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One consequence of the 2008-09 Global Financial Crisis was a new international consensus regarding the need to eliminate offshore tax evasion. While tax rates in Hong Kong are relatively low by northern European standards (income tax of 15% for individuals; 16.5% profits tax for corporations), this alone would not necessarily constitute an issue within the context of Hong Kong’s relationship with its international trading partners. The OECD did however point out, via its Global Forum on Transparency and Exchange of Information for Tax purposes, that there was a need to improve the mechanisms for exchange of tax information between Hong Kong and other countries. Failure to comply with the requirements of the Global Forum may ultimately lead to the international community pursuing different types of sanctions against the jurisdiction in question.

The two commonly used types of treaties for exchange of tax information are (i) comprehensive double taxation agreements (CDTAs), and (ii) tax exchange of information agreements (TEIAs). CDTAs provide a regime for determining which country shall have the right to tax individuals and companies who otherwise might have been subject to taxation in both of the countries that are parties to the agreement. CDTAs also provide applicable rates for withholding taxes that a country may apply to dividends, interest, royalties, and similar payments, made by a transferor in one country to a transferee in the other. As a rule, CDTAs always provide a framework for the exchange of information about tax subjects of one country who are resident in the other treaty country. TEIAs differ from CDTAs in that they do not seek to streamline the taxation regime itself, only the exchange of information; there is in other words no treaty protection against double taxation of individuals and companies under a TEIA.

Prior to 2009, Hong Kong only had a handful of tax treaties, and the territory did not have a policy of actively pursuing new tax treaties. Once the position of the Global Forum became clear, however, Hong Kong changed its approach; in the seven years that have gone by, Hong Kong has entered into approximately 30 CDTAs, with negotiations pending for another twelve CDTAs. In the Baltic Sea Region, Russia is the only country with a CDTA in force with Hong Kong; in the cases of Finland, Germany, and Latvia negotiations for CDTAs are in progress. For the remaining Nordic jurisdictions, TEIAs entered into force in December, 2015 (Denmark and Norway) and January, 2016 (Sweden). Magnusson understands that while the Hong Kong government was open to negotiating CDTAs also with these countries, the Danish, Norwegian, and Swedish governments were only willing to accept the TEIA route for now.

Given the increased attention being paid to cross-border tax compliance, and the effective tools now at the disposal of national tax authorities, Magnusson encourages its clients to review their international tax structures in general, and given the developments discussed here those concerning Hong Kong in particular.

The impact of the TEIAs is summarized in Q&A below:

Q: What does the entry into force of Hong Kong TEIAs mean for Danish, Norwegian and Swedish individuals and businesses in Hong Kong?

A: There is now in place a regime for home country tax authority to request and obtain information related to its tax subjects that are resident in Hong Kong. Typically, the information requested would relate to an examination, inquiry or investigation of a taxpayer’s tax liability for specified tax years. The TEIAs prohibit “fishing expeditions”, i.e. inquiries that lack substantial basis. Before sending a request, the requesting country should use all means available in its own territory to obtain the information except where those would give rise to disproportionate difficulties. Requests should be as detailed as possible and contain all the relevant facts, so that the receiving tax authority is well aware of the needs of the applicant contracting party and can deal with the request in an efficient manner. 

Q: Will it be possible for home country tax authority to obtain information about Hong Kong companies and their owners?

A: Yes. The TEIAs impose an obligation to exchange all types of information foreseeably relevant to the administration and enforcement of the requesting country’s domestic tax laws. This could include information on companies and trusts and their owners and beneficiaries. 

Q: Are there any safeguards in place to protect confidentiality?

A: Information exchanged for tax purposes must be treated as confidential. The TIEAs contain rules to ensure that information is used only for authorized purposes and thereby protect taxpayer privacy rights. 

Q: May requesting country use TEIA for other than tax purposes?

A: No, tax information received under a TEIA can only be used for the purposes stated in the agreements. 

Q: How do TEIAs relate to bank secrecy?

A: Bank secrecy may in certain circumstances be lifted in order for countries to enforce their tax codes. Since the new HK-Nordic TEIAs are tools supporting implementation of Danish, Norwegian and Swedish tax rules in Hong Kong, it is theoretically possible for the tax authorities of those countries to request access to information subject to bank secrecy in Hong Kong. In considering such requests, however, the Hong Kong authorities will take into account the far-reaching safeguards applied to bank information under Hong Kong law.

Related People: Kristian Odebjer
Related Service Areas: China Group, Tax
Related Countries: Hong Kong/China, Denmark, Finland, Norway, Sweden, Germany

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