Due to its excellent international reputation, Hong Kong has become one of the Four “Asian Tigers” along with Singapore, Taiwan, and South Korea. In addition to that, it has quickly turned into a highly-respected low-tax jurisdiction. As such, Hong Kong does not have income tax on dividends and interest payments to non-recipients. The country also does not impose tax on capital assets’ sales.
While Singapore keeps its leading position in the IFC and World Bank Ease of Doing Business annual rankings, Hong Kong is unbeaten for non-residents. In comparison to many other offshore zones that require a resident director, a Hong Kong-based business entity can be owned, managed, and operated from overseas.
What is a Certificate of Resident Status?
Businesses that are incorporated or constituted under the jurisdiction of Hong Kong would automatically satisfy the broad definition of “Hong Kong resident” that can be found in the most detailed and comprehensive double taxation agreements (DTA) signed by the country.
The Hong Kong competent authority issues a certificate of Resident Status (CoR) to an individual/ a business entity who needs it for the purposes of claiming tax benefits under the DTAs. However, the country recently suspended its Capital Investment Scheme for unlimited time. Not so long ago, it was “enough” to wire $1.29million to a bank in Hong Kong to get a resident status.
Hong Kong’s New Approach to CoR
However, the Inland Revenue Department (IRD) has recently updated its approach to issuing a CoR. The new changes apply to all types of business formations as of November 2015. Under the new rules, next to the residence test, before the issue of a CoR, the IRD will also examine whether the applicant meets any other requirement specified in the CDTA concerning the claimed tax benefits.
The applicant will also have to prove that he/she is the beneficial owner of the funds concerned and the arrangement fully complies with the CDTA terms. Another important change is the dismiss of the pre-approval and record filing conditions under the previous regime.
In a nutshell, it means that taxpayers or their withholding agents will now need to identify by themselves whether they are eligible to the tax treaty benefits. If so, they need to submit some additional paperwork and supporting documents to the Chinese Tax Authority. Last, but not at least, under the new rules, the tax payers are no longer supposed to obtain a letter of reference from the Chinese Tax Authority to apply for a tax resident status.
Why Having an advisor is Recommended?
It is often difficult, not to say impossible, to check by yourself whether all the new conditions are satisfied. Therefore, the applicants may hire an experienced tax adviser where appropriate.
The tax adviser will be able to have a very specific answer to this problem by planning and boarding meeting in Hong-Kong, helping you to have a staff and on office etc…