Introduction

Given Hong Kong’s expanding network of Comprehensive Double Taxation Agreements / Arrangements (“DTAs”), obtaining a Certificate of Resident Status (“CoR”) in Hong Kong has become an important part of tax planning for multinational corporations and Chinese enterprises in order to utilise the tax benefits under DTAs. The Inland Revenue Department of Hong Kong (“IRD”) adopts a strict approach in reviewing CoR applications. As such, it is important to understand the definition of “Hong Kong tax resident” and the prevailing practice of the IRD before making a CoR application.

Tax benefits under DTAs

Hong Kong tax residents are entitled to lower tax liabilities if the relevant tax rates under the DTA are lower than those stated in domestic law. As of September 2024, Hong Kong has entered into DTAs with 52 tax jurisdictions. A full list of Hong Kong tax treaty partners can be found on the IRD’s website.

The most common DTA applicable to Hong Kong corporations is undoubtedly that between Hong Kong and the Mainland of China (“PRC”). The table below summarises the differences in withholding tax rates on dividends, interest and royalty payments made by PRC corporations to Hong Kong corporations, with and without CoR.

These figures partly explain the reason why multinational corporations prefer to set up a Hong Kong holding company to invest in the PRC. If a Hong Kong holding company qualifies as a Hong Kong tax resident and fulfils the Beneficial Ownership requirement under the PRC’s Public Notice [2018] No 9 of the State Taxation Administration, it is highly likely to be able to enjoy a preferential tax rate of 5% on dividends received from its PRC subsidiaries.

The preferential tax rate also applies to PRC enterprises listing on the Hong Kong Stock Exchange. In the common red chip structure, a Hong Kong company would be set up to hold shares of the PRC operating entities. One of the main purposes for setting up a Hong Kong holding company is to reduce the withholding tax rate from 10% to 5% for profit repatriation from the PRC to Hong Kong. Such reduction would have a significant impact on the final amount of dividends distributed to investors.

On the other hand, Hong Kong corporations licensing its trademarks, licences or other intellectual properties to PRC corporations can also enjoy a reduced withholding tax rate if it qualifies as a Hong Kong tax resident.

Other tax benefits available include the elimination of double taxation and a more favourable definition of permanent establishment being applicable under the DTA.

Hong Kong tax residency and CoR

If a corporation is considered by the IRD as a Hong Kong tax resident, a CoR will be issued to the corporation, entitling it to the abovementioned tax benefits under DTAs. As such, obtaining a CoR is crucial for multinational and PRC enterprises operating through Hong Kong to capitalise on the reduced tax liabilities.

In the past, that fact that a company was incorporated in Hong Kong alone was sufficient for it to qualify as a Hong Kong tax resident under the DTAs concluded by Hong Kong. It was not difficult for a Hong Kong corporation to obtain a CoR.

In recent years, however, following the international practice of preventing treaty abuse and treaty shopping, the IRD now expects a corporation to establish substance in Hong Kong in order to qualify as a Hong Kong tax resident. In other words, a CoR application made by a shell company without substance in Hong Kong is likely to be rejected by the IRD.

Although the extent of substance required is not specified, Departmental Interpretation and Practice Notes No 61 (Revised) (“DIPN 61”) has shed some light on the IRD’s approach in determining Hong Kong tax residency. In order to be considered a Hong Kong tax resident, a corporation has to be centrally managed and controlled in Hong Kong. It is explicitly stated that the place of incorporation is not itself conclusive proof of where the central management and control is exercised. In making a decision, the IRD will look at all factors regarding the management and operations of the applicant company including:

1.      whether the directors and staff (particularly senior management personnel) of the corporation are based in Hong Kong;

2.      whether the board meetings of the corporation are held in Hong Kong (i.e., physical location of directors at the time of the meetings);

3.      whether the corporation maintains an office and/or any other business establishment in Hong Kong; and

4.      whether the profits of the corporation are subject to Hong Kong profits tax.

The above list is not intended to be exhaustive. Conversely, a corporation may not be required to fulfil all of the above requirements to qualify as a Hong Kong tax resident. For each of the above factors, the IRD will first examine whether the corporation has established the relevant substance in Hong Kong, and then compare the substance established by the corporation in Hong Kong with that in other tax jurisdictions.

Starting from June 2023, under certain circumstances, the IRD has relaxed the requirements to obtain the CoR. However, taxpayers should not undermine the importance of building up economic substance in Hong Kong, especially if the counter tax jurisdiction is the PRC. The PRC State Taxation Administration has been actively carrying its audit to examine if the taxpayer has fulfilled the beneficial ownership requirements of the taxpayer under the PRC’s Public Notice [2018] No 9 to determine if the taxpayer is eligible for the benefits under the DTA between the PRC and Hong Kong. Economic substance in Hong Kong is one of the major requirements in the beneficial ownership requirements.

Application for a CoR

CoR are issued on a calendar year basis irrespective of the accounting year-end of the applicant. If an applicant wishes to obtain tax benefits under two or more DTAs, separate applications have to be made even if the requirements are more or less the same. Application forms IR1313A (for DTA between Hong Kong and the PRC) and IR1313B (for all other DTAs concluded by Hong Kong) should be completed and submitted to the IRD.

A CoR is generally valid for  3 years for DTA with the PRC and 1 year for DTAs with other jurisdictions, provided that there is no significant change in the company’s operations.

It takes about 21 working days for the IRD to process a CoR application. If additional information and supporting documents are required by the IRD to make a decision, an enquiry letter will be issued to the applicant. The IRD has not specified a timeframe for reviewing the applicant’s reply to the enquiry letter. As such, it is advised that:

1.      sufficient information and supporting documents should be submitted to the IRD in the initial application in order to avoid any delay in the application process; and

2.      applications for CoR in respect of DTA between Hong Kong and the PRC (which is valid for 3 years) should be submitted well in advance to allow a sufficient buffer time in the application process.

Advice

Based on our experience, a failed application would render it more difficult for a corporation to successfully obtain a CoR in the future, while a successful application tends to make future applications easier. Therefore, corporations are encouraged to consult tax advisors to examine whether their current status is likely to qualify them as a Hong Kong tax resident. If insufficient substance is maintained in Hong Kong, to enhance the chance of success, tax planning should be carried out before submitting a CoR application to the IRD.