Application of Certificate of Residence Status in Hong Kong
In general, according to the comprehensive double taxation agreements / arrangement (“CDTA”) between Hong Kong and its treaty partners, Hong Kong resident company is defined as follows:
- A company incorporated in Hong Kong; or
- A company incorporated outside Hong Kong being normally managed or controlled in Hong Kong.
In the past, being a Hong Kong incorporated company should be sufficient for such company to obtain the certificate of Hong Kong resident from the Inland Revenue Department (“IRD”) for CDTA purpose. However, to avoid treaty abuse and to be a more responsible treaty partner, the IRD is more stringent in granting the Hong Kong tax resident certificate (“HKTRC”) to companies.
The IRD generally requires to a Hong Kong company to demonstrate that its management or control is normally exercised in Hong Kong and has sufficient business substances in Hong Kong for the HKTRC application. In particular, the IRD focuses on the following areas:
- The Board
The IRD normally examines the detail of the board of the company in order to determine the place where the company being normally managed or controlled, in particular the board members and the board meetings. Rather than focusing on the nationality of each board member, the place of residence of each board member would be reviewed by the IRD as it is accepted that a company would carry on its business operation near to where the board members reside. In addition, the IRD will review the board meetings details which include the location of the preparation works, the location of the board meetings held, the physical presence of the board members, the items being discussed and resolved, and the implementation and execution of the resolved matters during the meeting.
- The Employees
The IRD examines closely whether the company has hired any staff in Hong Kong. In addition, personal details of each employee (i.e. name, nationality, age, remuneration) and the job duty details will be collected by the IRD for the business substance tests.
- The Company Establishments
Here refers to the applicant’s fixed place of business and the location of the bank account facilitating the business operation and financing.
The IRD also places emphasis on the beneficial ownership status of the applicant for the income qualifying for the relevant CDTA benefits, in particular the passive income (i.e. royalties, dividends, interest income or capital gains) enjoining the preferential tax treatments under CDTAs. The IRD has mentioned in the notes for HKTRC application form that “where the applicant … is a recipient of dividends, interest or royalties and its right to use and enjoy the income is constrained by a contractual or legal obligation to pass on the payment received to another person, the applicant is not the beneficial owner….” In this regard, the IRD looks beyond the definition of “Resident” in the CDTAs and, if the IRD is of the opinion that the applicant is not the beneficial owner of the income, refuses to grant the HKTRC to the applicant.
Should you require further details or assistance on the above, please contact Sylvester Chu at tax@zetland.biz.
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