By Jennifer Lu
Those who hold an account (or are a controlling person) with Hong Kong Financial Institutions – both individuals and entities – must prepare to report their tax residency information to the Inland Revenue Department (IRD) by May 2018 for exchange with 75 reportable jurisdictions under the AEOI standard.
In September 2014, Hong Kong indicated its support for implementing automatic exchange of financial account information (AEOI) on a reciprocal basis with appropriate partners, with a view to commencing the first exchanges from 2018.
Under the AEOI standard, financial institutions in Hong Kong are required to identify financial accounts held by “tax residents of reportable jurisdictions” or held by passive non-financial entities whose controlling persons are tax residents of reportable jurisdictions, in accordance with due diligence procedures.
Required information of these accounts has to be collected and furnished to the IRD. Such information will be exchanged on an annual basis.
Determining tax residency
“Tax residents of reportable jurisdictions” refer to those who are liable to tax by reason of residence in the jurisdictions. In general, whether or not an individual is a tax resident of a jurisdiction is determined by having regard to the person’s physical presence or stay in a place or, in the case of a company, the place of incorporation or the place where the central management and control of the entity is exercised.
Tax residence is determined under the domestic tax laws of each jurisdiction. There might be situations where a person qualifies as a tax resident under the tax residence rules of more than one jurisdiction, and therefore is a tax resident in more than one jurisdiction.
For the purposes of the Common Reporting Standard (CRS), the Account Holder (or Controlling Person) must disclose all its tax residences in the required self-certification.
The Account Holder (or Controlling Person) can refer to below criteria for considering whether they are considered as a Hong Kong tax resident.
Tax residency criteria for individuals
An individual is regarded as a tax resident of Hong Kong if:
(a) He/she ordinarily resides in Hong Kong; or
(b) He/she stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment, one of which is the relevant year of assessment.
An individual is generally considered “ordinarily residing” in Hong Kong if he or she has a permanent home in Hong Kong where he or she or his or her family lives. The legal principles are:
(a) “Ordinary residence” connotes residence in Hong Kong with some degree of continuity and apart from accidental or temporary absence.
(b) To be an ordinary resident of Hong Kong, the person must be habitually and normally resident in Hong Kong, apart from temporary or occasional absences of long or short duration. The concept of ordinary resident refers to a person’s abode in Hong Kong, which he or she has adopted voluntarily and for settled purposes, with a sufficient degree of continuity, as part of the regular order of his or her life for the time being, whether of short or of long duration.
In ascertaining the number of days a person stays in Hong Kong, part of a day will be counted as one day.
Tax residency criteria for entities
An entity is regarded as a tax resident of Hong Kong if:
(a) Where the entity is a company, the company is incorporated in Hong Kong; or if the company is incorporated outside Hong Kong but normally managed or controlled in Hong Kong; or
(b) Where the entity is not a company, the entity is constituted under the laws of Hong Kong; or if the entity is constituted outside Hong Kong, but normally managed or controlled in Hong Kong.
The legal concept “normally managed or controlled” does not require that both management and control be exercised in Hong Kong.
“Management” refers to the management of daily business operations, or implementation of the decisions made by top management, etc.
“Control” refers to the control of the whole business at the top level, including formulating the central policy of the business, making strategic policies of the entity, choosing business financing, evaluating business performance, etc.
First reporting due
With the Inland Revenue (Amendment) (No. 2) Ordinance 2017 effective from July 1, 2017, Hong Kong will conduct AEOI with 75 reportable jurisdictions.
These jurisdictions include all EU member states, all of Hong Kong’s tax treaty partners that have committed to CRS, and other jurisdictions that have expressed an interest to the OECD in exchanging CRS information with Hong Kong.
As of July 1, 2017, financial institutions in Hong Kong have been required to collect the information about relevant account holders from these 75 jurisdictions. The first reporting to the IRD will be due in May 2018, in anticipation of exchange with partners.
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