Jun. 2013 - Application for certification of resident status

It is expected that there will be an increasing need for applying for the Hong Kong Tax Resident Certificate ("TRC") where a company is requested by the tax authority of the jurisdiction with which Hong Kong has signed a CDTA to produce proof of resident status for the purposes of claiming tax relief under the CDTA.

In the June 2013 issue of Mazars Hong Kong tax news, we will summarise the salient points of TRC application.

TRC application for the purposes of CDTA between Mainland China and Hong Kong

There are different application forms for companies incorporated in and outside Hong Kong. In general, companies incorporated in Hong Kong are only required to provide basic information whilst companies incorporated outside Hong Kong have to submit much more comprehensive information about their establishments and business operations in and outside Hong Kong. Companies applying for the TRC for the purposes of the CDTA between Mainland China and Hong Kong must submit to the Inland Revenue Department ("IRD") the referral letter entitled 《關於請香港特別行政區稅務主管當局出具居民証明的函》issued and stamped by the Mainland tax authorities.

Hong Kong resident foreign companies

Pursuant to Article 4 of the CDTA between Mainland China and Hong Kong, a company incorporated outside Hong Kong would still be considered as a Hong Kong resident if it is normally managed or controlled in Hong Kong.

The concept of “normally managed or controlled in Hong Kong”, as compared to that of “central management and control” established in common law, has a broader meaning as it does not require both management and control be exercised in Hong Kong. The IRD considers that “management”, in this context, refers to management of daily business operations or implementation of the decisions made by top management, etc. On the other hand, “control”, in this context, refers to control of the whole business at the top level including formulation of strategic policies, determination of business directions, setting of work plans, selection of mode of business financing,implementation of management policies / directions / work plans, evaluation of business performance, etc.

In a nutshell, if a foreign company has the management of its daily business operations or the implementation of the decisions made by top management or making of top-level policies being exercised in Hong Kong, it would be considered as being normally managed or controlled in Hong Kong and hence a resident of Hong Kong.

In order to substantiate that a foreign company is normally managed or controlled in Hong Kong, thus a resident of Hong Kong, both basic information required for Hong Kong incorporated companies AND additional comprehensive information on the establishment and business activities must be provided in the TRC application, notably:

• Locations of head office and main branches;
• Number of directors, senior executives and other staff resided in and outside Hong Kong;
• Whether bank account has been maintained in Hong Kong;
• Details of fixed assets located in Hong Kong;
• Places where the business is normally carried on and the business activities carried out in each country / territory;
• Organisation chart of permanent establishment in each country / territory;
• Details of directors;
• Details of business carried on in Hong Kong;
• Details of board of directors’ meetings held in the calendar year concerned;
• Full details of how, where and by whom certain management and control activities were carried out, etc.

TRC application for the purposes of CDTAs other than that between Mainland China and Hong Kong

Generally, the information required is largely similar to that requested for the TRC application for the purposes of the CDTA between Mainland China and Hong Kong except that a referral letter issued by the respective tax authority is not required.

Apart from the comprehensive information required to substantiate that a foreign company is normally managed or controlled in Hong Kong, additional information on the place of central management and control is required if its management and control was exercised in more than one location during the calendar year concerned.

Other points to note

The TRC application forms must be carefully completed. Applicants who, without reasonable excuse, give incorrect information in the forms may be subject to a maximum fine of HK$10,000 under Section 80(2D) of the Inland Revenue Ordinance.

It should also be noted that Hong Kong has an obligation to exchange tax information with the competent authorities of its treaty partners under the exchange of information article contained in CDTAs. The information and documents submitted by a company to the IRD in its TRC application may therefore be disclosed to the competent authorities of the treaty partner upon request.