Obtaining a Hong Kong Tax Residency Certificate can bring you significant advantages when doing business in Hong Kong. In this blog, Hongda will introduce the importance of applying for a Hong Kong Tax Residency Certificate and how you can get it!
What is a Hong Kong Tax Residency Certificate?
As its name suggests, a Hong Kong Tax Residency Certificate, (which is also called a Certificate of Resident Status) is an official document issued by the Hong Kong Inland Revenue Department to prove that an individual or a business entity meets the criteria for claiming tax benefits under the Comprehensive Double Taxation Agreements / Arrangements (DTAs).
Benefits with a Hong Kong Tax Residency Certificate
By applying for a Hong Kong Tax Residency Certificate, numerous benefits can be introduced:
- Tax Treaty Benefits: As multiple DTAs have been signed between Hong Kong and other countries/regions for double taxation reduction purposes, holding a Hong Kong Tax Residency Certificate offers you a chance to enjoy lower withholding tax rates or even exemption with another contracting party.
- Cross-border Transactions Benefits: A Tax Residency Certificate helps you clarify your tax status within cross-border payments such as dividends, interests, and royalty fees, leading to a lower tax risk and a simpler reporting and approval process.
- International Reputation Benefits: Holding a Tax Residency Certificate can enhance your global credibility and international reputation of financial institutes or commercial banks by demonstrating that you have fulfilled the legal and tax compliance requirements in Hong Kong.
- Taxation Benefits: By stating that your tax residency status in Hong Kong with a Tax Residency Certificate, you can ensure that your incomes and profits are not taxed twice by another country or region (including the Chinese mainland).
How to Apply for a Hong Kong Tax Residency Certificate
Step 1: Confirm Tax Residency Status
Before taking action to apply, you need to determine whether your company meets the criteria as a Hong Kong tax resident. According to the tax law of the Hong Kong SAR, companies incorporated or constituted in Hong Kong, or companies incorporated or constituted outside Hong Kong but managed or controlled in Hong Kong, can be considered Hong Kong tax residents. If you are unsure whether your company is qualified, you can simply book a meeting with Hongda for more information.
Step 2: Prepare Application Documents
To apply for the Certificate, you need to prepare the following documents:
- Application form.
- Company incorporation documents: such as Business License, Certificate of Incorporation, Articles of Association.
- Bank statements.
- Latest company financial statements.
- Proof of business activities in Hong Kong: including lease agreements, employee payroll records, or business contracts.
Step 3: Submit an Application
There are two methods to submit the application to the Inland Revenue Department of Hong Kong: through the online system or through a written request. Once the application is submitted, the department officials may contact you for additional materials. Don’t miss the call!
Step 4: Wait for Approval
Typically, the result of your application will be issued within 21 working days after submission. Once approved, the Certificate will be ready for collection at the Inland Revenue Department office or delivered to you by post.
Other Tax and Financial Incentives You Can Enjoy
Lower Withholding Tax Rates* (See below for detailed information)
If your company needs to receive incomes such as dividends or loan interest from other countries or regions, a Hong Kong Tax Residency Certificate allows you to enjoy a reduced withholding tax rates as agreed in a DTA. You can see the example below, which shows the tax rate difference between Hong Kong SAR and China Mainland.
Simplify Cross-border Fund Flows
A Hong Kong Tax Residency Certificate can help simplify the cross-border capital flow with countries or regions with foreign exchange controls, such as mainland China, making international fund transfers and payments easier.
*Example: Tax Treaty Benefits in Hong Kong SAR and China Mainland
Let’s take the tax rates of dividends, interest, and royalties in Hong Kong and the Chinese mainland as an example. According to the Double Taxation Agreement between Hong Kong and mainland China, if a Hong Kong company meets the requirements of applying for a Hong Kong Tax Residency Certificate, the tax rate on dividends sourced from mainland China is 5%, while the tax rate on interest and royalties is 7%. For Hong Kong companies without the Certificate, a tax rate of 10% is implemented to these three types of incomes. An even higher rate at 20% is set for mainland Chinese resident companies.
|
Tax Items |
Hong Kong Enterprises with Tax Residency Certificate |
Hong Kong Enterprise WITHOUT Tax Residency Certificate |
Mainland China Enterprise |
|
Dividends |
5% |
10% |
20% |
|
Interest |
7% |
10% |
20% |
|
Royalties |
7% |
10% |
20% |
Now you can see clearly that once a company qualifies as a Hong Kong tax resident, it can significantly reduce the corporate tax costs by enjoying lower tax rates.
Case Study of Utilizing Hong Kong Tax Residency Certificate
Case 1: Paying and Receiving Dividends from Mainland a China Company and a Hong Kong Company
Background:
I am the shareholder of companies registered in Mainland China and Hong Kong, and a new financial year is coming. During the previous year, my Mainland China company has made profits to be distributed as dividends. However, the foreign exchange control regulations in Mainland China seem to complicate the profit transfer process, not to mention that the high tax rate further repatriate my profits.
Analysis:
In this case, a shareholder of both a Mainland China company and a Hong Kong company wants to transfer and distribute the profits earned in Mainland China to Hong Kong. As the dividends tax rate in Mainland China is much higher (20%), transferring profits to the Hong Kong company first and receiving his dividend from the Hong Kong company seems to be a better choice.
If the Hong Kong company can obtain a Hong Kong Tax Residency Certificate, the withholding tax rate can be reduced during dividend payments. In addition, a Certificate can also simplify the cross-border money transfer process.
Solution:
Hongda suggests the Hong Kong company to apply for the Tax Residency Certificate in Hong Kong. By providing the Certificate to the Mainland China tax authorities, the original high withholding tax rate of 10% for a Hong Kong company without a Certificate now can be reduced to 5% once it qualifies as a Hong Kong tax resident. In addition, the dividends to be paid to the Hong Kong company shareholders can enjoy tax exemption incentives in Hong Kong. The Certificate can also serve as supporting evidence if required by foreign currency control authorities or banks.
Once the Hong Kong company receives the dividends from Mainland China, it can distribute to its shareholders. During this process, your own dividend will not be charged any tax because Hong Kong companies does not impose withholding tax on dividends paid to non-residents.
Case 2: Difficulties in Opening a Company Bank Account
Background:
I am the business owner of a company registered in Hong Kong. As my business grew, I wanted to open an additional corporate bank account for my company. However, my business arrangements made me travel all year round across the globe and I no longer resided in Hong Kong. When I was attempting to open a new account, the bank required information about my company’s country/region of residence, leaving me confused.
Analysis:
The bank may ask for the company’s country/region of residence for many reasons. According to the local governments and international regulations, the bank needs to verify a company’s tax residency status before processing the bank account opening request as a legal and taxation compliance requirement.
In addition, Hong Kong has long been considered a well-recognized global business center. Providing a Hong Kong Tax Residency Certificate can also indicate that your company is running and operating with good business record, which will benefit the bank’s Know Your Customer (KYC) process.
Solution:
Hongda’s consultant helped our client review the company’s business activity records and determine the company’s relevant jurisdictions, leading to a successful application of Hong Kong Tax Residency Certificate. With the Certificate, our client not only processed the bank’s evaluation procedure smoothly and opened an additional bank account but also enhanced his company’s credibility.
Conclusion
Applying for a Hong Kong Tax Residency Certificate is important, especially for corporates who want to enjoy the tax benefits from the Double Taxation Agreements, such as lower tax rates, avoidance of double taxation, and simplified capital flows between Hong Kong and another contracting country/region. It can also help to enhance your company’s reputation and credibility in the global business environment.
If you want to enjoy high quality assistance in determining whether your company is qualified and applying for a Hong Kong Tax Residency Certificate, you can simply book a meeting with us or leave a request today!
