On February 2, 2018, the Hong Kong Special Administrative Region officially formalized the process of ratifying the OECD’s Multilateral Competent Authority Agreement (MCAA). That means that the jurisdiction will join soon the existing multilateral network of data exchange between the tax authorities of many countries and territories around the world.
The Hong Kong Tax and Fees Department introduced the Ordinance on Automatic Exchange of Information on Financial Accounts (AEOI), which will optimize the process of obtaining information by the countries with which the jurisdiction agrees to exchange. This refers to the exchange both under the Common Reporting Standard (CRS) and the intercountry reporting exchange under the BEPS Plan.

After joining of Hong Kong the Multilateral Agreement, the authorities of the country will be able to pass a rather formal procedure for finalizing the relations with other participants through the OECD secretariat.
If we compare this process with the conclusion of separate bilateral agreements with a number of the countries, it is much faster and easier.
It is important to note that until the end of this year, the old (bilateral) rules for automatic exchange will remain in force in Hong Kong, and the new obligations will come into effect on January 1, 2019. Thus, the local financial institutions still have time to prepare and bring their internal control and reporting process in line with the new rules to be able to exchange the information for 2019 at the end of 2020.

On January 24, 2018, the Companies (Amendment) Bill 2017 was passed, which mandates incorporated companies of Hong Kong to keep a Significant Controllers Register (SCR). The new legislation will enter into force on March 1, 2018. The Hong Kong Companies Registry has set up a special section on SCR on its website containing, amongst others, a detailed Guideline on the Keeping of SCR and specific forms for the companies to use.

The main requirements for the new SCR regime are listed below.

Who are required to keep a SCR?

All companies “formed and registered” in accordance with the the Hong Kong Companies Ordinance, including dormant companies, financial institutions, charitable organizations, companies limited by guarantee and any other types of companies incorporated in Hong Kong, except for the listed companies, and foreign companies registered under Part 16 of the Hong Kong Companies Ordinance, must keep a SCR.

What should be contained in the SCR?

The SCR must contain information on the significant controllers of the applicable company, namely registrable persons (i.e., a natural person or a specified entity such as a government and international organisation) and/or registrable legal entities (i.e., a legal person, but not a specified entity, which is a member of the company) who have significant control over the company.

Significant control

A person has significant control over if one or more of the specified conditions have been fulfilled, which include holding directly or indirectly more than 25 percent of the issued shares (or voting rights) in the company, the right to exercise or to have significant impact or control over the company.

The examples are given in the Hong Kong Companies Registry SCR Guideline explaining what may constitute “exercising significant influence or control”, such as having veto rights in adopting or amending the company’s business plan or appointing (removing) the CEO.

Particulars Required

Registrable persons: name, address, identity card/passport number, date of registration of a person, and nature of control.
Registrable legal entities: name, address, registration number, legal form and governing law, date of registration of a legal entity, and nature of control.

How to prepare the SCR?

The applicable company has an obligation to ascertain the identity of any significant controller. In other words, the company that is subject to the new SCR regime must:

  1. take reasonable steps to identify its significant controllers and the required particulars;
  2. send out written notice to significant controllers requesting required particulars (or confirmation of particulars) within seven days after 1 March 2018;
  3. enter the date of Notice in the SCR;
  4. enter the particulars in SCR within seven days after receipt of all required particulars provided or confirmed by the addressee of the Notice and date of receipt of such confirmation (in the case where no confirmation is received within the statutory period of one month); and
    follow similar steps for any change in particulars to keep the SCR up-to-date, i.e; and
  5. send the notice to a person within seven days, knowing (or having reasonable grounds to believe) that a particular person (or entity) is a new significant controller; or in the case where the identity of the new significant controller is unknown, send the notice to third party whom the company believes (or having reasonable grounds to believe) to know the significant controller within the prescribed time; and
  6. to enter the particulars within seven days after receiving the confirmation by the significant controller (or a negative statement if it is appropriate).

Where is the SCR to be kept?

The SCR must be kept in English or Chinese language at the company’s registered office or at a prescribed place in Hong Kong. The Company must notify the Registrar of Companies of the place where the SCR is kept within 15 days after its creation or any change in location.

Access to SCR is limited only to officers of Companies Registry and law enforcement officers (who currently include Police officers, Independent Commission Against Corruption, Securities and Futures Commission, Hong Kong Monetary Authority, Insurance Authority, Customs and Excise, Immigration, or Inland Revenue Department). The company will have to appoint a representative who will serve as a contact point for providing information about the SCR and appropriate assistance to law enforcement officers.

On June 23, 2017, the official government publication of Hong Kong published a draft amendment in the Ordinance on the companies (Companies (Amendment) Bill 2017). One of the changes it covered was the introduction of a requirement for the companies registered in Hong Kong to collect, store and provide up-to-date information on their beneficiaries for the verification. This refers to the so-called "Registers of people with significant control over the companies". This innovation was adopted within the framework of the international policy on combating money laundering and financing of terrorism and it is designed to bring the corporate jurisdiction legislation in the line with the standards of the Financial Action Task Force on Money Laundering. By analogy with the definition given by the FATF, in anti-laundering legislation of Hong Kong, "significant controllers" are defined as individuals and legal entities that:

  • directly or indirectly own more than 25% of the company's shares;
  • directly or indirectly have more than 25% of the voting rights of the company;
  • directly or indirectly have the right to appoint or remove the majority of the members of the company's board of directors;
  • otherwise exercise or have the right to exercise the significant influence over the activities of a company or control over it;
  • in fact, exercise or they are entitled to exercise significant influence or control over the activities of a trust or partnership that is not a legal entity whose members or managers meet any of the above criteria.

Therefore the persons having significant control over the company imply its beneficiary owners. It is worth noting that the register of data on the beneficiaries will be non-public, that is, only law enforcement bodies and "people with significant control" themselves will have access to it.

In accordance with the new requirements, each company established in Hong Kong is required to identify individuals and legal entities that have a significant impact on its activities and control over it and then within 7 days send them a notice requesting the data required for the registry.

Regarding individuals, the following data are requested:

  • name and surname;
  • mailing address;
  • the number of the identification document and the country that issued it;
  • the date from which the person is "controlling";
  • the nature of control over the company.

As for legal entities, the registry will require:

  • name of the enterprise;
  • the address of the main office;
  • organizational and legal form and the country of registration;
  • the date from which the person is "controlling";
  • the nature of control over the company.

The persons who did not comply with the notification requirements within 1 month will be fined of up to 25,000 HKD. In addition to the above information, the contact data of the appointed representative of the company should be included in the register, who can provide the information to the law enforcement agencies about the "controlling" persons, if necessary.

On June 23, 2017, the official Hong Kong government publication published a draft amendment in the Ordinance on the Companies (Companies (Amendment) Bill 2017). The changes were adopted as the additional measures in combating with money laundering and financing of terrorism, and they are designed to bring the corporate legislation of jurisdiction in compliance with the international standards of the FATF (Financial Action Task Force on Money Laundering). The project provides for the introduction of two requirements for Hong Kong companies, one of which is the maintenance of public registries of the beneficiaries or "persons with significant control over the companies" (Register of People with Significant control). "Significant controllers" refer to the persons owning directly or indirectly of more than 25% of the company's assets, as well as entitled to exercise significant influence over its activities.

The second change concerns the introduction of the mandatory licensing for the providers of trust and corporate services. The license, which has validity for 3 years, will need to be received within 90 days, starting from January 1, 2018. The administrative liability will be imposed for non-compliance with this requirement in the form of paying fines of up to several hundred thousand HK dollars or, in extreme cases, imprisonment for up to 6 months. The licensing, as well as the storage of the list of service providers will be carried out by Hong Kong Companies Registry. The same body will monitor the compliance with the law with the right to suspend or revoke the license. The documents can be submitted electronically, even though the procedure promises to be fairly simple, the applicants will have to pass a fit and proper test. There are no requirements concerning the education and experience of the providers of corporate services, but bankruptcy or the existence of previous convictions by AML-law, as well as drug trafficking and financing of terrorism will cause the application to be rejected.

DTA entered into force between Russia and Hong Kong

Comprehensive agreement for the avoidance of double taxation (CDTA) was signed in January of this year between Hong Kong and Russia, which came into force on 29 July 2016. According to the sources, this agreement shall remain in force for Hong Kong each year since its signing to double taxation, which took place on or after April 1, 2017.

The CDTA is informed about what is required to support efforts to expand the tax obligations undertaken by the two countries in the framework of the «Belt and Road», which is a project of the Chinese government for the economic development aiming at the integration of trade and investment between the approximately 60 countries in Eurasia.

In the absence of the CDTA program, of Hong Kong companies income, which conduct their entrepreneurial activities with the help of permanent missions in Russia and taxed in both places if their earnings was received in Hong Kong. On this basis, in the new agreement, double taxation is eliminated, and now any Russian tax paid by the companies on their earnings, will be allowed to tax payable in Hong Kong.

Besides, in accordance with this agreement, the rate in Russia on income tax on royalties, up to the present time is 20% (for companies) or 30% (for individuals) will be limited to only 3%. A tax rate on dividends, which are in Russia for Hong Kong citizen will be reduced from the current rate of 15% to 5% or 10% depending on the shares of the recipient.

According with further provisions, all Hong Kong airlines which fly to Russia, will be subject to taxation in accordance with the corporate tax rate in Hong Kong, and will not be subject to taxation in Russia. Profits from international shipping transport earned by citizens who have been in Hong Kong, now is also not planning to impose taxes in Russia.

This agreement contains in itself provide a basis for the exchange of tax information between jurisdictions in accordance with international standards.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

Hong Kong. Benefits for Companies

June 3, 2016 in the official government publication in Hong Kong were published changes in the tax law, introducing a tax break for companies that perform the function of the treasury center. The changes were adopted by the Legislative Council of Hong Kong on May 26, 2016.

Now, the company engaged in Hong Kong treasury activities (namely intra-group financing business, the provision of treasury services and conducting treasury operations), under certain conditions, are able to take into account the the interest paid by them on loans as an expense for tax purposes. Under the changes, the Hong Kong companies, which meet the criteria of corporate treasury center will pay income tax at a reduced rate, in the amount of 8.25% (the standard corporate tax rate in Hong Kong is 16.5% rate).

The reduced rate of corporation may be applied against to income from treasury activity, obtained from April 1, 2016 and later. The new rules on percent accounting in the composition of expenditure of companies involved intragroup funding, will also be applied in respect of amounts accrued for payment on April 1, 2016 or later.

By introducing new benefits Hong Kong trying to increase its appeal to corporations interested in establishing treasury centers in Asia to intra-group financing and compete in this area with Singapore.

Last year, IKEA International Group has started creation of a regional treasury center to support its expansion in Southeast Asia. The corporation has chosen Singapore to accommodate the treasury center. In Singapore has long existed the benefit for regional treasury centers of large corporations (reduced corporate tax rate of 10% compared to standard rate of 17%). In addition, Singapore has concluded twice as much agreements on avoidance of double taxation with other countries than Hong Kong, which adds the attractiveness to the jurisdiction in the eyes of multinational corporations.

Author: Sergey Panov

managing partner Finance Business Service

Hong Kong Contract

Recently Hong Kong has signed DTA with Romania and Russia, which will cut tax for cross-border trade and investors. Due to Romanian double tax agreement, income tax of Romania can be paid from any other tax which has the same income.

Withholding of tax in Romania will cut to current 16 percent to 5 or even 3 percent.

The income profit earned by Hong Kong's residents will be enjoying to for full tax exemption.

Due to Russian DTA from Hong Kong will income tax paid by Russian residents or companies shall be allowed as a credit against any tax payable in respect of the same income in Russia.

Withholding of tax in Russia will cut from current 20 percent or 30 to even 3 percent.

The cap of 5 percent will be allowed if even one of the official owner has more than 15 percent of common profit of the company.

Profit from international shipping transport also will be enjoying to for full tax exemption. Hong Kong airlines which operating in Russia will pay tax only due to Hong Kong's tax rate.

Author: Sergey Panov

managing partner Finance Business Service

Hong Kong, Georgia and Maldives

The government announced that in Hong Kong in the near future there will be an agreement on free trade after negotiations with Georgia and the Maldives. The government also prepared a document for consultation to interested parties could submit proposals for the areas to be covered in the two agreements.

"Georgia and the Maldives is the emerging markets with the potential for further growth. The conclusion of free trade agreements with these two countries is of strategic importance for Hong Kong. These agreements after their signing will enhance Hong Kong's trade network in their respective regions, including Eurasia" the spokesman said.

"In order to minimize the risk of marginalization, it is important for Hong Kong to participate in the negotiation of free trade agreements.

The negotiations with the mainland of China which is our largest trading partner, accounting for about 50 percent of the total trade, have a special importance for maintaining Hong Kong's position as a major trade and logistics center, "he added.

The provisions of the two new free-trade agreements will include the elimination or reduction of tariffs; the liberalization of non-tariff barriers; liberalization, as well as the promotion and protection of investments; and the liberalization of trade in services.

Currently Hong Kong has signed four free trade agreements respectively with the mainland, New Zealand, the European Free Trade Association (including Iceland, Liechtenstein, Norway and Switzerland) and Chile. Hong Kong is actively negotiating with the Association of Southeast Asian Nations, and on closer economic partnership agreement with Macau.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

It has been signed an agreement on avoidance of double taxation between Hong Kong and Latvia on 13 April, Riga. This is the 35th contract that Hong Kong has signed with its trading partners. The Treaty establishes a clear allocation of taxation rights between the two jurisdictions and it helps investors better assess their potential tax liabilities.

Hong Kong - Latvia

It has been signed an agreement on avoidance of double taxation between Hong Kong and Latvia on 13 April, Riga.

This is the 35th contract that Hong Kong has signed with its trading partners. The Treaty establishes a clear allocation of taxation rights between the two jurisdictions and it helps investors better assess their potential tax liabilities.

In the absence of an agreement on avoidance of double taxation the profits of Hong Kong companies which operate through a permanent establishment in Latvia, were taxed in both places if the income comes in Hong Kong. Similarly, revenues received Latvian residents in Hong Kong are subject to tax in Latvia.

Under the new agreement, the tax rate in Latvia for royalty (currently different rates to 23 per cent in some cases) will be reduced to zero percent for companies and a maximum of three percent in all other cases. The tax rate on dividends will be reduced to zero percent for companies and up to 10 percent in all other cases.

The avoidance of double taxation agreement between Hong Kong and Latvia also included an article in accordance with international standards for the exchange of information in tax matters.

The Agreement will enter into force after completion of ratification procedures on both sides.

Author: Sergey Panov

managing partner Finance Business Service

Legislation Hong Kong

The Hong Kong Special Administrative Region (HKSAR) Government wants more multinational enterprises (MNEs) to call Hong Kong home. Recent financial budgets have contained important tax initiatives to encourage MNEs (including Chinese enterprises) to establish their asset management businesses, corporate treasury centers and intellectual property holding hubs in Hong Kong.

Under existing Hong Kong tax law, income earned by a group treasury company from its ordinary course of corporate treasury management and money lending activities carried out in Hong Kong is subject to profits tax at the rate of 16.5%. However, any interest payment made by such a group treasury company to its overseas group companies is not tax deductible because such interest is not chargeable to Hong Kong profits tax in the hands of the overseas recipients. This asymmetrical tax treatment has resulted in Hong Kong being a less attractive location for corporate treasury operations.

In the 2016 Budget, the Financial Secretary also sought to provide a more commercially friendly environment for operating an intellectual property (IP) hub in Hong Kong, with a view to attracting MNEs to hold their IP in Hong Kong. In particular, the scope of the tax deduction for capital expenditure incurred on the purchase of IP rights would be extended to cover more types of IP rights as appropriate.

Among other measures, the bill introduces the following amendments to the Inland Revenue Ordinance (IRO):

  • An 8.25% (i.e. current profits tax rate of 16.5% × 50%) concessionary tax rate will apply to qualifying profits of a qualifying CTC in relation to its qualifying corporate treasury activities, including:
  • Borrowing of money from and lending of money to non-HK associated corporations;
  • Qualifying corporate treasury services provided to non-HK associated corporations.
  • Adding new deeming provisions, to make it clear that the interest income and specified disposal profits – earned by a CTC in respect of the business of the borrowing from and lending of money to associated corporations in or outside Hong Kong – are deemed trading receipts chargeable to profits tax.
Author: Sergey Panov

managing partner Finance Business Service