AEOI: Guidance for Hong Kong financial institutions

What is Automatic Exchange of Information (AEOI)?

AEOI is the collective term for the two regimes currently in place in Hong Kong to facilitate the exchange of information with other jurisdictions. The two regimes are:

1. Common Reporting Standard (CRS), which facilitates information exchange between a large number of jurisdictions throughout the world (excluding the US).
2. Foreign Account Tax Compliance Act (FATCA), which facilitates information exchange between the US and participating jurisdictions, including Hong Kong.

These regimes place the burden of compliance on financial institutions, which are required to carry out due diligence procedures on all account holders or beneficial owners and report them to the tax authorities.

What is a financial institution?

The definition of a financial institution varies under the two different AEOI regimes but in both cases it’s wide-ranging. As well as the obvious banking or investment institutions, this can include small family trusts, unlisted or owner managed companies, partnerships and even charities where the main source of income is derived from financial investments.

What should you do?

Classification

Determining whether your organisation is a financial institution under these rules is the first and most crucial step.

Registration

Financial institutions must register with the tax authorities. For Hong Kong financial institutions this will be the Hong Kong IRD and, in some cases, the US Internal Revenue Service (IRS).

Due diligence

Specific due diligence procedures are required of financial institutions to identify potentially reportable account holders or beneficial owners. These will be account holders or beneficial owners who are resident outside of Hong Kong in another jurisdiction or who (for FATCA purposes), are US persons. The prescribed procedures on how this must be done are very detailed and there’s a penalty regime for financial institutions which fail to comply.

Reporting

An annual CRS report must be filed with the IRD by Hong Kong financial institutions by 31 May following the calendar year in question. The report must include details of any reportable accounts or beneficial owners, including the value of the account or equity interest and where the account holder is resident for tax purposes. This information is then exchanged by the IRD with the relevant jurisdictions. 

Separately, an annual FATCA report must be filed directly with the IRS to report US account holders. The due date for filing the report is 31 March following the calendar year being reported.

Self-certification

As part of this process, many account holders (both individuals and entities) will be receiving self-certification forms from the financial institutions they have accounts with. The information that is included in these forms will allow the financial institutions to determine the tax residence and classification of the account holder under the two AEOI regimes. 

In many cases, these forms are detailed, complicated and confusing, but the account holder is responsible for completing their own forms. The financial institutions cannot provide legal or tax advice. Therefore, if the account holder has questions about how to complete the forms, they will need to contact a tax adviser.

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