The administration said it understood the EU’s concerns, which stem from its non-taxation of certain offshore passive income, such as interest and royalties, but it has already committed to making changes.
It said the Inland Revenue Ordinance will be amended by the end of 2022 and measures to support the combating of cross-border tax evasion will be implemented in 2023.
The government said the proposed legislative amendments will target corporations, particularly those with no substantial economic activity in Hong Kong, that make use of passive income to evade tax across a border.
It stressed financial institutions will not have to pay more tax, because their offshore interest income is already subject to profits tax, and individual taxpayers will not be affected.
The government said stakeholders will be consulted on the legislative amendments, and authorities will try to minimise the compliance burden of corporations.
“Hong Kong enterprises will not be subject to defensive tax measures imposed by the EU as a result of being included in the watchlist on tax co-operation,” the government said. “The HKSAR Government will request the EU to swiftly remove Hong Kong from the watchlist after amending the relevant tax arrangements.”
It added the SAR will continue to adopt the territorial source principle of taxation and uphold a simple, certain and low-tax regime.