In our February 2022 edition, we will continue to study three issues about Hong Kong Certificate of Residence (CoR) in the 2020 Annual General Meeting between the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Inland Revenue Department (“IRD”).

2. Supporting documents for applying for the Certificate of Residence (“CoR”)

The latest approach of PRC tax authority for CoR requirement changes from year of accrual to year of payment

The IRD has been taking a stringent approach in approving CoR Application in recent years. While the applicants are requested to complete the Form IR1313A / IR1313B for CoR Application, very often the IRD would expect the applicants to provide lots of additional supporting documents (e.g., evidence of managerial activities performed by the Hong Kong-based director) to support the application.

 On the other hand, while a CoR should be valid for a particular calendar year, many applicants notice that the IRD sometimes requests for information for other years. As such, the HKICPA would like to clarify the latest approach adopted by the IRD.

 The IRD responded in the 2020 Annual General Meeting with HKICPA that, IRD officer would thoroughly examine the relevant facts of the application and exercise professional judgment to prevent treaty abuse and to protect Hong Kong’s reputation as a responsible treaty partner.

In some circumstances, IRD would inevitably request the applicants to provide information in prior year, for example, to prove the place of management and control of the company or the holding period to a subsidiary.

Points to note

The PRC State Tax Administration (“STA”) has changed its requirement of CoR from the year of accrual to year of payment. For instance, if the applicant would like to distribute its Year 2021 Profits in early Year 2022, it would have to apply for the CoR for Year 2022 instead of Year 2021.

On a related matter, the PRC STA would now generally allow the PRC Subsidiary to pay dividend / interest / royalty out of the PRC first at the preferential tax rate (without the presentation of the CoR), but would carry out random check and raise enquiries subsequently. If the PRC STA finds out the applicants is ineligible to the CDTA benefits, it will impose differences in withholding tax, plus penalty and surcharge.

Given the potential penalty and surcharge, it is advisable for the taxpayer to obtain the CoR first to ensure that it is eligible for CDTA benefits before the dividend / interest / royalty payment. 

However, the current practice of the Hong Kong IRD is that it would only process the CoR application when it is confirmed that benefits under the relevant CDTA are applicable (e.g. dividend has been paid by the PRC Entity). That means the CoR would not be available before the actual dividend / interest / royalty payment to provide assurance to the taxpayers.

The above practice of the IRD has caused significant inconveniences to the taxpayer in the CoR Application. Further clarifications are expected from the IRD over the administrative procedures to enjoy the CDTA benefits.

Experience Sharing on CoR Application

  1. If the taxpayer has not made the dividend payment for a particular year, tremendous effort in the form of oral and written explanation are required to convince the IRD that the taxpayer has the genuine needs to obtain the CoR (e.g. requirements from PRC local tax authorities).
  2. The IRD would now allow taxpayers to apply for Year 2022 CoR Application in early Year 2022. Very often it would also consider the economic substance of the taxpayers for the Year 2021 in granting the Year 2022 CoR.

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