Hong Kong, China

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Overall Phase 2 Rating is Largely Compliant

Table of Determinations and Ratings of the Combined Review

Jurisdictions should ensure that ownership and identity information for all relevant entities and arrangements is available to their competent authorities. (ToR A.1)
Determination Factors Recommendations
The element is in place, but certain aspects of the legal implementation of the element need improvement.   The new requirement for each company to have a Significant Controllers Register (SCR) allows not recording any significant controller (beneficial owner) in the SCR in certain situations.  Hong Kong is recommended to adequately address the legal gap that may arise in respect of not having any significant controller and thereby no beneficial owner recorded in the SCR. 
Legal ownership information of foreign companies that have a nexus to Hong Kong is available only when they have a bank account or engage a licensed trust or company service provider (TCSP).  Hong Kong is recommended to ensure that updated and accurate legal ownership information of foreign companies that have a nexus to Hong Kong is available in all cases. 
Beneficial ownership information of partnerships that do not engage a bank, a licensed TCSP or other AML obliged service provider may not be available. Also, although partnerships in Hong Kong do not have legal personality, only those partners with more than a 25% stake are identified as beneficial owners of partnerships.  Hong Kong is recommended to ensure that accurate beneficial ownership information of all partnerships carrying on business in Hong Kong is available at all times and retained for at least five years. 
AML obliged service providers dealing with trusts must identify beneficiaries entitled to a vested interest in more than 25% of the capital of the trust property. This is not fully in line with the ToR since the beneficiaries with less than 25% stake are not identified as beneficial owners.   Hong Kong is recommended to ensure that all the beneficiaries of a trust with nexus to Hong Kong are identified and available for access by the Competent Authority. 
Phase 2 Rating Factors Recommendations
Partially Compliant.  The amended AMLO has introduced a licensing regime for those who wish to provide trust or company services “by way of business”. The CR has been conducting on-site visits to the TCSPs on a risk basis. Given the recent introduction of these measures, more experience is needed to further demonstrate the effectiveness of supervision by CR over the licensed TCSPs.  Hong Kong is recommended to monitor the TCSP supervisory program to ensure the effective implementation of recent changes to the AMLO. 
The amended CO has introduced a SCR to capture the beneficial ownership information. Supervision is under progress and given its recent implementation, more experience is needed to further demonstrate the effectiveness.   Hong Kong is recommended to monitor the supervisory measures in place to ensure that the SCR are populated accurately by all companies. 
   
   
Jurisdictions should ensure that reliable accounting records are kept for all relevant entities and arrangements. (ToR A.2)
Determination Factors Recommendations
The element is in place.      
Phase 2 Rating Factors Recommendations
Largely Compliant.  The recently amended AMLO obliges the professional trustees to maintain records of every transaction and retain them for a period of at least 5 years. While supervisory measures are initiated, more experience is required to further demonstrate the effectiveness.  Hong Kong is recommended to monitor the supervisory program for effective implementation of AMLO requirements on TCSPs acting as trustees to maintain records. 
Certain entities and arrangements (including those solely earning non-taxable income) are only required to file tax returns every two to three years but not annually. This may pose a risk to the maintenance of reliable accounting records at all times.   Hong Kong is recommended to take measures to ensure that accounting records of all relevant entities and arrangements are available.  
Banking information should be available for all account-holders. (ToR A.3)
Determination Factors Recommendations
The element is in place, but certain aspects of the legal implementation of the element need improvement.   Banks are allowed to do simplified customer due diligence (CDD) which exempts the requirement to identify and verify the beneficial owner of investment vehicles, where the person responsible for carrying out measures that are similar to the CDD measures in relation to all the investors of the investment vehicle could be an institution from a wide range of countries that could be treated as equivalent jurisdictions.  It is recommended that Hong Kong ensures that beneficial ownership information of all investment vehicles coming from equivalent jurisdictions is available in Hong Kong in all cases at all times. 
Banks dealing with trusts must identify beneficiaries entitled to a vested interest in more than 25% of the capital of the trust property. Similarly only partners with more than 25% stake are identified as beneficial owners in partnerships, although they do not have any legal personality. This is not fully in line with the ToR.   Hong Kong is recommended to ensure that all the beneficiaries of a trust with nexus to Hong Kong are identified as beneficial owners and available for access by Competent Authority. Hong Kong is also recommended to ensure that all the beneficial owners of partnerships are identified and available for access by Competent Authority. 
Phase 2 Rating Factors Recommendations
Largely Compliant.     
Competent authorities should have the power to obtain and provide information that is the subject of a request under an exchange of information arrangement from any person within their territorial jurisdiction who is in possession or control of such information (irrespective of any legal obligation on such person to maintain the secrecy of the information). (ToR B.1)
Determination Factors Recommendations
The element is in place.      
Phase 2 Rating Factors Recommendations
Compliant.     
The rights and safeguards (e.g. notification, appeal rights) that apply to persons in the requested jurisdiction should be compatible with effective exchange of information. (ToR B.2)
Determination Factors Recommendations
The element is in place.      
Phase 2 Rating Factors Recommendations
Compliant.     
Exchange of information mechanisms should provide for effective exchange of information. (ToR C.1)
Determination Factors Recommendations
The element is in place.      
Phase 2 Rating Factors Recommendations
Compliant.     
The jurisdictions' network of information exchange mechanisms should cover all relevant partners. (ToR C.2)
Determination Factors Recommendations
The element is in place.      
Phase 2 Rating Factors Recommendations
Compliant.     
The jurisdictions' mechanisms for exchange of information should have adequate provisions to ensure the confidentiality of information received. (ToR C.3)
Determination Factors Recommendations
The element is in place.   DIPN 47 sets out the guidelines for exchange of information under tax treaties but does not clearly specify that information received under tax treaties cannot be shared with other law enforcement and supervisory agencies (like JFIU) without the consent of the supplying jurisdiction.  Hong Kong should consider refining DIPN 47 to make it clear that the IRD is not obliged to disclose information obtained through EOI requests to the JFIU unless it is duly authorised to do so under the relevant EOI agreement. 
Phase 2 Rating Factors Recommendations
Compliant.     
The exchange of information mechanisms should respect the rights and safeguards of taxpayers and third parties. (ToR C.4)
Determination Factors Recommendations
The element is in place.      
Phase 2 Rating Factors Recommendations
Compliant.     
The jurisdiction should provide information under its network of agreements in a timely manner. (ToR C.5)
Determination Factors Recommendations
The assessment team is not in a position to evaluate whether this element is in place, as it involves issues of practice that are dealt with in the Phase 2 review.      
Phase 2 Rating Factors Recommendations
Compliant.  Since there is a steep increase in the total number of requests received by Hong Kong as compared to the previous review period by about ten times, timeliness of responses has deteriorated and status updates have not been provided in all cases. However, the peers were generally satisfied and the performance improved to an effective level towards the end of review period, as a result of measures taken by Hong Kong to enhance its resources and maintain effective exchange of information.  Hong Kong is recommended to continue to enhance its resources to ensure that timely responses and systematic status updates are provided as appropriate. 

Earlier self-assessment based annual reports entitled Tax Co-operation 2010: Towards a Level Playing Field are also available.