Hong Kong is now challenging the tax substance of special purpose vehicles (SPV) such as intermediate holdings and this is producing great troubles for some companies.
If the Hong Kong Tax Residence Certificate (TRC) is denied by the Hong Kong Inland Revenue Department (IRD), it might eventually trigger the imposition of withholding tax when paying dividends to the holding company.
The IRD issued rules for obtaining a certificate of Hong Kong residence status had been effective since 1st February, 2015. This certificate is provided by the Hong Kong authorities to a resident which allows the resident to claim tax benefits under the Double Taxation Agreements (DTAs). The rules make it more difficult to obtain them.
The rules present a major breakthrough with what was done before. Since their enforcement, all companies, partnerships and trusts applying for a TRC in Hong Kong are required to submit each year a tax examination to the IRD for the tax resident status. Further, applicants must furnish an important amount of detailed information to the tax authorities, which can even request further documents, if necessary. The requested information is specified in the application form, such as the workforce, the directors, the partners, the establishment and business operations, bank account, assets, and balance of cash, etc.
Among most DTAs, in order to obtain a TRC, an individual is required to meet one of the following conditions:
- The applicant ordinarily resides in Hong Kong;
- The applicant stays in Hong Kong for more than 180 days during a year of assessment or for more than 300 days in two consecutive years of assessment one of which is the relevant year of assessment;
- Companies, partnerships and trusts incorporated in Hong Kong;
- Companies, partnerships and trusts incorporated outside Hong Kong but are normally managed or controlled in Hong Kong.
There is only one form for both incorporated companies and non-Hong Kong incorporated companies and two separate applications for the DTA with Mainland China and for the DTAs with the rest of the jurisdictions.
According to the IRD, it is absolutely important to uphold the purposes of Hong Kong’s DTAs by controlling the issuance of TRC. The position of the IRD is to rely on the provisions of DTAs to limit tax benefits. If the Hong Kong authorities consider that the applicant should not be eligible to the specifications of the respective DTA, because one criterion is not filled; they will refuse to grant the status of tax resident.
Taking the above together, it is obvious that the substance or commercial rationality of the Hong Kong SPV shall be always in place, rather than a mere paper company with no real business activities (advisable at least to have some auxiliary activities such as bookkeeping, arrangement of letters of credit and shipping, storage), people or premises, thereby substantiating the application for the TRC to end up with tax savings in terms of withholding tax when DTAs come into play.