On 14 February 2023, the EU Member States (‘Code of Conduct Group’) published their latest update of those countries that do not (sufficiently) comply with tax good governance standards. This includes standards in the area of fair taxation and tax transparency, and of fighting against tax fraud, evasion and avoidance, both at an EU level and globally.
The different jurisdictions are assessed against three main criteria: (i) tax transparency, (ii) fair taxation and their (iii) implementation of the BEPS minimum standards.
The Council announces its conclusions in a (black) list of non-cooperative jurisdictions for tax purposes (Annex I) and a (grey) list of cooperative jurisdictions that are still ‘in process’ of making further improvements to their tax policies or related cooperation (Annex II).
Annex I of the EU list is currently made up of 16 jurisdictions.
Those countries are American Samoa, Anguilla, the Bahamas, the British Virgin Islands, Costa Rica, Fiji, Guam, the Marshall Islands, Palau, Panama, Russia, Samoa, Trinidad & Tobago, the Turks & Caicos Islands, the US Virgin Islands, and Vanuatu.
The British Virgin Islands, Costa Rica, Marshall Islands and Russia were blacklisted in the latest update.
If you would be interested to learn why exactly these countries are currently blacklisted, we can refer to the above update published by the Group.
Annex II, which is effectively a watchlist, now includes the following 18 jurisdictions: Albania, Armenia, Aruba, Belize, Botswana, Curaçao, Dominica, Eswatini, Hong Kong, Israel, Jordan, Malaysia, Montserrat, Qatar, Seychelles, Thailand, Turkey and Vietnam.
In addition, Albania, Aruba and Curaçao were added to the grey list, while 4 jurisdictions were removed from it, as they had fulfilled their previous commitments (i.e. Barbados, Jamaica, North Macedonia and Uruguay).
Hong Kong and Malaysia were granted an extension to adapt their legislation. Qatar was also granted an extension because it faced constitutional reform constraints to complete its reform on time.
What about Hong Kong?
We reported in December 2021 already that Hong Kong was put on the grey list because of its foreign source exemption (FSIE) regime for passive income. It was given time until 31 December 2022 to amend the offshore regime, and to address the EU’s concerns about it.
Hong Kong adapted its FSIE regime, and its application was made subject to compliance with a substance condition. The HKSAR Government thus put in place a new FSIE regime for foreign-sourced dividend, interest, IP income and disposal gain in relation to shares or equity interests received in Hong Kong. The EU Council’s recent decision to retain Hong Kong on the grey list only refers to the capital gains regime, which still needs to be amended.
In a press release, the HKSAR Government announced afterwards that it will further refine the current FSIE regime with regard to foreign-sourced disposal gains in relation to assets other than shares or equity interests in light ofthe EU’s updated guidance.
From a Belgian perspective, the fact that Hong Kong continues to be on the watchlist, has no negative impact for the time being. However, if Hong Kong does not (sufficiently) comply in the coming months, it might still be ‘blacklisted’. This could have several negative tax consequences for Belgian companies that maintain business relationships with Hong Kong SAR.
We can refer to our previous article for a more detailed overview,in case Hong Kong would effectively be blacklisted.
The decision to keep Hong Kong on the grey list seems odd, as Hong Kong has effectively adapted its FSIE regime in line with the EU requirements.
The HKSAR Government will conduct a consultation exercise next month to seek stakeholders’ comments on the proposed refinements to the regime. They will most likely request the EU soon after to remove them from the grey list, after making the necessary legislative amendments.
Since 2020, the EU Council updates the watchlist twice a year. The next revision of the list is scheduled for October 2023. Hopefully, Hong Kong will be removed from the list at that point.