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On 14 July 2020, President Trump signed into law the Hong Kong Autonomy Act (HKAA), unanimously passed by the U.S. House of Representatives on 1 July 2020 and by the U.S. Senate on 2 July 2020. Simultaneously, President Trump signed Executive Order 13936 implementing the HKAA and revoking Hong Kong’s preferential trade status, meaning Hong Kong will now be treated the same as mainland China for the purposes of, among other things, export controls and possibly tariffs. That executive order, which takes immediate effect, also outlines certain actions related to Hong Kong for which sanctions can be imposed. Following the introduction of the executive order, on 19 August 2020, the Trump Administration announced that it intends to terminate the reciprocal tax exemption for Hong Kong income derived from the international operation of ships.

This note addresses the scope of the HKAA and focuses on the potential impact it could have on Hong Kong shipowners. This note also addresses the impact of the termination of the reciprocal tax agreement which, in general, provides that shipping companies based in Hong Kong (or that have a subsidiary in Hong Kong) will be liable for U.S. gross income tax from the international operation of vessels involving U.S. ports. 

The Hong Kong Autonomy Act

Sanctions on Foreign Persons

The HKAA authorises sanctions on Foreign Persons1 who “materially contribute” to “the failure of the Government of China to meet its obligations to Hong Kong under the Joint Declaration or the Basic Law”. The HKAA states that a Foreign Person materially contributes to the failure of the Chinese government to meet its obligations if they take any action that results in the inability of the people of Hong Kong to enjoy freedom of assembly, speech, press, or independent rule of law; or to participate in democratic outcomes. Actions that reduce the high degree of autonomy of Hong Kong can also constitute a material contribution. Commercial transactions (buying, selling and transporting cargoes), even when they involve Chinese government entities or Chinese or Hong Kong officials, however, are unlikely to be of the nature targeted under the HKAA unless they serve, as their underlying purpose, to implement or support Beijing’s national security law.

The HKAA requires the U.S. Secretary of State to, within 90 days, submit a report to Congress that identifies those who “materially contribute” to the failure of the government of China to meet its obligations to Hong Kong. Thereafter, the President may impose blocking sanctions and visa restrictions on those persons. The President is required to impose such sanctions on Foreign Persons who remain on the Secretary’s report one year after the original report is submitted.

These sanctions will, at the least, prohibit U.S. persons (including U.S. banks) from dealings with Foreign Persons. From that prohibition, it follows that non-U.S. persons will be prohibited from using U.S. dollars to transact with the sanctioned Foreign Persons. Whether the sanctions will impact the ability of non-U.S. persons to transact with such Foreign Persons where there is no U.S. nexus (e.g., U.S. dollars or U.S. persons) will turn on the way in which the sanctions are implemented. Specifically, while the HKAA authorises and then requires the imposition of blocking sanctions, it does not dictate whether such sanctions will be of the type where non-U.S. persons will be exposed to a risk of sanctions if they engage with such Foreign Persons (i.e., “secondary sanctions”). We note, however, that the majority of the Trump Administration’s sanctions programs, including Executive Order 13936, discussed below, have an extraterritorial application.

The HKAA also authorises the President to impose, from a “menu” in the HKAA, sanctions on Foreign Financial Institutions (FFIs) conducting “significant transactions” with anyone included in the Secretary’s report who materially contributes to China’s failure to meet its obligations to Hong Kong. This menu includes, among other things, a prohibition on property transactions subject to U.S. jurisdiction and a prohibition on transfers of credit or payments between financial institutions subject to U.S. jurisdiction. From the text of the HKAA, it does not appear that the sanctions that would be imposed on FFIs would impact non-U.S. persons’ dealings, but again, implementation of these sanctions could result in such expanded scope. These FFIs will be included in a report produced by the Secretary of State within 60 days of the report on Foreign Persons. If an FFI is still included in that report one year after initial publication, the President will be required to impose no fewer than five of the sanctions contained in the menu. If the FFI is still included in the report two years after initial publication, the President will be required to impose all of the sanctions contained in the menu.