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The IRD issues a CoR to prove resident status for tax benefits under the DTA. From June 12, 2023, the IRD will use the DTA definition of “resident of Hong Kong”. The application process for Mainland China tax benefits is also simplified. However, a CoR doesn’t guarantee successful claims and entities may need to show economic substance in Hong Kong.
Author: Chloe Lau, Associate Solicitor
CoR serves as proof of Hong Kong resident status
A Certificate of Resident Status (“CoR”) is a document issued by the Hong Kong Inland Revenue Department (“IRD”) which serves as proof of Hong Kong resident status of both natural and legal persons for the purpose of claiming tax benefits under the comprehensive avoidance of double taxation agreement/arrangement (“DTA”).
Historically, in deciding whether a CoR is to be issued, the IRD would consider whether the applicant is a resident of Hong Kong and its entitlement to tax benefits under the relevant DTA.
Since 12 June 2023, decision based on plain definition of “resident of Hong Kong”
In light of the changing business environment and with a view to strengthening international tax cooperation, the IRD has recently revisited its approach to the issuance of CoR and announced that it will, with effect from 12 June 2023, base its decision on the plain definition of “resident of Hong Kong” in the relevant DTA.
In most of the existing DTAs, “resident of Hong Kong” is defined to include a company incorporated in Hong Kong and any other person constituted under the laws of Hong Kong. Thus, under the new regime, a legal person incorporated or established in Hong Kong is likely to be treated as a resident of Hong Kong without the need to provide full details of its establishment and business activities when applying for a CoR.
An exception is the Hong Kong/Japan DTA, in which “resident of Hong Kong” is defined as an entity having a primary place of management and control in Hong Kong. As such, an applicant who is an entity incorporated or constituted in Hong Kong is still required to furnish detailed information on its establishment and business substance in and outside of Hong Kong.
Further, previously where an application for a CoR is intended for tax benefits claim on dividends, interest and royalties in Mainland China falling within the ambit of the Circular of the State Taxation Administration on Matters Concerning “Beneficial Owners” in Tax Treaties (“Circular”), the applicant is required to submit its application with a cover letter to provide particulars of its multi-tier holding structure and other relevant information for the IRD’s consideration. To facilitate such application of CoR for the purposes stated in the Circular, the IRD has taken the opportunity to formalise the above administrative facilitation measures and include the information required in the application form (Form IR1313A (06/2023)), thereby eliminating the requirement for separate supporting documentation.
Obtaining CoR does not guarantee successful tax benefits
The modified approach to the issuance of CoR and the revised application forms are generally welcomed as they aid in streamlining the application process and easing the applicant’s compliance burden, which hopefully serves as an attraction to corporations constituted outside Hong Kong to place its domicile in the region.
Nonetheless, applicants should beware that obtaining a CoR does not necessarily guarantee a successful tax benefits claim under the relevant DTA, and that the decision of whether such benefits would be granted remains ultimately with the DTA jurisdiction. With reference to various prevention of treaty abuse mechanisms, such as the “principal purpose test” included in some of the DTAs in place, resident entities may still be required to show sufficient economic substance in Hong Kong in order to combat potential challenges from the DTA partner from which a tax benefit is sought.
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