The perhaps most anticipated update concerned Hong Kong, which was put on the grey list last year because its foreign source exemption (FSIE) regime for passive income applied to all Hong Kong companies, irrespective of any substance in Hong Kong. Hong Kong was given time until 31 December 2022 to amend its FSIE regime.
In the meantime, Hong Kong adapted its regime and the application of the FSIE regime was made subject to compliance with a substance condition. For dividends and capital gains on shares, a participation exemption was introduced whereby dividends and capital gains would, under certain conditions, remain tax exempt, even if the Hong Kong entity would be deemed to have insufficient substance.
It was therefore expected that Hong Kong would be removed from the grey list during last week’s update of that list (and the black list). The good news is that Hong Kong was not blacklisted. However, the bad news is that Hong Kong (and Malaysia) remains on the grey list. Following a clarification of the Guidance on FSIE regimes in December 2022, the EU decided to grant Hong Kong (and Malaysia) additional time - until the end of 2023 - to amend its tax legislation regarding capital gains.
At first sight, the decision to keep Hong Kong on the grey list seems strange, as the Hong Kong regime was adapted in collaboration with the EU. Moreover, the EU’s decision to retain Hong Kong on the grey list only refers to the capital gains regime (which still needs to be amended). This is somewhat strange, as the conditions for an exemption of a capital gain on shares are equal to those for an exemption on dividends. Moreover, the conditions of the Hong Kong participation exemption are quite similar to those in the Parent-Subsidiary Directive.
In the meantime, the Hong Kong government published an official communication, clarifying why Hong Kong is still greylisted. It states that in order to comply with the updated Guidance, in which “capital gains” are listed as a category of passive income, the reformed FSIE regime should include all capital gains, financial as well as non-financial. The current FSIE regime in Hong Kong, on the other hand, only applies to capital gains on shares. Hong Kong is now communicating with the EU to determine how to comply with the EU substance requirements for all kinds of capital gains.
Furthermore, four new countries were added to the so-called black list of non-cooperative jurisdictions: British Virgin Islands (BVI), Costa Rica, Marshall Islands and Russia. Belgian companies or groups doing business with other (group) companies in these countries could face some negative tax consequences in Belgium, such as:
- Payments to companies established in these countries must be reported if the total amount of payments to so-called tax havens (such as the countries on the EU black list) exceeds 100,000 EUR. In case of non-reporting, the payments will not be tax-deductible in Belgium (however subject to DTT provisions and EU law).
- Payments by a Belgian company to companies established in these countries will only be tax-deductible in Belgium, if the Belgian company proves that the payments are made in the context of real and genuine transactions (and persons), other than artificial arrangements.
- The dividend received deduction does no longer apply to dividends from a company established in one of these jurisdictions and will therefore be subject to tax in Belgium.
- Subsidiaries of a Belgian company established in one of these jurisdictions will be subject to the Belgian CFC rules.
Finally, some countries do no longer appear on the EU grey list. Barbados, Jamaica, North Macedonia and Uruguay were removed from it after sufficiently adapting their legal framework and compliance standards.