Hong Kong To Amend Tax Guidelines For International-Supply Passive Earnings

Hong Kong To Amend Tax Guidelines For International-Supply Passive Earnings

by Jason Gorringe, Tax-Information.com, London

01 November 2021

The Hong Kong Authorities has issued an announcement committing to amend its tax regulation with regards the tax exemption for international supply passive revenue from 2023, to make sure the territory doesn’t find yourself positioned on the EU’s tax blacklist of non-cooperative territories.


In 2017, the EU’s Code of Conduct Group (COCG) discovered {that a} tax system that absolutely excludes passive revenue with a international hyperlink from taxation, with none situations, is dangerous.

The COCG has mentioned: “International supply exemption regimes which are broad sufficient to incorporate passive revenue, with none situations, may end up in ring-fencing and a scarcity of substance. Ring-fencing arises as a result of the receipt of passive revenue typically requires a transaction with a non-resident. Passive revenue is mostly not coupled with financial substance necessities. The COCG has discovered that the exemption of passive revenue with out clear situations (e.g. express hyperlink to some actual exercise within the jurisdiction) contravenes the rules of the Code.”

On Might 20, 2019, the Code of Conduct Group (COCG) agreed on an method to evaluate international
sourced revenue exemption regimes. It additionally issued pointers to offer
path for jurisdictions which have already taken a dedication to amend their international supply
revenue exemptions, as a consequence of dangerous options recognized by the COCG.

In these pointers, it mentioned: “International supply revenue exemption regimes, or regimes that cost company tax on a territorial
foundation aren’t, in themselves, problematic. In actual fact, exempting international earnings is appropriate and even
recommendable, in sure instances, to forestall double taxation. Nonetheless, issues come up when such
regimes not solely stop double taxation, but in addition create conditions of double-non taxation. That is
notably the case for regimes which have (i) a very broad definition of the revenue excluded
from taxation, notably international supply passive revenue with none situations or safeguards, and/or
(ii) a nexus definition that’s non-compliant with the definition of a everlasting institution within the
OECD Mannequin Tax Conference.”

The COCG has mentioned jurisdictions with dangerous international revenue exemption regimes ought to both:

  • Introduce taxation of passive revenue; or

  • In the event that they exclude from taxation sure kinds of passive revenue:

    • implement sufficient substance necessities to the entities involved, in keeping with the EU’s Code of Conduct (Enterprise Taxation);
      have sturdy anti-abuse guidelines in place; and

    • take away any administrative discretion in figuring out the revenue to be excluded from taxation.

Hong Kong’s response

The Hong Kong Authorities issued an announcement on October 5, 2021, following the inclusion of Hong Kong within the listing of territories which have a dangerous tax regime however have dedicated to deal with the COCG’s considerations. In line with the EU, Hong Kong has agreed to make legislative amendments to its tax legal guidelines by an agreed deadline of December 31, 2022, which in accordance with Hong Kong will probably be carried out from 2023.

The Hong Kong Authorities mentioned: “As a world monetary centre, Hong Kong has all alongside been actively taking part in and supportive of worldwide tax co-operation. Through the years, Hong Kong has adopted the territorial supply precept of taxation, whereby offshore earnings are typically not topic to earnings tax in Hong Kong.”

“The EU is anxious that corporates with no substantial financial exercise in Hong Kong aren’t topic to tax in respect of sure offshore passive revenue (akin to curiosity and royalties), therefore resulting in circumstances of ‘double non-taxation’. Beneath the premise of supporting the combating of cross-border tax evasion, the HKSAR Authorities agrees to co-operate with and has dedicated to the EU to amend the Inland Income Ordinance (Chapter 112 of the Hong Kong legal guidelines) by the top of 2022 and implement related measures in 2023.”

“Hong Kong will proceed to undertake the territorial supply precept of taxation. The Authorities will endeavour to uphold our easy, sure and low-tax regime with a view to sustaining the competitiveness of Hong Kong’s enterprise setting.”

“The proposed legislative amendments will merely goal companies, notably these with no substantial financial exercise in Hong Kong, that make use of passive revenue to evade tax throughout a border. Particular person taxpayers won’t be affected. As to monetary establishments, their offshore curiosity revenue is already topic to earnings tax below the Inland Income Ordinance at current, and therefore the legislative amendments won’t improve their tax burden.”

“We are going to seek the advice of the stakeholders on the particular contents of the legislative amendments and attempt to minimise the compliance burden of corporates.”

The Authorities concluded: “Hong Kong enterprises won’t be topic to defensive tax measures imposed by the EU because of being included within the watchlist on tax co-operation. The HKSAR Authorities will request the EU to swiftly take away Hong Kong from the watchlist after amending the related tax preparations.”

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