What is the EU tax watch list?

It is a list identifying jurisdictions that have committed to improving their tax systems to meet international standards.

Are individual taxpayers affected by the EU watch list?

No. The reforms do not affect individual taxpayers.

Does Hong Kong still apply territorial taxation?

Yes. Offshore profits remain generally exempt, subject to economic substance requirements.

What happens after Hong Kong amends its tax system?

After reform, Hong Kong may request removal from the EU tax watch list.

Hong Kong EU Tax Watch List: Why Hong Kong Was Added and What It Means

Stefan Schmierer
Nov 2, 2021
4 min read

Updated: Apr 13

Hong Kong Added to the EU List of Non‑Cooperative Countries and Territories for Tax Purposes

With effect from 5th October 2021, Hong Kong has been added to the EU list of non‑cooperative countries and territories for tax purposes.

EU Tax Watch List and Hong Kong’s Status Since October 2021

Hong Kong has been on the EU watch list for tax purposes since 5th October 2021.

The list is designed to combat tax fraud, tax evasion, tax avoidance, and money laundering. By doing so, the EU pursues the enforcement of diligent practice in cross‑border tax standards in light of its tax bases.

The list includes third countries that abuse tax practices or embezzle revenues resulting from the corporate taxes of EU Member States. The aim is to bring about a positive transformation of tax procedures and tax legislation in the countries on the list.

If third countries that do not yet fulfil all international tax requirements want to implement reforms consistent with EU standards, they are listed in a document on the status of cooperation, which functions as a watch list. Once requirements are met, jurisdictions may be removed from the list again.

However, where countries do not address the identified harmful aspects of their tax system, they may be moved from the watch list to the final blacklist of non‑cooperative countries and territories for tax purposes.

Penalties include denial of deductions for payments, higher tax rates, application of controlled foreign company rules, taxation of dividends, and administrative measures.

Planned Amendment of Hong Kong’s Territorial Tax System

Deadline Set for 31 December 2022

Following a review of tax exemption regimes for foreign source income (offshore income), Hong Kong was placed on the EU watch list. This placement also reflects Hong Kong’s agreement to amend the relevant legislation.

The EU considers that aspects of Hong Kong’s territorial tax system could facilitate tax avoidance or other practices considered harmful. Of particular concern is that companies without substantial economic activity in Hong Kong may not be taxed on certain passive offshore income, such as interest and royalties, resulting in double non‑taxation.

The change to Hong Kong’s territorial tax system represents one of the most significant reforms to profits tax in recent years and will have a fundamental impact on many resident companies. The EU set a deadline of 31st December 2022 for the necessary reforms. Without changes, Hong Kong risked being blacklisted.

Impact on Taxation of Offshore Profits of Foreign Companies

The Hong Kong SAR Government responded to the EU tax watch list in a supportive manner, committing to participate in the fight against cross‑border tax evasion. Hong Kong agreed to amend tax law by the end of 2022, with measures implemented in 2023.

Importantly, Hong Kong will continue applying the territorial principle of taxation, under which offshore profits are generally not subject to Hong Kong profits tax. The government seeks to preserve a simple, safe, and low‑tax system to maintain competitiveness.

Individual taxpayers are not affected by the amendment. The reforms target companies that do not carry out substantial economic activities in Hong Kong and that use passive offshore income for cross‑border tax avoidance.

Although Hong Kong was placed on the EU watch list, Hong Kong companies were not subject to immediate tax safeguards. Following amendments to the relevant regimes, the Hong Kong government planned to request removal from the list.

How Ravenscroft & Schmierer Can Help?

The placement of Hong Kong on the EU tax watch list and subsequent reforms require careful assessment for multinational and cross‑border businesses. Ravenscroft & Schmierer advises clients on territorial taxation, offshore profit claims, economic substance requirements, and compliance with international tax standards.

Contact our team if you are uncertain how the Hong Kong EU tax watch list reforms affect your structure or profits.

FAQ: Hong Kong EU tax watch list

Why was Hong Kong added to the EU tax watch list?

Hong Kong was added due to EU concerns that aspects of its territorial tax system could facilitate double non‑taxation.

What is the difference between the watch list and the blacklist?

The watch list applies to jurisdictions committed to reform, while the blacklist applies where harmful practices remain unaddressed.

Does the EU tax watch list affect individual taxpayers?

No. Individual taxpayers are not affected by the Hong Kong tax system reforms.

Are offshore profits still exempt in Hong Kong?

Yes. Hong Kong continues to apply territorial taxation, subject to new economic substance requirements.

What happens if Hong Kong had not reformed its tax system?

Failure to reform could have resulted in Hong Kong being placed on the EU blacklist.

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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