HONG KONG SAR, CHINA Trends and Developments Contributed by: Hui Wang and Hui Zheng, King & Wood
CARF is focused on transaction-level information relating to crypto-assets, including cryptocurrencies, stablecoins, and fungible and non-fungible tokens, and requires RCASPs to report clients’ transac - tion information annually. CARF expressly excludes CBDCs and specified electronic money products (SEMPs); those assets are instead addressed under the amended CRS. The amended CRS expands and reinforces the exist - ing CRS framework. At the digital asset level, it brings CBDCs, SEMPs and crypto-assets held indirectly through derivatives or investment entities within the reporting scope, thereby covering areas deliberately left outside CARF. A client who does not hold crypto - currency directly on an RCASP platform, but obtains exposure through fund interests or derivatives refer - encing crypto-assets, may still have account informa - tion reported under CRS. As regards reporting enti - ties, the amended CRS continues to rely primarily on traditional financial institutions, while CARF is centred on RCASPs. The two frameworks also differ in the depth of report - ing. CARF requires transaction-by-transaction report - ing for exchanges and cross-border transfers, where - as the amended CRS follows the annual account-level reporting model of the existing CRS, covering year- end balances and annual aggregate income. The combined coverage of CARF and the amended CRS means that digital assets are increasingly brought within the information exchange framework regardless of how they are held. Families should therefore review existing digital asset holding pathways and assess which entities in the structure bear reporting obliga - tions before the regimes take full effect. New compliance obligations The two bills will introduce enhanced compliance mechanisms with direct implications for financial institutions and RCASPs. CARF requires in-scope RCASPs in Hong Kong to report clients’ crypto- asset transaction information, including exchanges between crypto-assets and fiat currency, exchanges between crypto-assets, and cross-border transfers. The amended CRS requires traditional financial insti - tutions, including banks, custodians and digital cur -
rency providers, to include in their annual reporting account information relating to CBDCs, SEMPs and crypto-assets held indirectly through derivatives or funds. Together, the two regimes seek to provide com - prehensive information coverage across digital asset holding pathways. In terms of supporting infrastructure, the CRS Amend - ment Bill introduces mandatory registration require - ments for reporting institutions: all financial institutions and RCASPs that meet the relevant Hong Kong report - ing nexus criteria are required to complete institution - al-level compliance registration with the IRD, regard - less of whether they hold any reportable accounts in the relevant year. This measure is designed to enable the IRD to identify the full universe of reporting entities and address the regulatory blind spots created by the voluntary registration model under the current regime. Account record-keeping requirements are extended to six years, and penalties for non-compliant reporting entities are substantially increased. These enhance - ments also directly respond to the observations raised by the OECD in its peer review of Hong Kong’s CRS administrative framework, and are intended to ensure that Hong Kong maintains a strong rating in global tax transparency compliance assessments. Practical implications for family offices and high net worth clients For families that have established family offices in Hong Kong, or that hold digital assets through Hong Kong structures, CARF and the amended CRS mean that the boundaries of tax transparency are extend - ing from traditional financial accounts to digital asset relationships. The most immediate practical impact concerns cli - ent identification and tax residence verification. Hong Kong RCASPs and financial institutions will be required to verify the tax residence of their clients. Clients holding digital assets, whether directly hold - ing crypto-assets within CARF or indirectly holding CBDCs, SEMPs through derivatives or funds within the amended CRS, will be required to provide self- certifications identifying their tax residence and the relevant jurisdictions. Offshore structures historically used to hold digital assets will also face greater scru - tiny, as CARF tracks transaction flows comprehen -
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