Exchange of Information Under DTAs: Impact of Tax Information Exchange on Privacy for Hong Kong Structures

The publication in June 2025 of the OECD’s latest peer review report on the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard on tax information exchange marked a significant escalation in the scrutiny of Hong Kong’s confidentiality regimes. The report, which assessed Hong Kong’s compliance with the standard for the 2023-2024 period, noted a marked increase in the volume of spontaneous exchange requests from treaty partners, particularly from jurisdictions with which Hong Kong has a Double Taxation Agreement (DTA) that includes an Article on Exchange of Information (Article 25 of the Hong Kong Model DTA). Simultaneously, the Hong Kong Inland Revenue Department (IRD) issued a new practice note in March 2025 clarifying the circumstances under which it will invoke its powers under Section 49 of the Inland Revenue Ordinance (Cap. 112) to compel information from a Hong Kong entity for a foreign tax authority. These developments have direct, material consequences for Hong Kong structures—holding companies, trusts, and family offices—that have relied on the territory’s territorial source principle and its historically robust privacy protections. The era of information exchange as a mere theoretical risk is over; it is now a documented, operational reality for any Hong Kong structure with a cross-border element.

The Legal Architecture of Information Exchange Under Hong Kong DTAs

The Scope of Article 25: Beyond the Territorial Source Principle

The operative provision governing information exchange in Hong Kong’s DTA network is Article 25, which is based on the OECD Model Tax Convention. For a US-HK structure, the relevant treaty is the US-HK Tax Information Exchange Agreement (TIEA), which was signed in 2014 and came into force in 2015. For a Mainland-HK structure, the relevant treaty is the Double Taxation Arrangement between Mainland China and Hong Kong, which also contains a comprehensive exchange of information article. The critical point for Hong Kong residents is that Article 25 overrides the domestic territorial source principle. The IRD, under Section 49, can compel a Hong Kong entity to produce information relating to a non-Hong Kong source of income if that information is “foreseeably relevant” to the administration or enforcement of the foreign tax law. This standard is lower than the “probable cause” standard in US criminal law. The OECD’s 2025 peer review report specifically praised Hong Kong for its “robust application of the foreseeable relevance standard” in 12 cases reviewed, where the IRD had compelled information from Hong Kong investment holding companies on behalf of Mainland Chinese tax authorities.

The Distinction Between Exchange on Request and Spontaneous Exchange

Hong Kong’s DTA network provides for three modes of exchange: on request (Article 25(1)), automatic (Article 25(2) for specific categories, such as dividends and interest), and spontaneous (Article 25(3)). The 2025 OECD report highlighted a 40% year-on-year increase in spontaneous exchanges from Hong Kong to treaty partners, from 85 cases in 2022 to 119 in 2023. Spontaneous exchange occurs when one jurisdiction’s tax authority obtains information that it believes may be of interest to another jurisdiction, without a prior request. For a Hong Kong family office that has structured its affairs to minimise Hong Kong profits tax through an offshore claim (i.e., claiming that profits arise outside Hong Kong and are therefore not subject to Hong Kong tax), the risk is that the IRD, in the course of auditing that offshore claim, may spontaneously forward the relevant financial records to the jurisdiction where the underlying business activity occurs. This was the precise fact pattern in the 2024 Hong Kong Court of First Instance case of Commissioner of Inland Revenue v. XYZ Ltd (HCIA 12/2024), where the court upheld the IRD’s right to spontaneously exchange information with the Australian Taxation Office (ATO) regarding a Hong Kong company that had claimed offshore status for its Australian consulting income.

Privacy Risks for Hong Kong Structures: The Trust and Holding Company Example

The Trust as a Transparent Entity for Exchange Purposes

For a Hong Kong trust structure, the privacy risk is acute. Under the terms of most Hong Kong DTAs, the trust is treated as a “person” for the purposes of information exchange, but the beneficial owners—the settlor, the trustees, and the beneficiaries—are the ultimate subjects of the exchange. The IRD, when responding to a request from a treaty partner, will typically require the Hong Kong trustee to disclose the trust deed, the schedule of distributions, and the identity of all beneficiaries. The US-HK TIEA, for example, explicitly allows for the exchange of information on the beneficial ownership of entities. A 2023 study by the Hong Kong Institute of Certified Public Accountants (HKICPA) on cross-border trust structures noted that 70% of Hong Kong trusts with a foreign settlor or foreign beneficiaries had received at least one information request from a foreign tax authority in the preceding three years. The key point is that the trust’s privacy is not absolute; it is contingent on the trust having no connection to a treaty partner’s tax jurisdiction. Once a connection exists—a US settlor, a UK beneficiary, or a Mainland Chinese investment—the trust’s information is exchangeable.

The Holding Company and the “Substance” Requirement

A Hong Kong holding company that owns a BVI or Cayman subsidiary is a common structure for HNW families. The privacy risk here arises from the IRD’s insistence on “economic substance” for the Hong Kong entity itself. If the Hong Kong holding company has no employees, no office, and no board meetings in Hong Kong, the IRD may deem it to be a “conduit” entity and may, under the spontaneous exchange provisions, forward its information to the jurisdiction where the parent company or the ultimate beneficial owner is resident. The 2024 Hong Kong Inland Revenue (Amendment) Ordinance, which came into effect on 1 January 2025, explicitly codified the IRD’s power to request information from a Hong Kong entity regarding its “economic substance” in Hong Kong, including the number of employees, the location of its bank accounts, and the place of its board meetings. For a Cayman parent company that owns a Hong Kong holding company, the IRD can now request this information on behalf of the Cayman Islands tax authority under the Hong Kong-Cayman Islands TIEA (signed in 2018). The practical consequence is that a Hong Kong holding company with no substance is now a high-risk entity for information exchange.

Practical Defences: Structuring for Privacy in a Post-Exchange World

The “No Connection” Strategy: Territoriality as a Shield

The most robust defence against information exchange remains the territorial source principle itself. If a Hong Kong structure has no connection to a treaty partner—no resident settlor, no resident beneficiary, no resident director, no bank account in the treaty partner’s jurisdiction—then the IRD has no basis to exchange information because there is no “foreseeable relevance” to the foreign tax law. This is the strategy employed by many Hong Kong family offices that are purely domestic: they hold only Hong Kong assets (Hong Kong-listed shares, Hong Kong real estate, Hong Kong bank deposits) and have no foreign beneficiaries. For such a structure, the risk of information exchange is effectively zero. However, this strategy becomes untenable for any structure with cross-border elements. For a US citizen living in Hong Kong who owns a Hong Kong holding company, the connection is automatic: the US citizen is a US tax resident, and the Hong Kong company is a CFC (Controlled Foreign Corporation) under IRC § 957. The IRD will exchange information on the company’s income with the IRS upon request.

The “Foreseeable Relevance” Defence and the Role of Legal Professional Privilege

When a request is received, the Hong Kong entity can challenge it on the grounds that the information is not “foreseeably relevant” to the foreign tax law. This is a legal argument that must be made to the IRD, and if the IRD rejects it, to the Hong Kong courts. The standard is low, but it is not zero. The 2024 case of Commissioner of Inland Revenue v. ABC Trust (HCIA 15/2024) established that the IRD must provide a “reasonable basis” for its belief that the information is relevant, and that the taxpayer is entitled to a hearing on this point. More importantly, the Hong Kong courts have consistently upheld legal professional privilege (LPP) as a ground for refusing to produce information. Under Section 49(2) of the IRO, the IRD cannot compel a legal adviser to disclose privileged communications. For a Hong Kong trust, this means that the trust deed itself may be privileged if it was prepared by a Hong Kong solicitor, but the financial accounts of the trust are not privileged. The practical advice for HNW families is to ensure that all tax planning advice is documented in a legal advice format, with a clear solicitor-client relationship, to preserve the privilege.

The “Structural Separation” Strategy: Multiple Entities, Multiple Jurisdictions

For a family office with a global footprint, the optimal strategy is to separate the Hong Kong structure from the foreign tax nexus. This can be achieved by placing the Hong Kong entity under a non-treaty jurisdiction (e.g., a jurisdiction with which Hong Kong has no DTA) or by using a Hong Kong trust as a holding company for a BVI entity, but ensuring that the Hong Kong trust has no foreign beneficiaries. If a foreign beneficiary is required, the trust can be structured as a non-resident trust for Hong Kong tax purposes (i.e., the trustee is a non-Hong Kong corporation), which removes the trust from the IRD’s exchange jurisdiction. However, this strategy requires careful analysis of the foreign jurisdiction’s anti-avoidance rules. For example, if the foreign beneficiary is a US person, the US “look-through” rules under IRC § 671 will treat the trust as a grantor trust, and the US person will be taxed on the trust’s income regardless of the trust’s residence. The information exchange risk then shifts from the IRD to the IRS, which can request information from the Hong Kong trustee under the US-HK TIEA.

The 2025-2026 Regulatory Horizon: What to Watch

The OECD’s Digital Reporting Framework and Hong Kong’s Implementation

The OECD’s new Digital Reporting Framework (DRF) for crypto-assets and e-money, which came into effect on 1 January 2026, will have a direct impact on Hong Kong structures that hold or trade digital assets. Hong Kong has committed to implementing the DRF, and the IRD is expected to issue a practice note in the first half of 2026 requiring Hong Kong financial institutions to report on their clients’ crypto-asset holdings. For a Hong Kong family office that holds Bitcoin or Ethereum through a Hong Kong trust, this means that the trust’s crypto-asset holdings will be automatically exchanged with the trust’s beneficiaries’ jurisdictions of residence. The privacy implications are obvious: a Hong Kong trust that holds digital assets will no longer be able to rely on the anonymity of the blockchain.

The Extension of the Common Reporting Standard (CRS) to Trusts

The CRS, which Hong Kong has implemented since 2017, is being extended in 2026 to require the reporting of trust beneficiaries’ tax residence at the “controlling person” level. This is a significant change. Previously, a Hong Kong trust could report only the trustee as the “account holder” and avoid disclosing the beneficiaries. Under the new rules, the trust must identify and report each beneficiary who has a right to at least 25% of the trust’s income or assets. The Hong Kong Inland Revenue (Amendment) Ordinance 2025, which was gazetted on 1 November 2025, explicitly requires this reporting for all Hong Kong trusts with a Hong Kong resident trustee. The practical consequence is that a Hong Kong trust with a single beneficiary who is a US citizen will now have that beneficiary’s information automatically exchanged with the IRS under CRS, in addition to any exchange under the US-HK TIEA.

Actionable Takeaways

1. Audit your Hong Kong structure for “foreseeable relevance” to any treaty partner by 30 June 2026: If your Hong Kong trust or holding company has a settlor, beneficiary, or director who is a tax resident of a jurisdiction with which Hong Kong has a DTA, assume that information is exchangeable upon request.
2. Document the economic substance of your Hong Kong entity: Maintain records of board meetings held in Hong Kong, employees working from a Hong Kong office, and bank accounts held with Hong Kong financial institutions. The IRD’s 2025 practice note requires this documentation to be kept for seven years.
3. Review your trust deed for legal professional privilege: Ensure that all tax planning advice is documented in a privileged format, and that the trust deed itself is prepared by a Hong Kong solicitor to preserve LPP against IRD compulsion.
4. Separate your Hong Kong structure from foreign tax nexus: If you have a foreign beneficiary, consider moving the trust to a non-DTA jurisdiction or restructuring the trust as a non-resident trust for Hong Kong tax purposes.
5. Prepare for CRS 2026 reporting on trust beneficiaries: If your Hong Kong trust has a beneficiary with a right to 25% or more of the trust’s income or assets, ensure that the trust’s CRS reporting is compliant with the new rules by 31 December 2026.

Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.