IRD announces it will now issue certificates of “resident of Hong Kong” based on the plain definition of the term under a CDTA

On 8 June 2023, the Inland Revenue Department (IRD) announced on its website that it will now issue certificates of “resident of Hong Kong” (CoRs) based on the plain definition of the term as defined in a comprehensive avoidance of double taxation arrangement (CDTA). Such an approach will apply to all Hong Kong’s CDTAs. 

Most Hong Kong’s CDTAs 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. Otherwise, such an entity will be regarded as a “resident of Hong Kong” in most Hong Kong’s CDTAs if it is “normally managed or controlled in Hong Kong”.

This IRD’s announcement seems to indicate that, as a change from its previous administrative practice, the IRD will generally no longer examine whether such an entity has “sufficient economic nexus with Hong Kong” before the IRD issues a CoR for CDTA purposes. 

Apparently, where an entity is incorporated or constituted under the laws of Hong Kong, a CoR will, subject to the potential application of the tie-breaker rule, be issued as a matter of course. This would seem to be the case given that such an entity will plainly satisfy the definition of the term in all Hong Kong’s CDTAs, except that of the Hong Kong-Japan CDTA. 

However, although such an entity will be a resident of Hong Kong, it could also be regarded as a resident of the contracting party of a CDTA, e.g., if its effective place of management is located in the other side. In such a case, the residence of the entity would then have to be decided by the tie-breaker rule contained in the CDTA and the IRD would need to consider the issue when processing the CoR application.

Separately, the IRD has also formalized the application procedures under which CoRs will be issued to more than one applicant where (i) an investment in a mainland China entity is owned via a multi-level ownership structure; and (ii) the entity in Hong Kong that directly owns the mainland China investment cannot be regarded as the beneficial owner of a dividend income on its own, but an upper-level entity in the ownership structure can. 

In such a situation, more than one entity in the ownership structure will need to obtain a CoR in Hong Kong under Public Notice No. 9 (PN 9) issued by China State Administration of Taxation in 2018, if a reduced withholding tax rate on dividends in mainland China is to apply under the Hong Kong-mainland China CDTA. 

It is however unclear whether in processing CoR applications under PN 9, the IRD will, in addition to examining the Hong Kong residence of the entities involved, also examine whether the upper-level entity in Hong Kong is the beneficial owner of the dividends before it issues the CoRs required.

In any case, any claims for tax benefits will also be subject to the examination of the tax authorities of our CDTA partners under the terms of the CDTAs concerned. 

The terms of a CDTA that affect the eligibility of an applicant for the tax benefits sought include the resident status of an applicant under a tie-breaker rule, whether the applicant is the beneficial owner of the income concerned and whether a principal purpose of the arrangement in question is to obtain such benefits. Any adverse conclusion of any such other terms of a CDTA could result in the denial of the tax benefits. 

Claiming tax benefits under a CDTA is by its nature a complicated process and clients should seek professional tax advice, where necessary.