Search
Close this search box.

Hong Kong on EU ‘grey list’ – What does it mean?

Hong Kong on EU ‘grey list’ – What does it mean?

Early October 2021, Hong Kong was added to the European Union’s ‘grey list’ of non-cooperative tax jurisdictions. This means that the EU considers Hong Kong’s territorial tax system to potentially facilitate tax avoidance or other harmful tax practices. The EU is mainly concerned about corporations that do not have substantial economic activities in Hong Kong and are not subject to tax on their offshore passive income, such as dividends and royalties. Hong Kong has time until 31 December 2022 to make the necessary changes to their tax laws.

Since 2003, the double tax treaty between Belgium and Hong Kong has facilitated many business transactions in both directions. Hong Kong is renowned for its simple and low tax regime, making it one of the most business-friendly jurisdictions in the world. While the standard corporate tax rate is 16.5%, taxes are only levied on income derived from/arising in Hong Kong and not from outside the country. This ‘offshore’-principle means that a Hong Kong business that earns profits from elsewhere will not be taxed on those in Hong Kong. Other countries, like e.g. Singapore, have a similar tax system.

From a Belgian perspective, Hong Kong now being grey listed, does not have any immediate negative impact. However, if Hong Kong does not (sufficiently) comply by the end of 2022, it will be ‘blacklisted’, which could have several negative tax consequences for Belgian companies that maintain business relationships with Hong Kong.

  • Dividends paid by a Hong Kong company to a Belgian parent company would no longer benefit from the Dividends-Received Deduction (DRD) and will be taxed in Belgium at the corporate tax rate of 25%. The same would apply to realized capital gains on shares from a Hong Kong subsidiary.
  • The Controlled Foreign Company (CFC) rules that were recently introduced in Belgium, could be applied more quickly to Hong Kong companies. Under these rules, any undistributed profits of controlled, low-taxed subsidiaries are added to the taxable base of the Belgian entity.
  • Companies making (direct or indirect) payments to beneficiaries established in ‘blacklisted’ countries (tax havens) are required to report these if they exceed 100,000 during the taxable period. Failure to report these payments automatically results in their non-deductibility for tax purposes.
  • In view of DAC 6, Hong Kong being ‘blacklisted’ would also increase the reporting obligations for companies (and their advisors), that do transactions with entities located in Hong Kong.
  • For Belgian individual taxpayers, this will create additional reporting requirements as well under the Cayman Tax rules. An entity with legal personality established in an EU blacklisted country, is presumed to create a ‘legal construction’ that falls within the scope of the Belgian Cayman Tax.

It should be noted that Hong Kong has been ‘grey listed’ before, namely in December 2017 and was removed again from the list in March 2019, after making the necessary reforms and improvements on various tax matters.

It is currently not clear what changes the HKSAR Government will introduce to avoid being moved to the EU’s blacklist, but it is recommended to follow-up closely and make sure you are ready to restructure your business setup if needed.

Share