Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – Discussion On FATCA IGA Concluded With US.

3 July, 2014

 

Legal News & Analysis – Asia Pacific – Hong Kong – Tax


The Government of Hong Kong SAR announced on 9 May that it has concluded discussions with the United States relating to an inter-governmental agreement (the “IGA“) with respect to the US Foreign Account Tax Compliance Act (“FATCA“). The aim of the inter-governmental agreement is to facilitate compliance by Hong Kong financial institutions with the requirements under FATCA.


Under the IGA to be signed between the Government of Hong Kong SAR and the United States, Hong Kong is to establish a legal framework for Hong Kong financial institutions to seek consent to disclosures required by FATCA from their US account holders, and to report certain tax information of such account holders to the US Internal Revenue Service (the “IRS“). 


The details of the IGA are not yet available but, based on the Model II IGA the United States concluded with other countries (e.g. Austria, Japan and Switzerland), the IGA should provide additional exemptions and simplified reporting and due diligence procedures to reduce the compliance requirements of Hong Kong financial institutions.
The Financial Services and Treasury Bureau indicated that it expects the final IGA will provide partial or full compliance exemptions to the following entities:

 

(I) Exemptions As “Exempt Beneficial Owners”

 

  • the Government of Hong Kong SAR and all statutory bodies; 
  • all Mandatory Provident Fund (“MPF”) schemes; 
  • certain retirement products that fall within the specified criteria; 
  • the Grant Schools Provident Fund and the Subsidized Schools
  • the Provident Fund; and
  • international organisations based in Hong Kong.
 

(II) Partial Exemptions As “Registered Deemed-Compliant FFIs” Or “Certified Deemed-Compliant FFIs”

 

  • financial institutions licensed and regulated under the laws of Hong Kong with no fixed place of business outside of Hong Kong and the People’s Republic of China (the “PRC“), and with a client base comprising predominantly residents of Hong Kong or the PRC (by applying a threshold of 98% of accounts by value); 
  • all credit unions, as well as certain depository institutions (including deposit-taking companies) with an asset value of less than USD 175m on their own balance sheet; 
  • certain credit card issuers that impose restrictions on clients keeping a debit (deposit) balance on the accounts; 
  • certain regulated collective investment schemes; and 
  • investment advisers and investment managers. 
 

One question we have recently been asked is the applicability of FATCA to Real Estate Investment Trusts (“REIT“). In our view this depends on each REIT’s specific facts and circumstances (including its corporate structure and its investment holding). For instance, FATCA may not be applicable to a REIT which owns its real estate portfolio directly (instead of investing in partnerships which invest in real estate) on the basis that the REIT would fall outside the definition of “foreign financial institution”. It is also worth noting that FATCA contains detailed affiliate rules and the actions taken by an affiliate may affect the position of other members of the same group, including a REIT (and vice versa).

 

What Is FATCA? 


The FATCA provisions were specified in the Hiring Incentives to Restore Employment Act and were brought into law by President Obama on 18 March 2010. The aim of FATCA is to crack down on perceived tax avoidance by US taxpayers and the legislation is intended to supplement existing US withholding and reporting rules. 


What Does FATCA Do? 


A 30 per cent withholding tax is imposed on most payments of US source income (including interest payments, dividends, rent and profits) if these payments are made to a broadly defined group of foreign entities, including foreign hedge funds and private equity funds, unless those entities either enter into an agreement with the IRS (an “IRS Agreement“) to disclose certain information regarding their US account holders and investors, such as names, addresses and account numbers, values and activity levels or comply with an applicable IGA. 


Further, from 1 January 2017, certain gross proceeds such as sales proceeds and returns of principal derived from stocks and debt obligations generating US source dividends or interest will be classified as “withholdable payments” and be subject to a 30% tax when paid to non-FATCA compliant FFIs. 


In addition, beginning no earlier than 1 January 2017, payments made by FFIs may be treated as arising in part from US sources and may be subject to withholding when paid to non-FATCA compliant FFIs. 


Who Is Subject To The New Rules? 


The new rules will apply to foreign financial institutions (“FFI“), which is very widely defined to include:

 

  • foreign banks;
  • foreign custodians or depositaries; and
  • foreign entities that are primarily engaged in the business of investing, reinvesting or trading in securities, partnership interests or commodities or any interest in such items.


This broad definition will cover foreign private equity funds, hedge funds and other investment vehicles used in alternative fund structures. However, real estate is not considered a financial asset and so a REIT whose assets consist solely of non-debt, direct interests in real property located within and/or outside the United States will not be an FFI. Nevertheless, because certain profit sharing arrangements may be characterized as partnerships for US tax purposes, in determining that a REIT is excluded from the definition of FFI, care must be taken to review all profit sharing and contingent fee arrangements for possible recharacterization as partnership interests for US tax purposes. 


Even if an entity is classified as a FFI, the effect of FATCA may still be limited if the entity does not invest in securities generating US source income. However, FFIs should still be aware of the potential impact of the affiliate rules. Essentially, this provides that an entity’s decision not to enter into an IRS Agreement (because, for example, it has no US source income) or to comply with an IGA may preclude certain of its affiliates from entering into such an agreement – in other words, a fund (or other FFI) may be unable to comply with FATCA if a single affiliate (which may not be within its control) declines to comply with FATCA. Further, beginning no earlier than 1 January 2017, payments made by FFIs may be treated as arising in part from US sources and may be subject to withholding when paid to non-FATCA compliant FFIs. 


Next Steps 


Early advice should be sought to determine if an entity would be classified as an FFI under FATCA or if it may benefit from an exemption under the IGA. If an entity is classified as an FFI and no exemption is applicable, further advice should be sought.

 

Ashurst Logo

 

For further information, please contact:

 

Chris Whiteley, Partner, Ashurst

christopher.whiteley@ashurst.com


David Nirenberg, Partner, Ashurst

david.nirenberg@ashurst.com


Steven Kopp, Partner, Ashurst

steven.kopp@ashurst.com


Kenneth Pang, Ashurst

kenneth.pang@ashurst.com

 

Homegrown Tax Law Firms in Hong Kong 

 

Comments are closed.