Executive summary

Hong Kong’s Inland Revenue Department (IRD) discussed its view¹ on the following issues during its 2018 annual meeting with the Hong Kong Institute of Certified Public Accountants (HKICPA):

(i) The factors considered in determining whether a taxpayer is the beneficial owner in processing an application for a certificate of residence (CoR).

(ii) The requirements for application for a CoR of a permanent resident individual.

(iii) The requirements for CoR application for subsequent years after a CoR has been issued for certain year.

(iv) The procedures required for seeking a higher second-level review for CoR applications initially rejected.

This Alert summarizes the IRD’s position on these issues.

Detailed discussion

Beneficial ownership

In deciding whether a CoR can be issued, the IRD would consider whether an applicant is the beneficial owner of the income.

As a matter of practice, the following factors may be taken into consideration:

• The legal owner of the relevant asset
• The economic substance of the applicant
• Whether the applicant had any obligation to pass the income received to another person
• The extent of the applicant’s power to decide on the use of the relevant asset
• Whether the applicant assumed the risk and control of the income

CoR of permanent resident individual

In current practice, if an applicant satisfies the Hong Kong temporary resident requirement,² the IRD would simply issue a CoR showing only the temporary residence in Hong Kong, even though the applicant may also qualify as a permanent resident of Hong Kong.

However, under the tax law in China, taxpayers may not be able to obtain the tax benefits under the tax treaty between China and Hong Kong if they are not able to demonstrate that they are a permanent resident of Hong Kong.

Under the circumstances in which individuals clearly indicate in their applications that they are applying for a CoR showing that they are permanent resident, the IRD may issue a CoR indicating the applicant’s permanent residency status by taking into consideration the period of the physical presence of the individual in Hong Kong and all the other facts and circumstances during the given taxable year (e.g., whether the individuals habitually and normally resided in Hong Kong, where their family members habitually lived, whether they had any social and economic ties with Hong Kong, etc.).

CoR application for subsequent years after a CoR has been issued

Under the current administrative arrangement agreed between the IRD and the Chinese Tax Authority, a CoR will generally serve as proof of the Hong Kong residence of a taxpayer for three years. Accordingly, the IRD would not generally accept an applicant’s request for a CoR for the third year.

However, if Hong Kong resident taxpayers encounter difficulties in claiming treaty benefits and are specifically requested to submit a CoR for the third year by the Chinese Tax Authority, the applicants could elaborate in their CoR application the reasons and circumstances for requiring a CoR for the third year. The IRD would consider the facts and circumstances of each individual case to see if the application should be accepted.

Higher second-level review for CoR applications initially rejected

In response to the concerns raised by the HKICPA, the IRD agreed that an applicant could take the following steps to pursue an application for a CoR that had initially been rejected:

• The applicant should first contact the case officer to see whether further information and documents could be submitted to support the issuance of a CoR.
• If the case officer maintains the decision of not accepting the CoR application, the applicant could request that the case be referred to the Chief Assessor of the Tax Treaty Section for further review.

Endnotes

1. The report was issued in November 2018 for the meeting held in May 2018.

2. Under the tax treaty between China and Hong Kong, an individual would qualify as a temporary resident if such individual stays in Hong Kong for more than 180 days in a taxable year, or more than 300 days in two consecutive taxable years (one of which being the taxable year for which the application is made).

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

• David Chan | david.chan@hk.ey.com
• Paul Ho, Financial Services | paul.ho@hk.ey.com

Ernst & Young LLP, Hong Kong Tax Desk, New York

• Rex Lo | rex.lo1@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty | chris.finnerty1@ey.com
• Kaz Parsch | kazuyo.parsch@ey.com
• Bee-Khun Yap | bee-khun.yap@ey.com

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