With the economic turmoil of the American and European economies, many global business people have started planning to explore Asian countries more. Among the choices, Hong Kong is always at the top of the list.
Among the main reasons why Hong Kong ranks at the top of any entrepreneur’s list when it comes to starting a new business is the city’s business friendly environment with low taxes, fiscal initiatives by the government, and connectivity to other parts of the world. To help bolster the tax friendly nature of the city, Hong Kong has entered into Comprehensive Double Taxation Agreements (DTAs) with over 40 jurisdictions in double taxation issues. These income tax treaties save business founders from paying double the taxes when operating their business in Hong Kong and their native country.
If you are still confused about double taxation agreements and tax certificates in Hong Kong, this article will help you gather all the necessary information.
What is a Tax Certificate for Resident Status in Hong Kong?
A Tax Certificate for Resident Status (in Hong Kong), commonly known as Certificate of residence, is a document issued by the IRD (Inland Revenue Department, or HK tax department) for certifying tax residency status in Hong Kong. It is commonly used by individuals and companies in Hong Kong for tax benefits claims under the various Double Taxation Agreement (DTA) with other countries.
Every year, the application will receive one Certificate of Resident Status with respect to each DTA. There are certain cases when a person doesn’t fall into the process or eligibility criteria, especially for the claim of tax benefits to get the Tax Residency Certificate. In fact, business founders should be cautious about the fact the issued tax residency certificate doesn’t mean that the person is successful in claiming benefits under the relevant DTA.
The treaty partner is responsible for deciding whether the relief should be granted to foreign taxes or not. In short, the treaty partner will decide whether all the relevant conditions are fulfilled and whether benefits can be granted.
Benefits of Getting a Tax Certificate in Hong Kong
The main benefits of getting a tax Certificate in Hong Kong is that it can help the applicant lower or avoid withholding taxes on dividends, interest, royalties, and licenses fee in the jurisdiction where the payments are made. In fact, you can also bid for potentially avoiding capital gain tax in the country where your shares are disposed of.
Here, companies should be aware of the possible benefits, which may vary from applicant to applicant. You must ensure that you are filing for the tax residency certificate with compelling reasons.
Though this certificate is not a ‘must-have’ certificate for all Hong Kong taxpayers, if you are carrying on your business operations with the country that has a DTA with HK, obtaining such a tax residency certificate could provide obvious and numerous tax benefits.
Let’s say you have a Hong Kong company that provides consultancy services, and have entered into a contract for a new project in Indonesia worth $2,000,000. As the withholding tax in Indonesia is 20% for certain services, the total amount of tax withheld on your contract would be $400,000, unless you can provide the necessary documents to show your tax residency in Hong Kong. As Indonesia has a DTA with Hong Kong, you could explore the requirements to seek a tax certificate in Hong Kong and process to help you recover the withholding tax of your new contract.
Who Can Apply for a Tax Residency Certificate?
A tax residency certificate is issued by the IRD to help taxpayers gain relief from taxes. If you want to claim for this certificate, you have to make sure that you are meeting the eligibility criteria for a tax residency certificate:
- If you are residing in Hong Kong for more than 180 days under the assessment period or more than 300 days in two consecutive years of assessment;
- Individual who resides in Hong Kong
- Company/trust/business entity/partnership incorporated outside Hong Kong, but operating business transaction in Hong Kong.
- Trust/corporation/partnership/company incorporated or constituted in Hong Kong;
For more information about the eligibility criteria or for confirming the compelling reason to check whether one qualifies as a Hong Kong resident for that DTA, you can head over to Startupr. We will help you gather all the necessary documents and let you know whether you are eligible for this tax benefit.
How to Obtain a Tax Certificate for Resident Status in Hong Kong?
The tax residency certificate in Hong Kong is issued by the IRD as proof of residence status to claim tax advantages under the DTAs. If you are looking to obtain a tax residency certificate, you should gather all the required documents to make a case.
What are the Required Documents?
A list of documents need to be submitted to the IRD to claim for tax benefits under DTA. Below are the documents you should start gathering and preparing the information requested in the application form:
For an Individual:
- You need to fill out all the applicant’s details
- You’re required to fill out the Employment’s details / particular of your business operation in Hong Kong during the claim’s calendar year.
- More importantly, the generated amount of income and nature from the treaty party.
For Company /Body of Persons/ Partnership / Trust:
- Business’ Nature
- Headquarter location and its main branches
- Residential address, the key responsibility of every partner/principal officer/director/trustee
- The place of every trustee/principal officer/director/partner who performed their duties.
- Nature and amount of income generated from the treaty party
- The location where the management and control of Company /Partnership / Trust / Body of Persons was exercised
What are some of the questions on the form?
- The type of income earned in Hong Kong
- The location of business operations for your company
- List of company employees, and location of their work
- Location of company management, ie. where the activities of the company directors/officers occur
- Location of the company’s bank accounts, and number held in Hong Kong
How Do I Apply?
In order to apply for the tax residency certificate in Hong Kong, you are required to complete the form and submit it to the IRD along with the required documents.
The processing time for the initial tax residency certificate in Hong Kong application is approximately 21 days. If the information is insufficient to confirm the resident status, the IRD may review the file and request the applicant to provide further information and documents to the IRD.
It’s important to note that in many cases the IRD will send a follow up enquiry letter requesting further information and documents from the company. This letter may be many pages in length and cover questions in regards to all aspects of the company. The applicant must answer each and every question with relevant information and supporting documents to satisfy the requirements of the tax certificate. Therefore it’s important to plan ahead and have your application vetted by a professional tax lawyer or Hong Kong CPA to increase your chances.
Ways to increase your chances of getting a tax residency certificate
Here are some of the most important factors the IRD will consider when reviewing your application for a tax certificate:
- Have main business conducted in Hong Kong
- Have rental contract for Hong Kong office
- Have employees in Hong Kong
- Have a few years of financial statements (audit reports) to show business operations in Hong Kong
- Have a corporate account in a Hong Kong bank
- Have travel records showing arrival/departure in Hong Kong
- Have your application reviewed by a professional
This article is all about the tax residency certificate in Hong Kong and its benefits and procedure to claim the tax benefits in Hong Kong under the comprehensive DTAs. If you require any assistance when applying for this certificate or incorporating your business in Hong Kong, Startupr has the expertise to provide further guidance.
We are one of the leading service providers to help you operate your business effectively in Hong Kong and to make sure you follow all the taxation policies to avoid unnecessary penalties. We also provide company secretary services in Hong Kong. For more information about getting a tax certificate in Hong Kong, contact us today!