Claiming tax benefits under the tax arrangement between Mainland & HK
Polly Wan and Angela Chan share the latest regulations and tips for Hong Kong companies that plan to apply for double taxation agreements benefits in Mainland China Many tax jurisdictions including Hong Kong have entered into Comprehensive Double Taxation Agreements/Arrangements (DTAs) with one another. These DTAs protect taxpayers from paying double taxation in different jurisdictions and provide certain tax benefits to the taxpayer. However, the application of such DTA benefits is often not that straightforward. Hong Kong Certificate of Resident Status Currently, Hong Kong has entered into DTAs with 40 jurisdictions (including the Mainland) under which a Hong Kong tax resident is potentially entitled to tax benefits, such as preferential withholding tax rates in respect of payments on dividends, interest and royalties charged by Hong Kong’s DTA partners. Under the arrangement with the Mainland, Hong Kong companies might be able to enjoy preferential DTA rates on various China sources of income if they are Hong Kong tax residents. A Certificate of Resident Status (CoR) issued by the Inland Revenue Department (IRD) serves as a proof of the Hong Kong tax resident status under DTAs. In general, the following parties can apply for a CoR from the IRD:
- An individual who ordinarily resides in Hong Kong;
- An individual who stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment, one of which is the relevant year of assessment;
- A company, partnership, trust or body of persons incorporated or constituted outside Hong Kong but managed or controlled in Hong
- Whether the directors and senior management of the company principally reside in Hong Kong,
- Whether the applicant has employees in Hong Kong and whether remuneration is reported in the Employer’s Returns to the IRD;
- Whether there is active business income derived from and taxable in Hong Kong; and
- Whether the applicant has a physical office or fixed place of business in Hong Kong
- The recipient is obligated to pay or has actually paid more than 50 percent of the income to a resident(s) of a third jurisdiction within 12 months of receiving it.
- The business activities carried out by the recipient of the income do not qualify as substantive business activities (i.e. substantive manufacturing, trading and management activities, investment management, etc.).
- The relevant income is exempt from tax or not taxable in the jurisdiction of residence, or if the income is taxable, the effective tax rate is extremely low.
- In addition to a loan agreement under which interest arises and is paid, the creditor has concluded another loan agreement or deposit agreement on similar terms with a third party.
- A license or transfer agreement exists between the non-resident and a third party relating to the right to use, or the transfer of the ownership of, the copyright, patent or technology covered by a license agreement, based on which a royalty is derived and paid.