Issuance of tax residency certificates simplified

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Simplified Issuance of Tax Residency Certificates
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Hong Kong’s Internal Revenue Department has modified its approach to issuing certificate of resident status (CoR) in the context of strengthened international tax co-operation and changing business environment. Application forms have also been revised.

Under the new regime, the department will decide whether to issue a certificate solely on the plain definition of “resident of the Hong Kong SAR” in relevant tax treaties/arrangements or double tax agreements (DTAs). An applicant’s economic substance in Hong Kong will no longer be relevant.

In detail

For claiming tax benefits under DTAs, Hong Kong tax residents generally need to apply for a CoR to certify their tax residency status.

Historically, in deciding whether to issue a CoR, the department would consider both the applicant’s residency and whether it was “entitled to tax benefits” under the applicable DTA.

In practice, the department only issued CoRs to residents with sufficient economic substance in Hong Kong, even though such requirement was devoid of statutory basis in both domestic laws and DTAs. The department’s intentionally stricter scrutiny had intermittently put it into dispute, and even lawsuits, with taxpayers.

The department revamped its approach to non-individual applicants (companies, partnerships, trusts and any other body of persons) effective from 12 June 2023.

The new approach effectively means that, under most DTAs, applicants that are incorporated/established in Hong Kong should be able to easily obtain a Hong Kong CoR without being assessed on the sufficiency of their economic substance in Hong Kong.

The department is legally required to issue certificates to qualified applicants within 21 working days of a properly completed application. The authors have observed that such processing time has been significantly shortened by the department after the modified approach became effective. It is not uncommon among recent applicants to receive CoRs within a week.

The market feedback is evidence that the department has indeed foregone the assessment of applicants’ economic substance when deciding CoRs.

Observations

The modified practice removes an additional and disputable barrier imposed by the department itself and should improve tax certainty during cross-border tax planning.

Meanwhile, it is important to note that a CoR will not guarantee an applicant’s success in getting the treaty benefits under applicable DTAs. This is ultimately a decision to be made by the treaty partner jurisdiction and so it will be up to the treaty partner to determine whether all relevant criteria are satisfied, and whether applicable treaty benefits should be granted.

For example, in the cases where a Hong Kong tax resident pursues the treaty benefit under the tax arrangement concluded by mainland China with Hong Kong, the applicant should be a qualified beneficial owner of the income in concern and the principal purpose of the relevant arrangement should not be to obtain tax benefits under the tax arrangement.

Any adverse conclusion could result in the denial of tax treaty benefits. In that sense, Hong Kong applicants would generally still need to have sufficient economic substance in Hong Kong to withstand any potential challenges on treaty abuse by tax authorities of the jurisdiction from which a treaty benefit is sought.

According to the administrative arrangement agreed in the notes exchanged between the mainland and Hong Kong on 16 March 2016 and 15 April 2016, a CoR issued to an applicant for a particular calendar year could serve as proof of its Hong Kong residency status for that calendar year and the two following calendar years.

With the simplification of the CoRs process, it remains uncertain whether the authorities will also shorten the valid period of CoRs. Taxpayers should not be surprised if they finally decide to do so.


Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com

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