Certificate of Tax Resident Status – Is Your Company Able To Obtain It?
Income recipients are usually required to obtain a certificate of resident status (“CoR”) from the relevant tax authority. As such, the CoR is one of the most important documents for the purpose of enjoying the tax benefits offered in the DTAs.
This is necessary n order to be entitled to certain tax benefits granted under double taxation agreements (“DTAs”) such as reduction of withholding tax rates on dividend income, interest income and royalty income, it is generally required for recipients of the said income to prove that, amongst others, they are the beneficial owners of the income concerned and especially the income recipients to be tax resident in a particular tax jurisdiction pursuant to the relevant DTAs.
How to obtain a Certificate of Tax Resident?
In Hong Kong, the Hong Kong Inland Revenue Department (“HK-IRD”) will look at a number of factors when determining whether to issue a CoR to an applicant. The factors include but are not limited to the following:
- in which jurisdiction the applicant is incorporated?
- What are the principal activities of the applicant?
- From where the applicant is being (normally) managed and controlled?
- In which jurisdiction(s) the applicant’s director(s) and management personnel reside and their respective roles and duties for the applicant?
- Whether board of directors’ meetings of the applicant are physically held? If yes, in where the meetings are organised? Who participate into the meetings and what are the issues discussed and resolved in the meetings?
- Whether the applicant has its owned office/other forms of physical establishment (apart from a registered office address), staff, fixed assets, stocks, bank account, cash, telephone line and fax line as well as internet account maintained in Hong Kong? If yes, what are the relevant details?
There are no fixed and fast rules for obtaining a CoR from the HK-IRD as different cases have their unique facts and circumstances. Usually, the more tax substance maintained by an applicant in Hong Kong, the higher the chance it can obtain a CoR from the HK-IRD.
Potential issues with the IRD
Probably due to the concerns of abuse of tax treaty benefits by taxpayers and to protect Hong Kong’s reputation as a responsible tax treaty partner, the HK-IRD has become more and more stringent when considering whether to issue a CoR to the applicants. It is not uncommon that further to lodgement of an application for the CoR, the HK-IRD will request for detailed information together with supporting documents from the applicants for determining whether to issue the CoR.
Moreover, apart from ascertaining whether an applicant is a Hong Kong tax resident, the HK-IRD will also further consider whether the applicant is qualified for the claimed tax benefits granted under the relevant DTAs, such as whether the applicant is satisfied as the beneficial owner of the income concerned.
In this regard, it has been noted that the HK-IRD itself would ‘sit’ on the chair of the tax authority of the foreign tax treaty party to determine whether the applicant is qualified for the tax treaty benefits and accordingly whether to issue a CoR to that applicant.
In case an application for the CoR is rejected by the HK-IRD, it appears that it will be rather difficult for the applicant to continue to fight for the CoR with the HK-IRD. So far, there are no court cases in Hong Kong regarding the application of the CoR.
To conclude, in case one would like to obtain a CoR from the HK-IRD, it is recommended to have its management and control as well as its business operation to be well planned and structured in advance. In particular, the applicant’s management and control are suggested to be actually exercised from out of Hong Kong.
Moreover, it will be better for the applicant to have active business to be carried out in Hong Kong and have its own office, staff and other substance to be maintained in Hong Kong to run the business.