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Hong Kong’s AEOI Regime: Financial Institutions’ Obligations and Safeguards

HONG KONG - The Automatic Exchange of Information (AEOI) regime has been implemented in Hong Kong to prevent tax evasion by identifying and reporting financial accounts held by reportable persons. As part of this effort, financial institutions in Hong Kong are required to meet certain due diligence and reporting obligations.

Financial Institutions’ Obligations

According to Part 8A of the Inland Revenue Ordinance (IRO), a reporting financial institution is defined as a financial institution resident in Hong Kong or a branch of a non-resident financial institution located in Hong Kong. Such institutions are required to perform due diligence on their account holders and report certain information to the Inland Revenue Department.

  • The due diligence process involves verifying the identity of account holders, obtaining their tax residency status, and conducting ongoing monitoring to ensure compliance with the AEOI regime.

Safeguards

To ensure the security and confidentiality of reported information, financial institutions are required to implement robust safeguards. These include:

  • Confidentiality obligations: Financial institutions must maintain the confidentiality of reported information and prevent unauthorized access or disclosure.
  • Data protection measures: Institutions must put in place appropriate data protection measures to prevent data breaches or unauthorized disclosure.

Private Investment Companies

In particular, private investment companies (PICs) that invest in financial assets and are managed by a bank may be classified as either passive non-financial entities (NFEs) or professionally managed investment entities. Financial institutions must conduct due diligence to determine the correct classification of such PICs.

  • According to recent guidelines, if a PIC declares itself as a passive NFE but is found to have invested in financial assets and is managed by a bank, it may cast doubt on its correct classification. In such cases, financial institutions are expected to obtain additional information, including financial statements, to confirm the validity of the self-certification.

Conclusion

The AEOI regime aims to prevent tax evasion by identifying and reporting financial accounts held by reportable persons. Financial institutions in Hong Kong play a critical role in this effort by performing due diligence on their account holders and reporting certain information to the Inland Revenue Department. By implementing robust safeguards, financial institutions can ensure the security and confidentiality of reported information.

In conclusion, it is essential for financial institutions in Hong Kong to understand their obligations under the AEOI regime and implement necessary measures to comply with these requirements. Failure to do so may result in penalties or even criminal prosecution.