Benefits of Residency in Hong Kong for Your Business
When entering the international market, it is important to determine the tax residency of the company. Why is this so important? This status directly affects your business’s tax obligations and its strategic planning.
In Hong Kong, tax residency status provides companies with significant advantages, allowing them to minimize tax expenses and avoid double taxation of income. This is especially relevant for Hong Kong companies that often operate in international markets, where the volume of international operations can significantly exceed local ones. In such cases, eliminating double taxation becomes critically important.
Hong Kong is known for its unique tax system based on the principle of territorial taxation. This means your company will be taxed only on income earned directly in Hong Kong. Income sourced from abroad is exempt from local taxation. However, such income may be subject to taxation in other countries depending on their legislation. Therefore, confirmation of Hong Kong tax residency status is often required to comply with the tax requirements of other states. Companies conducting business in countries with which Hong Kong has double taxation avoidance agreements can significantly reduce their tax liabilities. For example, income earned in one of the treaty countries may be taxed only in Hong Kong or in the source country, but not in both.
Thus, tax residency in Hong Kong can provide the opportunity to significantly reduce tax obligations, allowing the saved funds to be directed towards further company growth and investment in its development.
What is a Certificate of Tax Residency?
A Certificate of Residence (CoR) is a document issued by the Hong Kong Inland Revenue Department (IRD) that confirms residency status for obtaining tax benefits under Double Taxation Avoidance Agreements (DTA). Below, we will discuss the countries with which Hong Kong has concluded such agreements.
This certificate serves as proof of Hong Kong residency status and can be issued for the current or previous year concerning a country with which Hong Kong has a double taxation avoidance agreement.
It is important to note that obtaining a tax residency certificate does not automatically guarantee the benefits provided under the double taxation avoidance agreement.
List of countries with which Hong Kong has concluded a double taxation avoidance agreement:
Armenia, Austria, Bahrain, Bangladesh, Belarus, Belgium, Brunei, Cambodia, Canada, Croatia, Czech Republic, Estonia, Finland, France, Georgia, Guernsey, Hungary, India, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Luxembourg, Macau, Mainland China, Malaysia, Malta, Mauritius, Mexico, Netherlands, New Zealand, Pakistan, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, South Africa, Spain, Switzerland, Thailand, Turkey, United Arab Emirates, United Kingdom, Vietnam.
Key Criteria for Obtaining a Certificate of Tax Residency
Criteria for Individuals
An individual can obtain a Certificate of Tax Residency (CoR) if one of the following conditions is met:
- Ordinary Residence in Hong Kong: the individual considers Hong Kong their home, where they or their family have a permanent place of residence. The term “ordinary resident” implies that the person has chosen Hong Kong as their place of residence voluntarily and on a permanent basis, with a sufficient degree of stability, as part of their usual lifestyle.
- Staying More Than 180 Days in a Year: the individual stays in Hong Kong for more than 180 days during one year.
- Staying More Than 300 Days Over Two Years: the individual stays in Hong Kong for more than 300 days over two consecutive years, including the current tax year.
Criteria for Legal Entities
For legal entities, the requirements are slightly different, and meeting one of them qualifies the company as a Hong Kong resident:
- Registration in Hong Kong: the company must be registered in Hong Kong.
- Management and Control from Hong Kong: If the company is not registered in Hong Kong, it must be managed and controlled from within Hong Kong.
Management: this involves the day-to-day running of business operations and the implementation of decisions made by senior management.
Control: this refers to the overall supervision of the business at the highest level, including the development of key business policies, strategies, selection of funding sources, and evaluation of business performance.
Application Process for Obtaining a Certificate of Tax Residency in Hong Kong
Obtaining a Certificate of Tax Residency (CoR) in Hong Kong is not merely a formality. To successfully obtain a CoR, it is essential to strictly follow the established procedures. In some cases, legal entities may need to provide documentary evidence of economic activity in Hong Kong.
Step 1: Preparation of Required Documents
The first step is to gather all necessary documents. The list of documents will vary depending on whether the applicant is an individual or a legal entity.
List of Documents for Individuals:
- Copy of passport or identity card.
- Proof of residence in Hong Kong.
- Proof of residential address in Hong Kong.
List of Documents for Legal Entities:
- Copy of the company’s registration certificate.
- Valid Business Registration Certificate (BRC).
- Application form from the Hong Kong tax authority.
- Information on the company’s income and the income beneficiary. If the beneficiary is not the company itself, a document confirming this must be provided.
For companies registered outside of Hong Kong, a more extensive list may be required:
- Documents proving the company is managed from Hong Kong, such as minutes of directors’ meetings, office lease documents, legal address in Hong Kong, and other information about the location and methods of conducting business.
- Information on the residence of the company’s managers.
- Other documents as necessary.
Step 2: Filling out and submitting the application
After preparing all the documents, it is necessary to correctly fill out the application form. The Hong Kong tax authority offers two main forms: IR1313A and IR1313B. Let’s consider their specifics.
Specifics of Forms IR1313A, IR1313B, IR1314A, IR1314B (Application for Certificate of Resident Status)
Form IR1313A (for legal entities) and IR1314A (for individuals):
- Designed for applications under the double taxation avoidance agreement with Mainland China.
- Includes sections for providing basic information about the applicant, their tax status, type of business, and details confirming residency in Hong Kong.
Form IR1313B (for legal entities) and IR1314B (for individuals):
- Used for applications under double taxation avoidance agreements with countries other than China.
- It is important to accurately provide all data confirming the management of the company from Hong Kong to avoid processing delays.
When filling out any of the forms, it is essential to carefully check all data and attached documents to ensure compliance with requirements and avoid potential delays in the application review process.
Step 3: Time and Certificate Issuance
After submitting the application, the Hong Kong tax authority reviews it and may request additional information if necessary. If the provided information is accurate and justified, the tax authority issues the certificate. Typically, the application review process takes up to 21 working days.
In practice, companies with well-organized documentation and compliance with all Hong Kong requirements can easily obtain a CoR. The success of your application largely depends on how accurately and thoroughly you present the information and complete the application.
It’s important to remember that obtaining a Certificate of Resident Status does not automatically guarantee benefits under the Double Taxation Avoidance Agreement (DTA). The final decision on granting tax benefits is made by the treaty partner, who assesses whether all conditions for granting benefits are met.
If Hong Kong residents believe they have been denied benefits, the competent authority in Hong Kong can engage with the treaty partner through the mutual agreement procedure.
In case of a refusal, you will receive a notification stating the reasons at your address in Hong Kong. Possible reasons for refusal may include insufficient information or failure to meet the criteria. In most cases, any deficiencies can be rectified by providing additional or corrected information and/or documents.
Certificate of resident status in Hong Kong
FAQ
A Certificate of Tax Residence (CoR) is a document that confirms Hong Kong residency status for obtaining tax benefits under Double Taxation Avoidance Agreements (DTA). It serves as proof of residency and can be issued for the current or previous year for countries with which Hong Kong has such agreements.
Tax resident status in Hong Kong allows companies to minimize tax expenses and avoid double taxation on income. Hong Kong’s tax system is based on the territorial principle, meaning only income earned in Hong Kong is taxed. This is particularly beneficial for companies conducting international operations, as foreign income is exempt from local taxation.
In Hong Kong, only one Certificate of Tax Residence can be obtained for one jurisdiction per tax year. If you need to confirm residency for multiple jurisdictions, separate applications must be submitted for each certificate.
For individuals: either ordinary residence in Hong Kong, staying more than 180 days in a year, or more than 300 days over two years is required. For legal entities: the company must be registered in Hong Kong or managed and controlled from Hong Kong.
The process includes several steps: preparing the necessary documents, completing and submitting the application, the tax authority’s review of the application, and receiving the certificate. It is important to provide accurate and justified information to avoid delays.
In case of refusal, you will receive a notification stating the reasons. This is usually due to insufficient information or failure to meet the criteria. Most deficiencies can be rectified by providing additional or corrected information and/or documents.