Why Getting HK Tax Residency Certificate & How to Benefit?
Contributed by Bridges Executive Centre
25 September, 2018
Hong Kong remains one of the hottest start-up cities (for more details, read article here), and one pivotal reason is that HK continues to expand its network of income tax treaties rapidly - HK has entered into Comprehensive Double Taxation Agreements / Arrangement (DTAs) with 40 jurisdictions (full list here) up to August 2018.
In order to claim tax benefits available under DTAs, some overseas entrepreneurs or investors owning HK companies applied for HK tax residency certificates ("Certificates") from the Inland Revenue Department ("IRD"), and they may recall that the application process requires a well-thought-out interpretation to prove the applicant can qualify as a resident for the purpose of the relevant DTA, which is a prerequisite for enjoying DTA benefits. Provided that there is no abuse of the DTAs in question and as a responsible treaty partner internationally, the IRD is willing to facilitate the reduction of foreign (withholding) taxes in the source countries by issuing tax residency certificates acknowledging that the HK company or person is a HK tax resident.
In this article, we've included a few examples illustrating how some of our clients have enjoyed the DTA benefits step by step.
What're the Possible Tax Advantages?
HK tax residency certificate application needs a convincing interpretation nowadays to prevent rejection by the IRD.
For those who are not sure or still considering whether it's worth to obtain a Certificate, the envisaged tax benefits that a person or corporation is potentially eligible for, might help you make the decision.
Yes, you heard it right. There are multiple ways how the applicant may benefit from getting a Certificate. For example, you may avoid or lower the withholding taxes on dividends, interest and / or royalties / license fees in the jurisdiction from where the payments are made; you can potentially avoid capital gains tax in the country where shares are disposed of; etc. The possible outcome and advantages vary on a case-by-case basis.
Although this Certificate is not a 'must-have' item for every taxpayer in HK, if the country where you (are considering to) carry on business or invest has a DTA with HK, obtaining such a tax residency certificate could provide obvious tax benefits. In particular, it is noted that HK has the most favorable DTA with Indonesia (compared with any other DTAs that Indonesia has concluded so far).
Who Can Apply for a Certificate of Resident Status?
In principle, any individual who ordinarily resides in HK, any company incorporated in HK, and any foreign (e.g. Seychelles, BVI, Cayman Islands) company which is controlled and managed in HK can apply for a Certificate from the IRD. To avoid abuse of DTAs, however, the IRD would ask for the (corporate) applicant to have an appropriate degree of 'business substance' in HK though (simply said, 'shell companies' that actually have no substance in HK would not be entertained by the IRD).
Let's take a look at the case studies below:-
CASE 1: "I have companies in both Mainland China and HK, it's almost the end of the current quarter, so I'd like to pay dividends from our Mainland Chinese company's retained earnings to its shareholder in HK to myself. But the high withholding tax and foreign exchange controls seems to make the profit repatriation complicated?"
ANSWER: The proposed transaction could be like the Mainland Chinese company paying dividends to the HK company, and the HK company pays dividends to its shareholder(s). By doing so, the originally high withholding tax % will be decreased from 10% to 5% if the DTA applies, and the dividend income of the HK company will become non-taxable in HK. In such case, the Mainland Chinese tax bureau would request the Mainland Chinese company to submit a Certificate from the IRD in HK, confirming that the recipient of the dividends, i.e. the HK company, is a resident of HK for the purpose of the HK / China DTA. Once the dividend income is received by the HK company, it can be further distributed to the shareholder / yourself without any withholding tax leakage since HK does not impose withholding tax on dividends paid to non-residents. The Certificate also forms part of the supporting evidence in case the Mainland Chinese foreign exchange authorities request documentation for the cross-border payment of the (net amount of) dividends.
CASE 2: "I'd like to open a new or additional bank account for my business, yet I left my home country behind as I travel here and there all year around. However, when I tried to open a corporate bank account, it requires me to declare the residence of my company so I got stuck there..."
ANSWER: This is where our consultant will help review your business activities and the jurisdictions involved, in order to guide you with the preparation and application for a Certificate in case the bank asks for proof of the residency in view of opening or maintaining your company's bank account(s).
There are various elements that can affect the possible outcome. To enjoy the most out of the benefits available under DTAs, the best approach is to obtain professional advice from our experienced specialists to get well prepared before making an application. You may also check out our Certificate of Resident Status Package here. Feel free to shoot us an email at firstname.lastname@example.org anytime for in-depth advice or appointment making with our tax strategist.
Or, simply drop us a private message to start chatting with our advisors who will swiftly answer your queries. Let's work together to conceive your sagacious cross-border tax planning before another year-end!
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