# Hong Kong removed from EU watchlist following changes in regulations on foreign-sourced income

- Link: https://www.thailand-business-news.com/european-union/129596-hong-kong-removed-from-eu-watchlist-following-changes-in-regulations-on-foreign-sourced-income
- Published: 2024-03-06T11:31:47+07:00
- Author: ASEAN Briefing

The European Union has removed Hong Kong from its watchlist of non-cooperative tax
jurisdictions after the city made changes to its foreign-sourced income exemption
regime.

The amendments require multinational enterprises that don’t meet certain requirements
to pay tax on certain types of foreign-sourced passive income.

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## Key Takeaways

 * Hong Kong has been removed from the EU watchlist of non-cooperative tax jurisdictions
   after amending its foreign-sourced income exemption (FSIE) regime, demonstrating
   its commitment to international tax standards.
 * The new FSIE regime in Hong Kong requires multinational enterprises (MNEs) that
   lack substantial presence in the region to pay profits tax on certain types of
   foreign-sourced passive income, impacting MNEs that do not meet substance requirements.
 * Despite the changes, Hong Kong continues to implement a territorial source principle
   of taxation, allowing companies with operations in the city to still enjoy a 
   favorable low-tax regime while demonstrating its commitment to international 
   compliance.

This move addresses concerns about double non-taxation of passive income and demonstrates
Hong Kong’s commitment to complying with international tax standards. The city’s
proactive approach reassures businesses of its robust tax regulations while maintaining
its appeal as a global financial hub.

On February 20, 2024, the EU Council decided to remove Hong Kong from its list of“
non-cooperative jurisdictions” due to unfair tax legislation enabling tax evasion.
Hong Kong was previously added to the ‘grey list’ of non-cooperative tax jurisdictions
on October 5, 2021. The Council had listed Hong Kong under Annex II, indicating 
that it had not fully complied with international tax standards but had committed
to reform.

## Changes to Hong Kong’s FSIE regime

In response to the EU Council’s recommendations, Hong Kong has amended its FSIE 
regime for passive income so that MNEs that do not have a sufficiently substantive
presence in Hong Kong will be required to pay profits tax on certain types of foreign-
sourced passive income.

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In effect, this will mean that MNEs that are incorporated in Hong Kong purely for
tax purposes and that do not have actual operations in the region will be required
to pay profits tax on this type of income, while companies with actual operations
in Hong Kong can continue to enjoy the exemption.

Read More : [Hong Kong FSIE Change Results in City’s Removal from EU Watchlist (china-briefing.com)](https://www.china-briefing.com/news/hong-kong-fsie-change-removal-eu-watchlist/)