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June 22, 2023
2023-1115

Hong Kong simplifies application process for seeking tax residence certificates

  • Hong Kong’s Inland Revenue Department has revised its application process for taxpayers seeking a “Certificate of Resident” in Hong Kong.
  • The certificate will generally be issued without examining whether the taxpayer meets economic nexus requirements with Hong Kong.
  • Taxpayers should revisit its eligibility to treaty benefit under the simplified approach.

Executive summary

A revised application process for seeking Hong Kong’s Certificate of Residence (CoR) provides that, effective from 12 June 2023, CoRs (i) will be issued based on the plain definition of the term as defined in a comprehensive avoidance of double taxation arrangement (CDTA) and (ii) will generally no longer examine whether the applicant has sufficient economic nexus with Hong Kong. The revised CoR application forms also accommodate requests for seeking multiple CoRs to take advantage of the China safe harbor treatment for obtaining treaty benefits when distributing dividends from China.

Detailed discussion

Simplification of CoR application

For the purposes of claiming tax benefits under a CDTA, a Hong Kong tax resident must apply for a CoR from the Hong Kong Inland Revenue Department (HKIRD) to prove its tax residency status. It has been the HKIRD’s practice to only issue CoRs to Hong Kong residents who have sufficient economic nexus with Hong Kong, even though the nexus requirement is not specified in the Hong Kong CDTA.

Following litigation on this practice, the HKIRD has announced that it will now issue the CoR based on the plain definition of tax residency as defined in a CDTA and will generally no longer examine whether the nexus requirement has been satisfied. This approach will apply to all Hong Kong CDTAs, most of which define a company, partnership, trust or body of persons to be a “resident of Hong Kong” if it is incorporated or constituted under the laws of Hong Kong. Such an entity will be regarded as a “resident of Hong Kong” in most Hong Kong CDTAs if it is “normally managed or controlled in Hong Kong.” The tie-breaker rule of relevant CDTA will still apply in dual residency situations.

Note that, apart from being a Hong Kong tax resident, the taxpayer should also be regarded as the beneficial owner of the income at issue and the principal purpose of the arrangement should not be to obtain tax benefits under the CDTA. Any adverse conclusion could result in the denial of the tax treaty benefits.

CoR application for dividend distribution from China

The Chinese tax authorities provided safe harbor rules under the Circular of the State Taxation Administration on Matters Concerning “Beneficial Owners” in Tax Treaties (STA Circular 2018 No. 9) (PN 9) issued in 2018 when determining beneficial ownership of dividends distributed from China for entitling treaty benefits. In particular, a look-through approach is applied in a multi-level holding structure and an applicant can be deemed as the beneficial owner of the dividend if it satisfies the same jurisdiction rule or the same treaty benefit rule.

In practice, multiple entities in the ownership structure are required to obtain their CoRs when taking advantage of the PN 9 safe harbor rules. Accordingly, the HKIRD has now formalized the CoR application procedures that CoRs will be issued to multiple applicants in such situations.

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

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 
 

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