HONG KONG SAR, CHINA Law and Practice Contributed by: Jeffrey Lee, Jessica Leung and Hilary Leung, Charles Russell Speechlys
are tax residents of reportable jurisdictions in accord - ance with due diligence procedures, and to provide the required information of such accounts to the IRD. To help financial institutions identify such accounts, account holders may be required to provide self-cer - tifications on their personal information, including tax residence. Hong Kong signed an intergovernmental agreement with the United States in 2014 to implement the For - eign Account Tax Compliance Act in Hong Kong. It requires participating financial institutions to iden - tify and report account information of specified US persons to the Inland Revenue Service of the United States. Accordingly, banks may need to obtain addi - tional information or documentation from their cus - tomers to achieve this. Hong Kong has entered into Tax Information Exchange Agreements with seven jurisdictions: Denmark, the Faroe Islands, Greenland, Iceland, Norway, Sweden and the United States. In 2024, the Hong Kong government announced its commitment to the implementation of the Organi - sation for Economic Co-operation and Develop - ment (OECD) Crypto-Asset Reporting Framework to improve international tax transparency in crypto- asset transactions, and the first automatic exchanges between Hong Kong and the relevant jurisdictions are intended to start from 2028. Foreign-sourced income regime Hong Kong was included in the EU watchlist of non-cooperative jurisdictions for tax purposes. In response, the Hong Kong authorities introduced a refined foreign source income taxation regime, which came into effect on 1 January 2023 and was later fur - ther updated with effect from 1 January 2024. Under the new regime, specified foreign-sourced income (interest, dividend, equity interest disposal gain, non- IP disposal gain, IP disposal gain and general income from IP) can only be exempt from Hong Kong profits tax if the qualifying entity meets: • the economic substance requirement, if the income is foreign-sourced interest, dividend or non-IP disposal gain;
• the nexus requirement, if the income is foreign- sourced IP income or IP disposal gain; or • the participation requirement, if the income is foreign-sourced dividend or equity interest disposal gain. In addition, an intra-group transfer relief has been introduced to defer charging of tax on foreign-sourced disposal gains derived from the transfer of property between associated entities, subject to specific anti- abuse rules. On 20 February 2024, as a result of the updated regime and in recognition of Hong Kong’s efforts in complying with the EU’s relevant requirements, Hong Kong was removed from the EU watchlist of non-cooperative jurisdictions for tax purposes. Transfer Pricing The transfer pricing rules in Hong Kong came into operation in 2018 to comply with the base erosion and profit shifting guidelines put forth by the OECD. When a related-party transaction is not conducted at “arm’s length”, the IRD can adjust the income or loss - es to remove any potential tax advantages. Domestic transactions between domestic parties that do not give rise to actual tax differences and that are not being made for tax avoidance purposes are not sub - ject to transfer pricing rules. The IRD requires companies to prepare transfer pric - ing documentation in the form of a “master file” pro - viding an overview of the Hong Kong entity’s group of enterprises, and a “local file” providing transactional transfer pricing information specific to the enterprise in each jurisdiction. The files should be prepared with - in nine months after the end of the relevant account - ing period and retained for not less than seven years. Companies can be exempt from preparing these files if they meet certain requirements regarding the size of business and the amount of controlled transactions. Where the consolidated group revenue of a multi - national enterprise group having constituent entities or operations in two or more jurisdictions exceeds HKD6.8 billion, that group will be required to file a “Country-by-Country Report”.
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