Hong Kong’s Financial Services and Treasury Bureau (FSTB) recently issued a consultation document on amending the Companies Ordinance law. If the amendment proposal is approved, companies incorporated in Hong Kong will need to identify their beneficial owners and register such information with the Hong Kong Companies Registrars.
This rule applies to all companies incorporated in Hong Kong, including those limited by shares, by guarantee, and unlimited companies. However, publicly listed companies will be exempted from the proposed requirements as the Securities and Futures Ordinance already have a stringent set of rules requiring listed companies to register their interests of shares.
Given Hong Kong’s strong commitment to global governance on combating money laundering and terrorist financing, it is highly likely that it will introduce a bill into the Legislative Council in the second quarter of 2017. It is recommended that Hong Kong-incorporated companies stay current with the ongoing changes, so as to make adjustments to comply with the laws and mitigate potential business losses.
Definition of beneficial owner
The FSTB adopts a similar definition of “beneficial owner” as that proposed by Financial Action Task Force, an inter-government body developing and promoting policies to combat money laundering and terrorist financing, and that adopted by the UK, Italy, Spain, Belgium, and Switzerland. Under the proposed amendments, a beneficial owner in relation to a company is an individual who meets one or more of the following specified conditions:
- Directly or indirectly holding more than 25 percent of the shares;
- Directly or indirectly holding more than 25 percent of the voting rights;
- Directly or indirectly holding the right to appoint or remove a majority of directors;
- Otherwise having the right to exercise, or actually exercising, significant influence or control;
- Having the right to exercise, or actually exercising, significant influence or control over the activities of a trust or a firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions (in their capacity as such) in relation to the company, or would do so if they were individuals.
Register of people with significant control
When registering beneficial ownership information with the Hong Kong Companies Registrars, a company needs to accurately file a “Register of People with Significant Control” (PSC register) in a timely manner. A person with significant control (PSC) is an individual who meets one or more of the specified conditions set out in the above definitions for beneficial owners (i.e. a registrable individual).
Given that a registrable individual may hold an interest in a company indirectly through successive layers of holding companies in a chain of ownership, a company also needs to register a relevant legal entity (i.e. a registrable legal entity) with significant control over the company. This registrable legal entity does not have to be formed or incorporated in Hong Kong. It is registrable as long as it meets one or more of the specified conditions set out in the definitions of beneficial owners. Additionally, only a legal entity immediately above the company in the company’s ownership chain is deemed as a registrable legal entity.
When a company has identified its registrable individual and registrable legal entity, it should file the following information in its PSC register in addition to the already required registration details under the Companies Ordinance:
- Name of the registrable individual or registrable legal entity;
- The number of the identity card, or the number and issuing country of any passport, of the registrable individual;
- The legal form of the registrable legal entity (including the law by which it is governed) and the company registration number or the equivalent in its place of incorporation or formation;
- The correspondence address (excluding post office box number) of the registrable individual, and the address of the registered or principal office of the registrable legal entity;
- The date when the person became a registrable individual, and the date when the legal entity became a registrable legal entity; and
- The nature of the control of the registrable individual or of the registrable legal entity over the company in accordance with the specified conditions.
Here is an example of how to identify a registrable individual and a registrable legal entity for entry into a PSC register.
If HK Company A is directly owned by Person 1 (20 percent) and HK Company B (80 percent), then HK Company B is deemed a registrable legal entity since it is the direct owner of HK Company A and it holds 80 percent – more than 25 percent – of the shares. Although Person 1 does not directly own more than 25 percent of the shares in HK Company A, Person 1 is still considered a registrable individual because this person indirectly holds 80 percent of HK Company A through intermediaries HK Company B and Non-HK Company C. Therefore, when filing the PSC register for HK Company A, Person 1 is its beneficial owner (registrable individual) and HK Company B is its registrable legal entity.
Similarly, HK Company B also needs to keep a record in the PSC register due to its Hong Kong incorporation status. In this case, since Non-HK Company C is directly above HK Company B in the corporate ownership structure and it is the sole shareholder of HK Company B, Non-HK Company C should be filed in the PSC register as the registrable legal entity of HK Company B. HK Company B also needs to register Person 1 as its beneficial owner since this person indirectly owns the company (100 percent) through intermediary Non-HK Company C.
Although the major contents required for entry into PSC registers have been listed in the proposed consultation document, it is still unclear how the PSC register form will look like in practice. It is also unclear what will happen to a company, if it is not able to identify its registrable individual or registrable legal entity and despite the fact that this company has stated its situations in the PSC register.
As a major international financial and business center, Hong Kong has been seeking to strike a balance between maintaining the robustness of its regulatory regime and ensuring its competitiveness on the global stage. Given recent high profile cases of companies using complex ownership and control structures for illicit purposes, the need for tracking beneficial owners of opaque corporate vehicles has been increasingly urgent.
The trend towards enhancing transparency in beneficial ownership will only become more apparent in the future. Businesses must therefore prepare to reveal and, if necessary, restructure ownership arrangements to ensure compliance with new regulations and avoid incurring heavy penalties.
This article was first published March 2017.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.