Double Taxation Relief and Exchange of Information Arrangements - Automatic Exchange of Financial Account Information (AEOI)

AEOI is a system that involves the transmission of financial account information from Hong Kong to a tax jurisdiction with which Hong Kong has entered into an AEOI arrangement (or known as an "AEOI partner").  The information relates only to the tax residents of the jurisdiction of the AEOI partner.

Exchanging financial account information on an automatic basis is an international standard, designed to enhance tax transparency and combat cross-border tax evasion.  Members of the international community were advocating AEOI as a more efficient mode of international tax co-operation and have made it a global standard.  The Organisation for Economic Co-operation and Development (OECD) released in July 2014 the Standard for Automatic Exchange of Financial Account Information in Tax Matters, calling on governments of all jurisdictions to obtain relevant financial account information from their financial institutions and exchange that information automatically with jurisdictions of residence of account holders on an annual basis.

As a responsible international citizen and a leading financial centre, Hong Kong indicated in September 2014 our commitment to implement AEOI and commence the first information exchanges by the end of 2018.

The Inland Revenue (Amendment) (No. 3) Ordinance 2016, which commenced operation on 30 June 2016, has put in place a legislative framework for Hong Kong to implement AEOI.  To deliver the commitment, Hong Kong has commenced the first exchanges since September 2018.

A financial institution resident (or known as “located”) in Hong Kong will identify the financial accounts held by individuals or entities liable to tax by reason of residence in the AEOI partner jurisdictions.  The financial institution will collect and furnish to the Inland Revenue Department (IRD) information of the identified account holders (individual or entity) and the financial account information on an annual basis.  IRD will then transmit the information to the tax administration of the relevant jurisdiction of which the account holder is tax resident.

Reporting financial institutions will be liable for reporting on financial accounts held by reportable persons.  Hong Kong taxpayers who are not tax residents of any territory outside Hong Kong will not be reported.  The Inland Revenue Ordinance (IRO) requires the reporting financial institutions to apply due diligence procedures to collect all required information and documentation from account holders.  To identify reportable persons, reporting financial institutions may ask account holders to complete self-certification forms for verification of their tax residency status.  The self-certifications will be kept by the reporting financial institutions for a period of six years.

This is a formal declaration that the account holder and controlling person make in connection with his/her tax residence.

According to the due diligence procedures under the IRO, which are based on the international standard required, self-certifications would be required from account holders and controlling persons for all new accounts (i.e. accounts opened on or after 1 January 2017).  As for pre-existing accounts (i.e. accounts opened before 1 January 2017), if a reporting financial institution has doubts about the tax residence of an account holder or a controlling person, it can seek a self-certification from the account holder or controlling person to verify his/her tax residence.  Please also see Item 7 below.

If the account holder or controlling person has doubts about his/her tax residence, he/she may consider seeking professional advice.

In OECD’s Automatic Exchange Portal, you can find more information regarding the tax residency rules applicable to different jurisdictions.  The information can be accessed via the following link:

https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/#d.en.347760

An account holder or a controlling person who knowingly or recklessly provides a statement that is misleading, false or incorrect in a material particular in making a self-certification to a reporting financial institutions is liable on conviction to a fine at level 3 ($10,000).  IRD may check the details of the self-certification, if necessary.

Reporting financial institutions are required to apply the due diligence procedures to identify the tax residency of the account holders and controlling persons for the purpose of AEOI.  Therefore, the account holders and controlling persons are required to provide their tax residency to the reporting financial institution concerned.

According to the due diligence procedures set out in the IRO, which are based on the international standard required, account holders and controlling persons have to provide self-certifications to the reporting financial institution in respect of their personal information, including tax residence, for all new accounts.  For pre-existing accounts, financial institutions are required to conduct due diligence procedures to identify and verify the tax residence of the account holders and controlling persons.  In case of doubt, self-certifications from account holders and controlling persons will be sought.  Furthermore, financial institutions can opt to apply the due diligence procedures of new accounts to pre-existing accounts.  In other words, an account holder and a controlling person may have to provide a self-certification to a reporting financial institution regarding the pre-existing accounts.

Account holders and controlling persons should advise the reporting financial institutions of any change in circumstances which affects their tax residency status or causes the information contained in a self-certification to become incorrect.  Generally, they should provide financial institutions with a suitably updated self-certification form within 30 days of such change in circumstances.

In general, whether or not an individual or entity is a tax resident of a jurisdiction is determined by having regard to the individual´s physical presence or stay in a place (say, whether over 183 days within a tax year) or, in the case of a company, the place of incorporation or where the central management and control of the entity lies.  That a person has paid taxes charged by a jurisdiction (say, value-added tax, withholding tax or capital gains tax) does not automatically render that person a tax resident of that jurisdiction.

In OECD’s Automatic Exchange Portal, you can find more information regarding the tax residency rules applicable to different jurisdictions.  The information can be accessed via the following link:

https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/#d.en.347760

Each jurisdiction has its specific definition of tax residence.  Tax laws may differ amongst jurisdictions and the tax residence of individual account holders and controlling persons may change from one year to another.  Individual account holders and controlling persons ought to verify and update their tax residence and seek legal advice if necessary.

For new accounts, financial institutions will seek self-certification from account holders and controlling persons in respect of their personal information, including tax residence.  For pre-existing accounts, financial institutions will be required to conduct due diligence procedures to identify and verify the tax residence of the account holders and controlling persons.  In case of doubt, self-certifications from account holders and controlling persons will be sought.

If you are not a tax resident in any territory outside Hong Kong, the financial institution is not required and should not report your financial account information to IRD for transmission to any tax administration outside Hong Kong.

If you are a tax resident of Country A in accordance with its tax law, Bank-HK will report information in the joint account (in entirety, with no apportionment) to IRD for transmission under AEOI to the tax administration of Country A.  Bank-HK is not required to report the information of your spouse who is not a tax resident in any territory outside Hong Kong.

Provided that you are not a tax resident of Country B under its tax laws, the ownership of a property in Country B and your liability to pay capital gains tax of Country B alone will not automatically render you a tax resident of Country B.  Non-Hong Kong tax residents are advised to seek legal advice if in doubt.

No.  The account holder is the beneficiary, not the agent, of the account.  You are not the account holder, but your spouse.  Since your spouse is not a tax resident of Country C, the account information will not be exchanged.  Only information of a financial account of which the beneficiary, and not the agent, is a tax resident of Country C will be exchanged.

As far as personal data is concerned, the information to be exchanged includes name, address, jurisdiction of residence, taxpayer identification number (TIN), and the date and place of birth.  As for financial account data, it includes the account number, account balance or value (year-end), and the gross amount of interests, dividends and sale proceeds of financial assets as appropriate for the year concerned.

For AEOI purposes, a person meeting the following criteria is regarded as a tax resident of Hong Kong:

Individual

1. An individual ordinarily resides in Hong Kong; or
2. An individual 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.

Entity

1. (where the entity is a company) the company is incorporated in Hong Kong; or if the company is incorporated outside Hong Kong, being normally managed or controlled in Hong Kong; or
2. (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, being normally managed or controlled in Hong Kong.

For more information, please see the document about the tax residency for Hong Kong tax residents published on the Automatic Exchange Portal developed by the OECD:
https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/Hong-Kong-Tax-Residency.pdf

For AEOI purposes, the following identifiers are equivalent to the TIN of a Hong Kong tax resident: 

1. Individuals: Hong Kong Identity Card (HKID) number of the Hong Kong tax resident. 
   The TIN equivalent for individuals includes all letters and numerals of the HKID number, including the letter or numeral in the bracket (but without bracket).  The “TIN” shown on the Tax Return-Individuals and related Notice of Assessment is solely for login onto “eTAX” account and access to the e-services provided by IRD.  Such “TIN” is not used as a tax identifier of a Hong Kong tax resident and therefore should not be provided for AEOI purposes.
2. Entities: Business Registration (BR) number of the Hong Kong tax resident.
   The TIN equivalent for entities includes 8 numerals at the front of BR certificate number.

For more information, please see the document about the TIN for Hong Kong tax residents published on the Automatic Exchange Portal developed by the OECD:
https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-identification-numbers/Hong-Kong-TIN.pdf

Financial institutions covered include -

• custodial institutions;
• depository institutions;
• investment entities; and
• specified insurance companies.

A financial institution does not have obligations under the AEOI regime in Hong Kong, unless it is a "reporting financial institution" which is defined to mean a financial institution resident in Hong Kong or a branch of a non-resident financial institution located in Hong Kong.

Financial accounts include -

• custodial accounts;
• depository accounts;
• equity or debt interests in investment entities; and
• cash value insurance contracts and annuity contracts.

A reporting financial institution must establish, maintain and apply due diligence procedures to identify account holders (including controlling persons of the accounts) who are tax residents in reportable jurisdictions.  The financial institution is also authorized to apply the due diligence procedures in relation to any financial account where the account holder is a tax resident in a territory outside Hong Kong that is not a reportable jurisdiction.

As the due diligence requirements are mandatory only for reportable accounts (but not other accounts held by residents of non-reportable jurisdictions), reporting financial institutions will be sanctioned only if they fail to identify, collect and report information of reportable accounts to IRD.

No.  If you do not maintain any reportable account, you are not required to register an AEOI Account.  Certainly, you may still actively register an AEOI Account.

Please note that you are required to register an AEOI Account and give a notice to the Commissioner via the AEOI Portal within 3 months if you commence to maintain a reportable account.

Once the AEOI Account is registered, there is no mechanism to cancel the AEOI Account afterwards.

IRD will consider suspending the issue of future Financial Account Information Returns (AEOI Returns) to the AEOI Account if the entity:

1. has been liquidated;
2. was struck off by the Registrar of Companies;
3. is no longer a reporting financial institution (e.g. entity type is changed to an active or a passive non-financial entity (NFE), revocation of licence under the Securities and Futures Ordinance, etc); or
4. is no longer a resident for tax purposes in Hong Kong.

If the entity would like to request suspending the issue of AEOI Returns to its AEOI Account, it should lodge a formal request to IRD in writing with details of reasons and documentary evidence in support. 

If the issue of AEOI Returns is suspended for an entity but the entity subsequently resumes as a reporting financial institution and maintains reportable accounts as a result of change in circumstances, the entity is required to notify IRD of the change in writing so as to resume the issue of AEOI Returns.

Generally, IRD will issue electronic notices through the AEOI Portal, to all registered financial institutions in January annually for filing the AEOI Returns.  For example, the AEOI Return for the reporting year 2024 will generally be issued in January 2025.  If the financial institution is in the process of liquidation or no longer a reporting financial institution during a year (say 202x) and would like to file the AEOI Return for that year (i.e. 202x), the financial institution can make a written request to IRD.  Upon receipt of request, IRD will issue an electronic notice to the financial institution´s AEOI Account requiring it to file the AEOI Return for 202x.

Financial institutions are expected to rely on the self-certification if it satisfies the reasonableness test based on the information obtained by the institution in connection with the opening of the account, including any documentation collected pursuant to the prevailing due diligence or Know-Your-Customers procedures.

Financial institutions are not expected to carry out an independent legal analysis of relevant tax laws to determine the residence of an account holder.

The IRO imposes legal obligation on financial institutions to establish and apply due diligence procedures to identify tax residents of reportable jurisdictions outside Hong Kong for AEOI purpose and collect specified information for submission to IRD.

Financial institutions are expected to observe requirements under the Personal Data (Privacy) Ordinance.  For instance, they should inform the account holders of the purpose of use of the personal data for AEOI.  They should take all practicable steps to ensure the accuracy and security of the personal data.  Account holders are entitled to request access to and correction of their personal data.  In case an individual refuses to allow the financial institution to release his/her personal data for AEOI purpose, the financial institution may have to consider whether or not the account should be maintained.

Yes, exemptions are provided to certain financial institutions and financial accounts which present a low risk of being used to evade tax.  They are defined as "non-reporting financial institutions" and "excluded accounts" in Schedule 17C to the IRO.  Non-reporting financial institutions do not have any due diligence and reporting obligations while excluded accounts are not subject to reporting by financial institutions.

In general, IRD will issue electronic notices, through a secure and dedicated AEOI Portal, to all registered financial institutions in January annually for filing AEOI Return.  Financial institutions is normally required to furnish information of reportable accounts to IRD in early June of the same year.

Financial institutions can access to the AEOI Portal and use online services including -

1. account registration (i.e. opening an AEOI Account),
2. filing notification;
3. lodging AEOI Return;
4. checking return lodgment status; and
5. submitting amendment to the data file attached to AEOI Return.

The AEOI Portal has been ready for financial institutions to sign up since 3 July 2017.  A financial institution with reportable accounts can open its AEOI Account via the AEOI Portal.  A Guide to Account Registration is available in the AEOI Portal.

Yes, a Lead Operator, being either a service provider or person acting for the non-corporate financial institution to maintain financial accounts, can be authorized to act on behalf of one or more reporting financial institutions to carry out registration via IRD’s AEOI Portal; and perform the due diligence or reporting obligations under Part 8A of the IRO that the reporting financial institutions would have been required to perform.

Each Lead Operator will be allotted a unique Lead Operator Reference Number (LORN), which will enable the Lead Operator to operate the AEOI Accounts of reporting financial institutions for which it is acting by a single login.  Once the registration of each reporting financial institution is completed, the Lead Operator can access each of the reporting financial institution’s AEOI Account with a single LORN login.  The Lead Operator does not need to log into each of the AEOI Account separately.

IRD will exchange information with AEOI partners only when an arrangement is in place with the relevant jurisdiction to provide the basis for exchange.  Safeguards have been provided to protect taxpayers’ privacy and confidentiality of information exchanged as prescribed under the international standard.  Such safeguards will apply to the information to be exchanged for AEOI purpose.

In addition, the AEOI agreement provides that all information exchanged is subject to the confidentiality rules and data privacy safeguards.  Should there be any breach of such rules or safeguards, Hong Kong may suspend the information exchange or terminate the AEOI agreement with the partner concerned.

An entity is "managed by" another entity if the latter entity performs, either directly or through another service provider, one or more of the following activities or operations on behalf of the first mentioned entity:

1. trading in money market instruments, including cheques, bills, certificates of deposit, and derivatives; foreign exchanges; exchange, interest rate and index instruments; transferable securities; or commodity futures;
2. individual and collective portfolio management; or
3. otherwise investing, administering, or managing financial assets or money on behalf of other entity or individual.

However, an entity does not manage another entity if it does not have the discretionary authority to manage the latter entity’s assets either in whole or in part.

Whether an entity is a professionally managed investment entity depends on the facts and circumstances.  Other than meeting the requirement of "managed by" a financial institution, the "primarily" test has to be satisfied before an entity is to be considered as a professionally managed investment entity.  The "primarily" test is met if an entity’s gross income attributable to investing, reinvesting, or trading in financial assets equals or exceeds 50% of the entity’s gross income during the shorter of (a) the three-year period ending on 31 December of the year preceding the year in which the determination is made; or (b) the period during which the entity has been in existence.

Despite above, the term “investment entity” does not include the following active NFE:

1. holding companies that are members of a non-financial group;
2. start-up entities;
3. entities that are liquidating or emerging from bankruptcy; or
4. treasury centres that are members of a non-financial group.

In addition, the definition of passive NFE includes a professionally managed investment entity that is not a participating jurisdiction financial institution. In other words, if a professionally managed investment entity is resident or located in a non-participating jurisdiction, it is treated as a passive NFE, rather than a financial institution.

In case the information on file with the financial institutions includes details on the activities of an entity, such as financial statements and/or articles of incorporation, such information should be used in order to confirm the reasonableness of the classification of the entity in its self-certification.  In case there is a particular reason to assume that the entity might either be classified as a passive NFE or an investment entity, such as the discretionary management, it would be reasonable to expect that the financial institution has ensured that the relevant information, in particular recent financial statements, are obtained as part of the account opening process to confirm the validity of the self-certification.  In any event, and in particular when relevant additional information (such as financial statements) is obtained subsequent to account opening, new information that casts doubt as to the validity of the self-certification of an entity account holder with respect to its status as a passive NFE or investment entity, would constitute a reason to know that the self-certification is incorrect or unreliable.  In such instances, the financial institution would be required to obtain a new and valid self-certification to confirm the status of the entity account holder.

Part 8A of the IRO imposes certain due diligence and reporting obligations on a reporting financial institution, which is defined to mean a financial institution resident in Hong Kong or a branch of a non-resident financial institution located in Hong Kong.  Thus, if the PIC is resident in Hong Kong or a branch of a non-resident financial institution, it has the obligation to fulfill the requirements under Part 8A of the IRO.

An enforcer is a person who is given the power and duty to enforce the trust.  The appointment of enforcer is commonly found in non-charitable trusts. The enforcer’s role is to oversee the actions of the trustee to ensure those actions are in line with the purposes stated in the trust instrument.

The Amendment Notice came into operation on 1 January 2021.  It applies from the reporting year 2022 (in respect of information covering 1 January to 31 December 2021) and thereafter.

Prior to the amendment, controlling persons of a partnership under the IRO for the purpose of AEOI refer to, among others, those individuals who are entitled to or control more than 25% of the capital/profits/voting rights of/in that partnership.  After the amendment, all individuals who exercise control over a partnership will fall within the definition of controlling persons of that partnership, regardless of the stake held in terms of capital/profits/voting rights of/in that partnership.

Although the Amendment Notice removes the 25% threshold applicable to trusts, the amendment has no actual effect to the identification of controlling persons of a trust. It is because the Inland Revenue (Amendment) (No. 2) Ordinance 2019 has already amended the definition of controlling persons to the effect that the controlling persons that need to be identified in relation to a trust are those that hold a position as settlor, protector (or enforcer), trustee and beneficiary or a member of a class of beneficiaries of the trust, regardless of the stake held.  The Amendment Notice to amend the threshold applicable to a trust is made for the sake of completeness.

For an entity that is a corporation, the specified percentage relating to the identification of controlling persons remains unchanged at 25%.

The penalty provisions contained in the IRO seek to provide sufficient deterrent effect to ensure effective implementation of the AEOI regime in Hong Kong while not imposing disproportionately heavy sanction on financial institutions and individuals.

Three major categories of penalty were imposed to sanction non-compliance, "incorrect returns", and fraud with willful intent.  The levels of penalties (generally penalty at Level 3/ $10,000 for the first two categories, and penalties at Level 3 or Level 5/ $50,000 with imprisonment for six months or three years for the last category) have made reference to other sanctions of similar gravity in the IRO.

The legal obligations imposed under the IRO are to ensure compliance by financial institutions; hence, the sanctions for non-compliance of the due diligence requirements and for filing of incorrect returns with intent to defraud are targeted at financial institutions.

As far as individual account holders are concerned, it is an offence for a person to provide, knowingly or in a reckless manner, misleading, false or incorrect information in a material particular, in making a self-certification to financial institutions.  The penalty is fine at Level 3/$10,000.  This is to ensure that we abide by the international standard concerning effective implementation.