Hong Kong Tax Residency Certificate Video Part 4 (4/4)

Welcome to Our Hong Kong Tax Residency Series Part 4. We are really grateful for your interest in our video. In this last part, I will talk about practical guides to apply for Hong Kong Tax Residency Certificate.

The definition of Hong Kong tax resident is that the central management and control of the company is exercised in Hong Kong. As such, you have to set up economic substance like directors, staff and office in Hong Kong to obtain the Double Taxation Agreement benefits.

If you do not have anything in Hong Kong right now, you will have to perform tax planning before you apply for the Tax Residency Certificate.

Let us take one of our cases to show the basic idea of the tax planning. In this case, the Headquarters is listed in Taiwan. It has a subsidiary in Hong Kong, which holds two subsidiaries in Mainland China.

Can you take 5 seconds to guess what is their purposes of obtaining Hong Kong Tax Residency Certificate?

Obviously the reason for the application is to save the China withholding tax on dividend. The Tax rate can be reduced from 10% to 5% for Hong Kong Tax Residents.

Let’s look at the situation of the Hong Kong company before tax planning.

The Hong Kong company is principally engaged in the provision of agency services. The two directors of the company are stationed in Taiwan and Mainland China respectively. They seldom travel to Hong Kong.

The Hong Kong company maintained 16 staff, but none of them performed their duties in Hong Kong. It only maintained a registered office address in Hong Kong. The registered office address was provided by an independent company secretarial service provider.

Interestingly, the Company pays Hong Kong Profits Tax on its service income despite the fact that their services are supposed to be non-Hong Kong sourced.

If you understand the concept of tax resident, you will know that this company is unlikely to obtain the Hong Kong Tax Residency certificate because most of the operations are carried out outside Hong Kong. Paying tax in Hong Kong would not help.

So what should the company do step-by-step?

Director is the most important element in the management of a company. As such, it is important to maintain a director who is physically based in Hong Kong. Relocating the existing directors to Hong Kong will certainly the best method, but it may not be commercially feasible.

Another option is to recruit a new director in Hong Kong, but this is not sufficient as there are still more directors outside Hong Kong. As such, it is important to provide sufficient documentary evidence to demonstrate the importance of the Hong Kong director over the non-Hong Kong directors.

On the other hand, you need to recruit staff in Hong Kong. Certainly it does not make commercial sense to recruit another 16 staff in Hong Kong. It may be sensible to recruit a few people in Hong Kong, and then demonstrate that the Hong Kong staff perform more important duties than the Taiwan and China staff. A qualified tax advisor would likely be able to help you in this regard.

A Hong Kong physical office is almost a must for a successful application. It is reasonable to deduce that, in order to physically manage a Hong Kong, there must be a working place. Registered office is not sufficient.

Last but not least, it is important to set aside some business roles to be taken by the Hong Kong director and staff. As Hong Kong has been an international financial centre and trading hub, there are tremendous number of finance, accounting and logistics professionals in Hong Kong. These may be some of the directions Multi-National Corporations can think of.

This is the end of the 4-Part Hong Kong Tax Residency Series. We hope it will help you understand the Hong Kong Tax Residency Concept and save your tax liabilities when you move into Asia and China.

You are most welcomed to contact us via email or schedule a meeting with us for Hong Kong and China Tax Advice. If you would like to know more our firm background and our services, please feel free to browse our company website.

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