Author: Dominik Stuiber
Hong Kong has enacted CRS and specified 75 jurisdictions[i] with which financial account information is to be exchanged starting from 2018. The first reporting period however falls into 2017 and for UK and Japanese account holders is from 1st January 2017 to 31st December 2017. The first reporting period for other jurisdictions specified by the IRD is from 1st July 2017 to 31st December 2017.
The exchange of information with other countries requires a Competent Authority Agreement to be ratified before any information can be transmitted by the Hong Kong tax authority to their overseas counterparts. However, financial institutions are required to report to the Hong Kong tax authority the account balances or values of any accounts the account holder of which is a resident in any of the 74 jurisdictions, regardless whether a Competent Authority Agreement is already in place.
With the CRS reporting date for financial institutions fast approaching and therefore the requirement to collect account information of reportable accounts, many existing account holders or persons and companies wishing to open new bank accounts are presented with an additional form to complete. As with FATCA reporting forms, the account holder or applicant is often left with no explanation what the form is for and how it is to be completed.
CRS depends on a self-certification form that is not designed by a single jurisdiction and each participating jurisdiction may have a different format, unlike FATCA. The self-certification form should be accompanied by a list of definitions of the CRS terminology. We have combined the most frequently asked questions to the classifications and completion of entity self-certification forms hereunder.
Why am I being asked to complete a self-certification form?
Reporting financial institutions will be liable for reporting on financial accounts held by reportable persons. 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.
According to the due diligence procedures set out in the Ordinance, self-certifications would be required from account holders for all new accounts and for pre-existing accounts a financial institution may be unclear about the tax residence of the account holder. Given the reporting liability of financial institutions, it is likely that financial institutions will require all pre-existing entity accounts to provide a self-certification form, rather than applying a selective approach.
What is a self-certification?
Why am I asked to provide my tax residency?
The Automatic Exchange of Information is based on tax residency rather than citizenship or jurisdiction of incorporation. In order to determine whether an account is a reportable account, reporting financial institutions are required to identify the tax residency of the account holder, i.e. the individual, entity, or the controlling persons of an entity. Therefore an account holder is required to provide his tax residency to a reporting financial institution.
How do I know if I am a tax resident somewhere else?
In general, whether or not an individual or entity is a tax resident of a jurisdiction is determined by having regard to that jurisdictions tax law, regulations and definitions. A person may become a tax resident by means of physical presence or stay in a place or, in the case of a company, the place of incorporation or where the central management and control of the entity is located. An indication that an entity is resident for tax purposes in a jurisdiction if, under the laws of that jurisdiction (including tax conventions), it pays or should be paying tax therein by reason of its domicile, residence, place of management or incorporation, or any other criterion of a similar nature. However, taxation only from sources in that jurisdiction does not automatically render that person a tax resident of that jurisdiction.
What is a NFE?
A NFE is a non-financial entity, i.e. an entity that is not a financial institution.
What is the meaning of active and passive?
This refers to the source of income an entity has. Passive income includes dividends, interest, rents, royalties, annuities, capital gains, FX gains and amounts received under cash value insurance contracts.
An active status applies if at least 50% of an entity’s gross income or assets held are not attributable to any passive income source or for the production of passive income.
There are different categories of active NFE. To which does my entity belong to?
Listed companies and related entities. An entity is considered an active entity if its stock is traded on a recognized exchange. A related entity by ownership or common control, i.e. a subsidiary or sister company, is also an active NFE.
A governmental entity, international organisation, central bank or their wholly owned subsidiaries.
Active NFE by reason of income and assets. An active status applies if at least 50% of an entity’s gross income or assets held are not attributable to any passive income source or for the production of passive income.
Start-up NFE. Entities that had been incorporated within the past 24 months and have not yet commenced business or only invested capital into assets with the intent to operate a business.
Holding NFE. Substantially all (80%) of the activities of the NFE consist of holding (in whole or in part) the outstanding stock of, or providing financing and services to, one or more subsidiaries that engage in trades or businesses. Neither the standard, not the commentary does further specify what is meant by activities. However, referring to the definition of an active NFE by reason of income and assets, it suggests that an income and asset valuation test should be applied to determine a holding company’s activities.
Treasury centres. Entities that are engaged in financing and hedging transactions with or for its related entities.
Charitable institutions.
The self-certification form only provides limited selections for active NFE and my entity type is not available. Which do I choose?
If your entity is an active NFE by means of income and assets, a holding NFE, or treasury centre, chances are, the self-certification form presented to you will not have these available as predefined selections. You should specify the type under other active NFE.
Where can I find the Tax Identification Number (TIN)?
Hong Kong does not have separate Tax Identification Numbers (TIN). For individuals the applicable TIN is the HKID number and for entities the Business Registration Number is to be used as the TIN.
Who are the Controlling Persons?
The term “Controlling Persons” means the natural person(s) who exercises control over the Entity. “Control” over an Entity is generally exercised by the natural person(s) who ultimately has a controlling ownership interest in the Entity. A “controlling ownership interest” depends on the ownership structure of the legal person and is identified by a priority test:
1. Any natural person(s) owning more than a 25% of the legal person;
2. Where no natural person(s) exercises control through ownership interests, the Controlling Person(s) of the Entity will be the natural person(s) who exercises control of the Entity through other means; or
3. Where no natural person(s) is identified as exercising control of the Entity, the Controlling Person(s) of the Entity will be the natural person(s) who holds the position of senior managing official.
Where can I find a sample of this self-certification form?
The adopted format of the form may vary depending on the financial institution. For a reference form, you may refer to the Inland Revenue Department’s website at http://www.ird.gov.hk/eng/pdf/2016/scf_entity.pdf.
[i] The list of specified jurisdictions is available at http://www.ird.gov.hk/eng/tax/aeoi/rpt_jur.htm
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