HONG KONG – The European Union has removed Hong Kong from its watchlist on tax cooperation in recognition of the city’s efforts in ensuring that its foreign-sourced income exemption, or FSIE, regime is in full compliance with the relevant EU requirements.

Welcoming the move, the special administrative region government said Hong Kong will continue to comply with international tax standards while maintaining tax competitiveness.

“We are pleased to note that the EU has recognized our efforts in this regard and removed Hong Kong from the watchlist … As an international financial center, Hong Kong has all along been supporting international cooperation in combating cross-border tax avoidance,” said Secretary for Financial Services and the Treasury Christopher Hui Ching-yu. 

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Following the EU’s inclusion of Hong Kong in its watchlist in 2021, the HKSAR 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.

I am confident that Hong Kong will continue to maintain its favorable business environment and strengthen its status as an international business and trade center.

Christopher Hui, Secretary for Financial Services and the Treasury, HKSAR 

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 December last year, the SAR government enacted the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 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 Jan 1, 2024.

Stressing that the Hong Kong government will continue to take forward and implement new policy initiatives to create new impetus for sustainable market development, Hui said: “I am confident that Hong Kong will continue to maintain its favorable business environment and strengthen its status as an international business and trade center.”

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Despite the impact of the global geopolitical situation and high interest rate environment, Hong Kong has remained resilient and continued to strengthen its competitiveness as an international financial center, said the government.

Hong Kong enjoys unique advantages, including a simple tax regime, a regulatory regime aligned with major overseas markets, free flow of capital and information, and a diversified talent pool, it said, adding that the SAR is the only place in the world where the global advantage and China advantage converge in a single city allowing Hong Kong to be China's gateway to the world's financial markets and investors.