An increasing number of taxpayers have been applying to the Inland Revenue Department (IRD) for Hong Kong tax residency certificates (TRCs) in order to claim tax benefits available under the applicable DTAs. However, the IRD’s attitude towards these applications has changed over recent years and has become notably more stringent.
The IRD views its more stringent approach to granting TRCs as a measure to prevent treaty abuse and for Hong Kong to be regarded as a responsible treaty partner.
The IRD clarified its view that “beneficial ownership” is a pre-requisite for granting the preferential tax treatment in the passive income articles of a DTA. Accordingly, if a company is unable to meet all the criteria of the relevant article of the DTA, including the requirement to be the beneficial owner of the income, the IRD may refuse to issue a TRC.
Taxpayers need to understand the IRD’s current practices and requirements before submitting their applications for TRCs, to ensure a successful and efficient process.