Hong Kong has long been recognized as an effective gateway for investing into China for many obvious reasons. Under Circular 165 (2013) (“Circular 165”) issued by the Chinese State Administration of Taxation (“SAT”), Hong Kong’s strategic position as the preferred jurisdiction of choice for multinational enterprises investing into China is further enhanced.
Under the PRC Corporate Income Tax law, a 10% PRC Withholding Tax (“PRC WHT”) will generally be imposed to foreign enterprises (which have not created any taxable presence in China) on any PRC sourced income derived from China, including dividend paying from the Chinese subsidiaries. The 10% WHT on dividend may however be reduced to 5% according to the respective Double Taxation Arrangement (“DTA”) entered between China and the relevant contracting states. The DTA may also provide tax relief on other types of income.
To enjoy the reduced WHT rate, one critical condition being that the dividend recipient must be the beneficial owner (“BO”) of the income. In the absence of clear definition, the application of the BO concept has been controversial and created many disputes between taxpayers and the PRC tax bureau leading to unsuccessful application of the reduced WHT rate.
With the issuance of Circular 165, it provides a better and easier way for Hong Kong tax residents to claim the reduced dividend WHT rate under the Hong Kong-China DTA comparing to tax residents located elsewhere.
Before Circular 165, the SAT has issued in another tax Circular 601 (2009) listing down several factors considered as unfavorable for BO determination. For example, if a Hong Kong tax resident merely holding interests in a Chinese investment, it can be viewed as an adverse factor in assessing the BO status and resulted in denial of the lower WHT rate. Amongst other things, Circular 165 now clarifies that investment activities will be considered as business activities for BO assessment and granting DTA relief.
There are also other more lenient measures provided in Circular 165 which, if implemented as expected, should provide greater certainty for HK tax residents to secure DTA relief on dividends.
Multinational businesses are advised to study the impacts of Circular 165 and fully explore the potential benefits of using Hong Kong investing into China.
The contents in this article are for general reference only. Readers should consult professional advisors for detailed analysis before implementation. For more information or further advice on the above subject or analysis of other tax and related issues, please feel free to contact us.