How to Claim Double Tax Relief on Investments Between Hong Kong and Mainland China

The Comprehensive Double Taxation Arrangement (CDTA) between Hong Kong and Mainland China represents one of the most significant tax treaties for cross-border investment in the region. With extensive economic integration between the two jurisdictions, understanding how to properly claim double tax relief has become essential for businesses and investors operating across the border. This comprehensive guide examines the mechanisms, procedures, and strategic considerations for maximizing tax efficiency under the arrangement.

Overview of the Hong Kong-China CDTA

The Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income was signed on 21 August 2006 and has been amended by five protocols, with the Fifth Protocol signed on 19 July 2019 and effective from 6 December 2019. This arrangement applies to income derived from 1 January 2020 in Mainland China and from 1 April 2020 in Hong Kong.

Purpose and Scope

The CDTA serves several critical functions for cross-border taxpayers:

• Allocates taxing rights between Hong Kong and Mainland China to prevent the same income from being taxed twice
• Provides certainty to investors regarding their tax obligations in both jurisdictions
• Reduces withholding tax rates on passive income flows including dividends, interest, and royalties
• Establishes clear rules for permanent establishment determination
• Facilitates exchange of tax information between authorities
• Provides mechanisms for resolving disputes through the Mutual Agreement Procedure

The Fifth Protocol: BEPS Implementation

The Fifth Protocol incorporates important aspects of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative into the arrangement. Key changes introduced include:

• Principal Purpose Test (PPT): Article 24 (Additional) precludes treaty benefits if one of the principal purposes of an arrangement or transaction is to obtain a tax benefit under the CDTA
• Revised Tie-Breaker Rule: For entities resident in both jurisdictions, competent authorities must reach mutual agreement on residence status
• Expanded Capital Gains Provisions: Extends taxing rights to shares deriving value from immovable property to include partnerships and trusts, with the threshold updated from “not less than 50%” to “more than 50%”
• Teachers and Researchers Article: New provisions addressing tax treatment of income for educational and research activities

Reduced Withholding Tax Rates Under the CDTA

One of the most significant benefits of the Hong Kong-China CDTA is the reduction in withholding tax rates for passive income. Understanding these rates and eligibility requirements is critical for tax planning.

Withholding Tax Rate Comparison

Dividend Withholding Tax Relief

For dividends paid from Mainland China to Hong Kong residents, the CDTA provides substantial relief:

5% Rate Requirements: To qualify for the preferential 5% rate, the Hong Kong recipient must:

• Be the beneficial owner of the dividends (not merely a conduit)
• Hold directly more than 25% of the equity in the Mainland company paying the dividends
• Not be receiving dividends that should be characterized as business profits
• Satisfy the Principal Purpose Test (i.e., obtaining the tax benefit was not a principal purpose of the arrangement)

Beneficial Ownership Requirements: Following State Taxation Administration Circular 2018 No. 9, beneficial owners must demonstrate:

• Actual receipt and control of dividend income with full rights of use and disposal
• Engagement in substantive business activities (not merely holding companies)
• Absence of obligation to pass through 50% or more of the income to third-country residents within 12 months
• Adequate substance, including appropriate staffing, premises, and business operations

Interest and Royalty Relief

The CDTA reduces withholding tax on interest and royalties from 10% to 7%, providing a 30% reduction in tax cost. This applies to:

• Interest: Payments for loans, bonds, debentures, and other debt instruments
• Royalties: Payments for use of or right to use intellectual property including patents, trademarks, copyrights, know-how, and technical services

The beneficial ownership requirements apply equally to interest and royalty payments, requiring substance and genuine economic activity.

How to Claim Tax Relief: Step-by-Step Procedures

Claiming double tax relief under the Hong Kong-China CDTA involves specific procedures depending on the type of relief sought. There are two primary mechanisms: claiming reduced withholding tax at source in Mainland China, and claiming tax credits in Hong Kong.

Step 1: Obtain a Certificate of Resident Status

The Certificate of Resident Status (CoR) is the foundation of any CDTA claim, providing official proof that you are a Hong Kong tax resident entitled to treaty benefits.

Application Forms:

• Companies: Form IR1313A (specifically for Mainland China DTA)
• Individuals: Form IR1314A (specifically for Mainland China DTA)

Required Supporting Documents:

• Business Registration Certificate (for companies)
• Certificate of Incorporation (for companies)
• Hong Kong Identity Card copy (for individuals)
• Recent Profits Tax or Salaries Tax assessments
• Evidence of Hong Kong tax payments
• Proof of business operations in Hong Kong (e.g., office lease, utility bills, employee records)
• Organization chart showing corporate structure
• Details of the Mainland income for which relief is claimed

Special Requirements for Beneficial Owner Claims: If claiming reduced withholding tax rates under Articles 3 or 4 (dividends), Part 2 of the Appendix to Form IR1313A must be completed, demonstrating:

• Business substance in Hong Kong
• Number of employees and their functions
• Nature and scale of business activities
• Assets held and their relationship to business operations
• Evidence that the company is not obligated to distribute 50% or more of the income to non-Hong Kong residents

Processing and Validity:

• Processing time: 12-15 working days
• Validity: For the application year plus two succeeding calendar years (unique to China DTA; most other jurisdictions receive only one-year validity)
• Format: Digital certificate (PDF) sent to eTax account inbox
• Renewal: Must reapply if circumstances change or after the three-year validity expires

Step 2: Present Certificate to Mainland Payer for Reduced Withholding

Once you have obtained the Certificate of Resident Status, present it to the Mainland entity making payments (dividends, interest, or royalties) to claim the reduced withholding tax rate at source.

Procedure:

• Provide the Certificate of Resident Status to the Mainland payer before the payment date
• The payer submits the certificate to their local tax bureau along with application for reduced withholding
• Mainland tax authorities may request additional documentation to verify beneficial ownership
• Once approved, the payer withholds tax at the reduced treaty rate instead of the domestic rate
• The payer issues a withholding tax receipt showing the amount withheld at the treaty rate

Mainland Filing Requirements: The Mainland payer must file with their tax bureau:

• Report on Withholding of Income Tax of Non-Resident Enterprises
• Hong Kong Certificate of Resident Status
• Contract or agreement giving rise to the payment
• Board resolutions approving dividend distribution (for dividends)
• Documents evidencing the 25% shareholding requirement (for 5% dividend rate)

Step 3: Claim Tax Credit in Hong Kong (If Applicable)

Even after claiming reduced withholding tax in Mainland China, Hong Kong residents may need to pay Hong Kong tax if the income is Hong Kong-sourced or deemed Hong Kong-sourced. In such cases, a tax credit can be claimed for the Mainland tax paid.

Legal Basis: Section 50 of the Inland Revenue Ordinance allows credit for foreign tax paid, limited to the Hong Kong tax payable on the same income.

Important Changes from 2018/19: Prior to the 2018/19 year of assessment, taxpayers could claim exemption under section 8(1A)(c) for income from services rendered in Mainland China. From 2018/19 onwards, this exemption is no longer available for income from jurisdictions with which Hong Kong has a CDTA. Instead, taxpayers must claim tax credit under section 50.

Filing Procedure:

• For Companies: Complete the tax credit claim section in the Profits Tax Return (BIR51/BIR52), specifying the amount of foreign tax paid and the corresponding Hong Kong assessable income
• For Individuals: Complete the tax credit section in the Salaries Tax Return (BIR60) or the Personal Assessment Return
• Supporting Documents: Attach proof of Mainland tax payment including:
  • Official tax receipts from Mainland tax authorities
  • Withholding tax certificates
  • Mainland Individual Income Tax assessments (for employment income)
  • Bank statements showing tax payments
  • Translation into English or Chinese if original documents are in other languages

Calculation of Credit: The tax credit is the lower of:

• The amount of Mainland tax actually paid on the income, or
• The Hong Kong tax payable on the same income calculated by the formula: (Foreign income / Total assessable income) × Total Hong Kong tax payable

Step 4: Documentation and Record Keeping

Maintain comprehensive documentation to support CDTA claims:

• All Certificates of Resident Status issued
• Correspondence with Mainland tax authorities or payers
• Contracts, agreements, and board resolutions
• Shareholding records and corporate structure diagrams
• Evidence of business substance (employee records, office leases, financial statements)
• Tax returns filed in both jurisdictions
• All tax payment receipts and withholding certificates
• Bank statements evidencing income receipts and tax payments

Records should be retained for at least 7 years as required by Hong Kong law.

Special Considerations for Employment Income

Cross-border employment between Hong Kong and Mainland China raises unique double taxation issues addressed by the CDTA.

Mainland Tax Liability for Hong Kong Residents

Hong Kong residents working in Mainland China face the following tax treatment:

Hong Kong Tax Credit Claims for Employment Income

For Hong Kong residents who have paid Individual Income Tax in Mainland China for services rendered there:

• Claim tax credit under section 50 of the IRO and the CDTA when filing Salaries Tax Return
• The section 8(1A)(c) exemption is no longer available from 2018/19 onwards
• Provide evidence of Mainland Individual Income Tax payment
• Tax credit limited to Hong Kong tax on the same income
• If the income is non-Hong Kong source and not charged to Salaries Tax, no credit claim is necessary

Anti-Avoidance Provisions and Compliance Risks

The Fifth Protocol’s incorporation of BEPS measures significantly increases compliance requirements and risks for treaty benefit claims.

Principal Purpose Test (PPT)

Article 24 (Additional) denies treaty benefits if obtaining those benefits was one of the principal purposes of any arrangement or transaction. Tax authorities will consider:

• The overall commercial rationale for the structure
• Whether the Hong Kong entity has genuine business substance
• The degree of control and decision-making authority in Hong Kong
• Whether the structure was created shortly before deriving the Mainland income
• Whether similar tax benefits could have been obtained through alternative, more direct structures

Practical Impact: Pure holding companies or conduit entities established solely to access treaty benefits face significant risk of denial. To mitigate PPT risk:

• Ensure the Hong Kong entity has substantive business operations beyond passive investment holding
• Demonstrate commercial reasons for the Hong Kong structure independent of tax benefits
• Maintain adequate staffing, office premises, and operational infrastructure
• Document business decisions made in Hong Kong by qualified personnel
• Consider consolidating multiple functions in the Hong Kong entity to demonstrate genuine regional headquarters status

Beneficial Ownership Requirements

Mainland China strictly enforces beneficial ownership tests through STA Circular 2018 No. 9. Key requirements include:

• Legal Ownership: Must have legal right to income
• Control and Risk: Must bear the risk and control the use of the income
• No Conduit Obligation: Must not be obligated to pass 50% or more to third-country residents within 12 months
• Substantive Business Activities: Must conduct real business operations, not merely holding investments

Failing the beneficial ownership test results in denial of treaty benefits and application of the full 10% withholding rate.

Domestic Anti-Avoidance Rules

Both jurisdictions retain their domestic anti-avoidance provisions:

• Hong Kong: Section 61A general anti-avoidance rule applies where the sole or dominant purpose is to obtain a tax benefit
• Mainland China: General Anti-Avoidance Rules (GAAR) under Enterprise Income Tax Law Article 47 and Special Tax Adjustment rules

The CDTA does not override these domestic provisions, meaning taxpayers must satisfy both treaty requirements and domestic law requirements.

Mutual Agreement Procedure for Dispute Resolution

When double taxation arises despite CDTA provisions, or when treaty interpretation is disputed, the Mutual Agreement Procedure (MAP) provides a resolution mechanism.

When to Use MAP

• Taxation not in accordance with CDTA provisions
• Conflicting residence determinations
• Permanent establishment disputes
• Transfer pricing adjustments resulting in double taxation
• Disputes over source of income
• Denial of treaty benefits where taxpayer believes entitlement exists

MAP Application Process

To Hong Kong Competent Authority:

• Submit written request to Senior Assessor (Tax Treaty), Tax Treaty Section, Inland Revenue Department
• Address: 17/F, Inland Revenue Centre, 5 Concorde Road, Kai Tak, Kowloon, Hong Kong
• Email: [email protected]
• Timeframe: Within 3 years from first notification of taxation not in accordance with CDTA

Required Information:

• Detailed description of facts and circumstances
• Copies of tax assessments from both jurisdictions
• Explanation of why the taxation is not in accordance with the CDTA
• Copies of relevant correspondence with tax authorities
• Supporting legal analysis and relevant CDTA articles
• Proposed resolution

The competent authorities of Hong Kong and Mainland China will consult to resolve the dispute. While MAP does not guarantee resolution, it provides an important avenue for relief from double taxation.

Strategic Tax Planning Considerations

Optimizing Dividend Repatriation

For Hong Kong companies receiving dividends from Mainland subsidiaries:

• Achieve 25% Ownership Threshold: Structure investments to exceed 25% direct ownership to access the 5% withholding rate, representing a 50% reduction from the standard 10% rate
• Direct vs. Indirect Ownership: The 25% test requires direct ownership; indirect ownership through intermediate entities does not qualify
• Timing of Distributions: Consider timing dividend distributions after establishing sufficient substance and operational history in Hong Kong
• Reinvestment vs. Distribution: Evaluate whether reinvesting profits in Mainland operations or distributing to Hong Kong is more tax-efficient given the withholding tax cost

Financing Structures

For cross-border lending between Hong Kong and Mainland China:

• Interest Deductibility: Ensure Mainland borrowers satisfy thin capitalization and related-party interest deduction limitations
• Beneficial Ownership: Hong Kong lenders must demonstrate they are beneficial owners of the interest income with real lending business
• 7% Withholding Rate: Properly document treaty eligibility to secure the reduced 7% rate versus 10% standard rate
• Hybrid Instruments: Exercise caution with hybrid debt-equity instruments given increased scrutiny of tax characterization

Intellectual Property Licensing

For royalty payments from Mainland China to Hong Kong:

• Substance Requirements: Ensure the Hong Kong entity has genuine IP development, enhancement, or management activities
• Value Creation: Document how value is created or added by Hong Kong operations to support beneficial ownership
• 7% Treaty Rate: Claim the reduced 7% withholding rate with proper certificates and beneficial ownership documentation
• Transfer Pricing: Maintain arm’s length documentation to support royalty rates charged

Building Substance in Hong Kong

To withstand scrutiny under the PPT and beneficial ownership tests:

• Physical Presence: Maintain dedicated office premises (not merely virtual offices or mail forwarding addresses)
• Qualified Staff: Employ sufficient qualified personnel with decision-making authority for the business activities claimed
• Active Decision-Making: Conduct board meetings in Hong Kong with substantive business decisions documented in minutes
• Operating Expenditure: Incur genuine operating expenses proportionate to the business activities
• Business Functions: Perform real business functions beyond mere passive holding, such as:
  • Regional headquarters coordination
  • Group treasury and financing functions
  • IP development, management, or licensing
  • Business development and market expansion
  • Strategic planning and group management

Common Pitfalls and How to Avoid Them

Failure to Obtain Certificate of Resident Status in Time

Many taxpayers miss the reduced withholding rate opportunity by failing to obtain and present the Certificate before payment is made. The Mainland payer cannot apply the treaty rate without the certificate.

Solution: Apply for the Certificate well in advance of expected income payments. For regular dividend distributions, maintain a valid certificate at all times given the three-year validity period.

Insufficient Documentation of Beneficial Ownership

Generic or boilerplate responses to beneficial ownership questions in Form IR1313A Part 2 lead to certificate denial or Mainland tax authority rejection.

Solution: Provide specific, detailed information with supporting evidence:

• Name employees and describe their specific roles
• Provide organization charts showing reporting lines
• Attach photos of office premises
• Include utility bills, lease agreements, and business licenses
• Submit audited financial statements showing operating expenses

Ignoring the Principal Purpose Test

Structures created solely or primarily for tax benefits face denial under Article 24 (Additional), regardless of formal qualification.

Solution: Document non-tax commercial reasons for the Hong Kong structure:

• Access to Hong Kong’s legal and financial infrastructure
• Regional headquarters for Asia-Pacific operations
• Proximity to Mainland China with separate legal system
• Talent pool and business environment advantages
• Time zone and language advantages for regional coordination

Misunderstanding the Tax Credit Limitation

Taxpayers sometimes assume they can claim a full credit for all Mainland tax paid, but the credit is limited to the Hong Kong tax on the same income.

Solution: Calculate the credit limitation carefully. If Mainland tax exceeds the Hong Kong tax on the same income, the excess cannot be credited. Consider:

• The effective tax rates in both jurisdictions
• Whether the reduced treaty withholding rate or higher domestic rate was applied
• Structuring to minimize overall tax rather than maximizing credit claims

Neglecting Record Retention

Tax authorities may audit CDTA claims years after filing, but supporting documentation has been lost or destroyed.

Solution: Implement systematic record retention:

• Maintain digital archives of all certificates, tax filings, and supporting documents
• Retain for minimum 7 years as required by Hong Kong law
• Organize by tax year and income type for easy retrieval
• Back up critical documents in multiple locations

Recent Developments and Future Outlook

BEPS 2.0 Pillar Two Implementation

Hong Kong enacted legislation implementing the OECD’s Pillar Two global minimum tax framework effective from 1 January 2025. This introduces a 15% minimum tax rate for multinational enterprise groups with consolidated revenue of EUR 750 million or more.

Impact on CDTA Planning:

• Even with reduced treaty withholding rates, large groups must consider whether their effective tax rate meets the 15% minimum
• Top-up taxes may apply where the overall effective tax rate in a jurisdiction falls below 15%
• Tax planning must consider both CDTA benefits and Pillar Two implications holistically

Enhanced Substance Requirements

Both Hong Kong and Mainland tax authorities continue to strengthen enforcement of substance-over-form principles. Recent trends include:

• More detailed questioning during Certificate of Resident Status applications
• Site visits to verify claimed operations and employee presence
• Requests for employment contracts, payroll records, and employee qualification documentation
• Greater scrutiny of related-party arrangements and transfer pricing

Automatic Exchange of Information

Hong Kong and Mainland China exchange tax information automatically under the Common Reporting Standard (CRS) and bilateral CDTA provisions. This means:

• Both tax authorities have access to financial account information
• Inconsistencies between declared income and third-party reported information trigger audits
• Transfer pricing and related-party transactions receive enhanced scrutiny
• Compliance is essential as detection of non-compliance is highly probable

Practical Checklist for CDTA Claims

Use this checklist to ensure proper CDTA compliance:

Conclusion

The Hong Kong-China Comprehensive Double Taxation Arrangement provides significant opportunities for tax savings on cross-border investments, with reduced withholding tax rates and mechanisms to eliminate double taxation. However, the Fifth Protocol’s incorporation of BEPS measures, particularly the Principal Purpose Test and enhanced beneficial ownership requirements, means that successful CDTA claims require genuine business substance and careful compliance.

Taxpayers seeking to benefit from the arrangement must maintain adequate operations in Hong Kong, obtain Certificates of Resident Status with proper documentation, present them to Mainland payers in a timely manner, and claim tax credits correctly in Hong Kong filings. With proper planning, documentation, and professional guidance, the CDTA can substantially reduce the tax burden on investments between Hong Kong and Mainland China.

As tax authorities in both jurisdictions enhance enforcement and information exchange, proactive compliance and thorough documentation have become more important than ever. Businesses and investors should regularly review their structures to ensure ongoing CDTA qualification and consider the impact of recent developments including Pillar Two minimum taxation.