions with Bermuda or the BVI should closely monitor the future developments and be prepared to assess the potential impact of any forthcoming changes to the tax regimes in these jurisdictions on their businesses. 

For Hong Kong SAR, the HKSAR government has committed to amending the tax law to address the EU’s concerns about the offshore regime in respect of passive income in Hong Kong SAR. While the exact changes to the Hong Kong SAR tax system required for Hong Kong SAR to get off from the ‘grey-list’ are yet to be confirmed, the deadline for making such changes remains to be the end of 2022.  

In its press release issued on October 5 2021, the HKSAR government has made it clear that Hong Kong SAR will maintain the territorial source principle of taxation. In addition, the tax law changes will only target corporations that make use of passive income to evade cross-border tax, particularly those with no substantial economic activity in Hong Kong SAR.  Individual taxpayers will not be affected.

Effective from January 1 2023, the potential changes to be made to the Hong Kong SAR tax system include: (i) taxation of offshore passive income remitted into Hong Kong SAR, (ii) introduction of a substance requirement and/or subject-to-tax condition for exempting offshore passive income remitted back to Hong Kong SAR; and (iii) introduction of a participation exemption for dividends and gains from disposal of equity interest. 

If offshore passive income may be subject to tax in Hong Kong SAR under certain circumstances in the future, consideration should also be given as to whether Hong Kong SAR should introduce a mechanism for unilateral tax credit in the absence of a tax treaty to provide relief for double taxation. 

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