The modified approach to issuing Certificate of Resident Status in Hong Kong SAR
Lewis Lu and John Timpany of KPMG China discuss the Inland Revenue Department (IRD)’s adjusted approach to issuing Hong Kong Certificate of Resident Status (HK CoR) and the revised HK CoR application forms.
The change in approach to issuing HK CoR
On June 8 2023, the IRD indicated on its website that it has revisited its approach to issuing HK CoR. The process is now adjusted such that the IRD will base its decision of whether a HK CoR can be issued on the plain definition of “resident of Hong Kong” stipulated in the relevant Hong Kong double tax agreement (DTA).
For most of the Hong Kong DTAs, “resident of Hong Kong” is defined to include a company incorporated in Hong Kong and any other person constituted under the laws of Hong Kong. One exception is the Hong Kong/Japan DTA, under which “resident of Hong Kong” is defined as a company or any other person having a primary place of management and control in Hong Kong.
There is also a note on the IRD’s website indicating that an applicant incorporated or established in Hong Kong is generally not required to provide full details of its establishment and business activities in the HK CoR application form.
Major changes to the HK CoR application forms
With effect from June 12 2023, the HK CoR application forms for non-individual applicants (i.e. companies, partnerships, trusts, a body of persons) have been revised to:
Reflect the above change in the IRD’s approach to issuing HK CoR; and
Formalise the existing administrative facilitation measures for HK CoR applications under the DTA between Hong Kong and the mainland (CN/HK DTA) and relating to the Circular of the State Taxation Administration on Matters Concerning “Beneficial Owners” in Tax Treaties (STA Circular 2018 No. 9).
Under the IRD’s existing administrative facilitation measures, a bundled HK CoR application can be made to cover:
The treaty benefit applicant (e.g. the Hong Kong SPV that is the immediate recipient of the dividends from the mainland) and its ultimate/intermediate 100% shareholder(s) under the “safe harbor rule”;
The treaty benefit applicant and its ultimate 100% shareholder that qualifies as a beneficial owner of the dividends under the “same jurisdiction rule”; or
The treaty benefit applicant and its intermediate 100% shareholder(s) under the “same treaty benefit rule” under STA Circular 2018 No. 9.
We welcome the modified approach to the issuance of HK CoR adopted by the IRD and the revised HK CoR application forms. These changes imply that from June 12 2023, under most of Hong Kong’s DTAs, a HK CoR applicant which is an entity incorporated or established in Hong Kong should be able to get a HK CoR on a straightforward basis. This is without being assessed on the amount of economic substance (ES) in Hong Kong or requested to provide detailed supporting information/documents regarding its establishment and/or business operations in Hong Kong.
However, business groups wishing to enjoy a treaty benefit under a Hong Kong DTA should note that obtaining a HK CoR does not necessarily mean the relevant DTA jurisdiction would agree to grant the treaty benefit to their Hong Kong resident entities. This is particularly true as the “principal purpose test” for preventing treaty abuse has either been included in an existing Hong Kong DTA during treaty negotiation or will be added to an existing Hong Kong DTA by means of the relevant provisions of the OECD’s Multilateral Instrument (MLI). Hong Kong resident entities would still need to have sufficient ES in Hong Kong to withstand any potential challenges on treaty abuse from the DTA jurisdiction from which a treaty benefit is sought.
In addition, with the foreign-sourced income exemption (FSIE) regime that became effective in Hong Kong from January 1 2023, an in-scope entity needs to meet the specified ES requirements in Hong Kong if they receive foreign-sourced dividends, interest, royalties or equity disposal gains in Hong Kong (or fulfil the participation exemption conditions in cases of foreign-sourced dividends and equity disposal gains). In particular, in the case where a foreign-sourced equity disposal gain derived by a Hong Kong resident entity is tax exempt in the foreign source jurisdiction as a result of a treaty benefit under a Hong Kong DTA, the “15% subject-to-tax condition” under the participation exemption of the FSIE regime would not be met and the entity would need adequate ES in Hong Kong to fulfil the ES requirement under the FSIE regime to enjoy a tax exemption of the disposal gain in Hong Kong.