Automatic Exchange of Information in Hong Kong

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1 May 2017 simmons-simmons.com elexica.com Automatic Exchange of Information in Hong Kong Introduction In September 2014, Hong Kong indicated its support for implementing the international standard for automatic exchange of financial account information in tax matters (AEOI) on a reciprocal basis with appropriate partners. Following public consultation, the Hong Kong Government introduced an amendment bill into the Legislative Council in January 2016, which was passed on 22 June The Inland Revenue (Amendment) (No. 3) Ordinance (Amendment Ordinance) came into effect on 30 June The Amendment Ordinance amends the Inland Revenue Ordinance (IRO) to provide the legal framework in Hong Kong for implementing AEOI. The Organisation for Economic Development (OECD) first announced the AEOI in July 2014 in order to increase international tax cooperation and transparency, and to combat cross-border tax evasion. In many respects, the AEOI is similar to the Foreign Account Tax Compliance Act (FATCA) in the United States. The idea is to systematically allow the transmission of financial account information from an AEOI-compliant jurisdiction, say, Hong Kong, to an overseas jurisdiction with which Hong Kong has entered into an AEOI agreement (AEOI partner). This allows the AEOI partner to identify the assets its tax residents have offshore held with financial institutions in Hong Kong or other AEOI partner jurisdictions. The AEOI partner will also reciprocate with Hong Kong. The regime therefore requires all AEOI-compliant governments to obtain relevant financial account information from their resident financial institutions and to thereafter exchange the information with the relevant AEOI partners (i.e. report such information to the jurisdiction in which the account holder to be reported is tax resident). This Oversight briefly covers the key concepts that financial institutions should concern themselves with under AEOI, focusing on certain issues related to asset managers and collective investment schemes, as highlighted by the Inland Revenue Department of Hong Kong (IRD) in its guidance materials. Reporting financial institutions and financial accounts The A reporting financial institution (which includes, with certain exceptions, a financial institution resident in Hong Kong and a branch located in Hong Kong of a non-resident financial institution) will, under AEOI, be required to identify the financial accounts held by (with exceptions) individuals or entities that are tax resident in AEOI partner jurisdictions or their estate (a reportable person ), and to submit to the IRD, on an annual basis, identity information and financial account information relating to such persons. The IRD will then report such information to the jurisdiction in which the account holder is tax resident.

2 Financial institutions covered under the AEOI regime include custodial institutions, depository institutions, investment entities (e.g. collective investment schemes) and specified insurance companies which are resident in Hong Kong, or are branches of non-resident financial institutions located in Hong Kong. The types of financial accounts reportable to the IRD include custodial accounts, depository accounts, equity or debt interests in investment entities and cash value insurance contracts and annuity contracts held in the reporting financial institution. Mechanism Reporting financial institutions will have to report on financial accounts held by reportable persons. Under the Amendment Ordinance, due diligence obligations require reporting financial institutions to ask financial account holders to complete selfcertification forms for verification of their tax residency status. Self-certification forms are formal declarations that account holders make regarding their tax residence, accessible here: There are sanctions against account holders who deliberately or recklessly provide misinformation (see below). There are different due diligence procedures for financial accounts held by individuals and entities as well as for preexisting and new accounts. IRD Guidance On 7 November 2016, the IRD issued a set of frequently asked questions (FAQs) regarding the introduction of AEOI in Hong Kong. The FAQs addressed the practical operation of AEOI and how it might affect, among other parties, financial institutions. The FAQs can be accessed here: The FAQs set out the IRD s expectation as to the standard of due diligence required of reporting financial institutions, in particular the standard expected when attempting to verify the information in self-certifications. The FAQs state that financial institutions may rely on a self-certification if it satisfies the reasonableness test, having regard to the wider body of information it has obtained in connection with the opening of the account, including any documentation collected pursuant to prevailing due diligence or knowyour-customers procedures. However, financial institutions are not expected to carry out independent legal analyses of relevant tax laws to determine an account holder s tax residence. The FAQs also clarify that, in respect of pre-existing accounts (i.e. accounts opened before 1 January 2017), if the tax residence of an account holder is in doubt, the reporting financial institution may solicit a self-certification form. In respect of new accounts opened on or after 1 January 2017, self-certifications will be required from all account holders without exception. From these selfcertifications, the financial institution will identify persons or entities tax resident in an AEOI partner jurisdiction and, on an annual basis, report his, her, or its financial account information to the IRD. The IRD also issued guidance for financial institutions (Guidance) ( The Guidance is intended as a reference for Hong Kong financial institutions, tax, compliance and legal professionals. Set out below are the key points which are relevant for Hong Kong asset managers and service providers to funds: Collective Investment Schemes (CIS) The definition of investment entity (one category of financial institutions ) under the Amendment Ordinance is wide and includes CIS, as well as fund managers, fund administrators, transfer agents, depositories and trustees of unit trusts. The following types of CIS fall within the definition of an investment entity: a CIS authorised by the Securities and Futures Commission (SFC) under the Securities and Futures Ordinance (SFO) and a CIS not authorised under the SFO that is resident in Hong Kong (or is non-resident in Hong Kong but has a branch located in Hong Kong). The IRD pointed out that, however, an entity will only have reporting obligations if it maintains financial accounts (examples of which are set out above). An entity within the definition of investment entity, by virtue of investing, administering or managing financial assets of a CIS but which does not itself maintain financial accounts is not required to identify or report the accounts it administers or manages. For example, a transfer agent who provides services to a CIS on a third party basis would not typically have a direct obligation to identify or report the accounts of the CIS. An entity which is regarded as an investment entity and therefore a financial 2

3 institution solely because it administers or manages the financial assets of a CIS will not be regarded as a reporting financial institution with reportable accounts merely because of its management or administration activities. Where a CIS is a reporting financial institution, the person responsible for ensuring compliance with the obligations under the Amendment Ordinance are: (a) for a CIS constituted as a corporation, that corporation and its directors; and (b) for a CIS that is not constituted as a corporation, the person who acts for the CIS to maintain financial accounts. SFC-authorised CISs in Hong Kong may have a fund manager who is the product provider and has assigned responsibility for fulfilling the legal and regulatory obligations of the CIS, including the anti-money laundering regulatory obligations. The IRD stated that the fund manager will be regarded as the person who acts for the CIS to maintain financial accounts and is responsible for compliance with the due diligence and reporting obligations in relation to the financial accounts of the CIS. A fund manager may appoint a third party service provider to fulfil account identification and reporting requirements. In practice, a CIS that has reporting obligations is required to conduct due diligence on its accounts to identify whether any such accounts are held by reportable persons; and report to the IRD information on such accounts. Details of unitholders or shareholders, including but not limited to their name, jurisdiction of birth, address, tax residence, account details, account balance/value, and income or sale or redemption proceeds, may be reported to the IRD and subsequently exchanged with government authorities in the relevant jurisdictions of tax residence. The fund manager should ensure that disclosure is made under the offering documents of the CIS about the collection and potential reporting of such information, and the consequences if the investors fail to provide the same. Relevant clauses should also be included in client agreements such as distribution agreements to obtain investors acknowledgment and consent. The SFC has issued a circular to issuers of SFC-authorised CISs concerning AEOI: For non SFC-authorised CISs, the overwhelming majority of which tend to be established in the Cayman Islands, these requirements will not apply. Typically, SFC-authorised CIS which are UCITS funds are not normally managed or controlled in Hong Kong, so they would not be resident in Hong Kong for the purpose of the Amendment Ordinance. These CIS will be subject to the requirements of the jurisdiction of establishment or management. Distributors, platforms and nominees The IRD stated that fund distributors, which may include financial advisers, fund platforms, wealth managers, brokers, banks and insurance companies, may fall within the definition of investment entity because of their role in distributing a CIS. Where a distributor holds the legal title to the CIS (i.e. as nominee), customers may access the platform in order to buy and sell investments and to manage their investment portfolio. The platform will back the customers orders with holdings in the CISs, and possibly other assets, but only the platform will appear on the shareholders register of the CISs. Where this is the case the platform will be responsible for the reporting on its financial accounts. On the other hand, where a financial adviser acts in an advisory-only capacity and does not hold legal title to assets (and customers appear on the share register of the CIS or as a direct customer to a fund platform), the financial adviser will not be regarded as the financial institution that maintains the financial accounts. Nominees that hold legal title to assets on behalf of customers and are part of the legal chain of ownership of interests in a CIS will be custodial institutions and thereby financial institutions because they will be holding assets on behalf of others. Timeline for Implementation Reporting financial institutions are required to start collecting information for reportable accounts of account holders who are tax resident in an AEOI partner, beginning in the calendar year following the approval by the Legislative Council of the inclusion of that AEOI partner as a reportable jurisdiction in the law. The financial institutions will then report the information to the IRD in the next calendar year after the year it collects such information. The information will then be forwarded by the IRD to the relevant AEOI partners. For example, if a jurisdiction is included as a reportable jurisdiction in 2016, collection of information should have started in the calendar year 2017 and the reporting will take place in Please note, however, the expansion of the list of reportable jurisdictions as discussed below. As mentioned, under the Amendment Ordinance, all new accounts opened after 1 January 2017 must be supported by a selfcertification form. For pre-existing accounts, financial institutions can use information on file to determine tax residence; any doubts may require the institution to solicit more information (e.g. via self-certification) from the holder of that pre-existing account. 3

4 Submission of information of reportable financial accounts to the IRD must be done through an IRD AEOI Portal (Portal). The Portal is expected to become operational by July 2017, at which time reporting financial institutions should sign up. Submissions of reportable information of a particular calendar year (e.g. 2017) should be made in May of the following year (i.e. 2018), and the IRD will transmit in September (of 2018) the information to relevant AEOI partners. Expansion of the list of reportable jurisdictions for Hong Kong In February 2017, the IRD and the Financial Services and the Treasury Bureau (FSTB) issued a paper in relation to the expansion of the list of reportable jurisdictions. Subsequently, the Hong Kong Government introduced the relevant amendment bill into the Legislative Council on 29 March 2017, with a view to implementing the expansion by 1 July Hong Kong has signed bilateral Competent Authority Agreements (BCAAs) with Japan and the United Kingdom respectively for conducting AEOI starting from 2018 (with respect to data from 1 January 2017 onwards), and these jurisdictions are included in the list of reportable jurisdictions of Hong Kong (i.e. they are confirmed AEOI partners ). In October 2016, Hong Kong indicated that it will expand its AEOI network to cover all tax treaty partners committed to adopting AEOI and the IRD approached them for discussions as regards BCAAs. Hong Kong has subsequently signed BCAAs with Belgium, Canada, Guernsey, Italy, Korea, Mexico and the Netherlands for conducting AEOI. While Hong Kong is on its way to commencing the first automatic exchanges with its confirmed AEOI partners, both the OECD and the European Union (EU) started their respective exercises to draw up lists of non-cooperative tax jurisdictions. In order to fulfil OECD and EU requirements, the Hong Kong Government sees the need for Hong Kong to expand its AEOI network quickly, because a non-cooperative jurisdiction will be subject to countermeasures by the OECD or the EU which will make it a less attractive place for investment and business. The IRD and the FSTB pointed out two constraints for expanding Hong Kong s AEOI network: BCAA discussions with individual jurisdictions take time and in many cases bilateral tax treaties would need to be amended to allow for AEOI; financial institutions are currently mandated to only identify and collect information in relation to accounts held by tax residents of confirmed AEOI partners as included in the list of reportable jurisdictions. Financial institutions have no obligation to the same in respect of tax residents of a prospective AEOI partner, which makes it difficult for Hong Kong to exchange account information from 1 January 2017 until such time as a jurisdiction becomes a reportable jurisdiction. This would lead to information loss as raised by some jurisdictions. The Hong Kong Government stated that the EU is particularly keen on receiving data with respect to 2017 and would like to get data at least for the period commencing 1 July Faced with the above challenges, the Hong Kong Government proposes in a new amendment bill to include 65 prospective AEOI partners and seven confirmed AEOI partners as Hong Kong s reportable jurisdictions with effect from 1 July This means that financial institutions will need to furnish the IRD with the collected information with respect to accounts related to such jurisdictions from 2018 onwards (with respect to the period from 1 July 2017 to 31 December 2017 for the newly added 72 jurisdictions; the period for Japan and the United Kingdom remains 1 January 2017 to 31 December 2017). The date of second and third reading of the amendment bill is to be confirmed. Enforcement An account holder who knowingly, or recklessly, provides a statement that is misleading, false or incorrect particularly in his selfcertification form is liable, on conviction, to a Level 3 fine (HK$10,000). The IRD may inspect the details of the self-certification. Reporting financial institutions may also be sanctioned if they fail to identify, collect and report information of reportable accounts. Specifically, there are 3 main types of offenses: non-compliance, incorrect returns and fraud with willful intent. The first 2 types of offenses will attract a Level 3 fine (HK$10,000), while the last type (willful fraud) will attract a Level 3 or Level 5 (HK$50,000) fine with imprisonment for 6 months or 3 years. 4

5 Conclusion Financial institutions should, if they have not already, implement systems, procedures and documentation as necessary to ensure compliance with AEOI. The IRD has issued detailed guidance as to obligations of financial institutions under AEOI. General questions (e.g. questions on the Portal) can be submitted to the IRD, and financial institutions should seek advice from legal and tax advisers in case of uncertainty of their obligations.. 5

6 To find out more, contact: Hong Kong Rolfe Hayden T E rolfe.hayden@simmons-simmons.com Gaven Cheong T E gaven.cheong@simmons-simmons.com Eva Chan T E eva.chan@simmons-simmons.com Ivy Yam T E ivy.yam@simmons-simmons.com Esther Lee T E esther.lee@simmons-simmons.com Natalie Kong T E natalie.kong@simmons-simmons.com Stella Wai T E stella.wai@simmons-simmons.com elexica.com is the award winning online legal resource of All rights reserved, and all moral rights are asserted and reserved. This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of. is an international legal practice carried on by and its affiliated practices. Accordingly, references to mean and the other partnerships and other entities or practices authorised to use the name or one or more of those practices as the context requires. The word partner refers to a member of or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of s affiliated practices. For further information on the international entities and practices, refer to simmons-simmons.com/legalresp is a limited liability partnership registered in England & Wales with number OC and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. B_LIVE_EMEA1: v1

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Oversight. Consultation Conclusions regarding the Hong Kong Position Limit Regime. April 2017 simmons-simmons.com elexica.com

Oversight. Consultation Conclusions regarding the Hong Kong Position Limit Regime. April 2017 simmons-simmons.com elexica.com Oversight April 2017 simmons-simmons.com elexica.com Consultation Conclusions regarding the Hong Kong Position Limit Regime On 21 March 2017, the Hong Kong Securities and Futures Commission (SFC) issued