BackgroundRecently the European Union (EU) completed its review of the foreign-source income exemption (FSIE) regime in Hong Kong. Though the EU acknowledges that FSIE regimes are not in themselves problematic, it is concerned that corporates with no substantial economic activity in Hong Kong are not subject to tax in respect of certain offshore passive income (such as interest and royalties),1 thereby leading to circumstances of double non-taxation.On 5 October 2021, Hong Kong was placed on Annex II of the EU list of non-cooperative jurisdictions for tax purposes (the so-called “gray list”).2Hong Kong’s response to the EU’s assessmentIn response to the EU’s...