Hong Kong Tax Alert: 31 October 2013

Residence of an overseas bank with a Hong Kong branch

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Generally, only tax residents of the two contracting states to a comprehensive avoidance of double taxation agreement (CDTA) can enjoy the tax benefits offered by a CDTA.

Under the HK-mainland China CDTA, an overseas bank, not incorporated or constituted under the laws of Hong Kong, will be considered as a resident of Hong Kong if it is “normally managed or controlled in Hong Kong”.

Typically, such an overseas bank as a whole will be managed or controlled outside of Hong Kong (including the exercise of top-level control over the operation of any Hong Kong branch where one exists). Nonetheless, Departmental Interpretation and Practice Note No. 44 (DIPN 44) issued by the IRD in August 2008 states that “[i]f the Hong Kong branch of an overseas bank is “managed” in Hong Kong, the [overseas] bank will be regarded as a resident of Hong Kong”. 

As a result, DIPN 44 indicates that if a Hong Kong branch manages its own daily business operations in Hong Kong (including the implementation in Hong Kong of decisions made for it by top management overseas), the overseas bank will itself be regarded as being a resident of Hong Kong. 

However, in DIPN 44 the IRD has noted that the State Administration of Taxation (SAT) of mainland China does not agree with the IRD’s approach in this regard. DIPN 44 explains that the SAT has taken the view that in deciding whether an overseas bank is “normally managed or controlled in Hong Kong”, the SAT would consider the management or control of the overseas bank as a whole, instead of that of the Hong Kong branch alone. Nonetheless, the IRD indicates in DIPN 44 that it will continue to discuss with the SAT their different approaches with a view to reaching a consensus.

In its 2013 annual meeting with the HKICPA held earlier this year, the IRD announced that it has now changed its previous approach and adopted the approach of the SAT. In deciding whether an overseas bank is “normally managed or controlled in Hong Kong”, the two tax authorities have now agreed that the management or control of the bank as a whole, rather than that of the Hong Kong branch alone, should be considered.

The IRD further indicated that as a result of the consensus now reached, it would henceforth decline to issue a certificate of Hong Kong residency to a bank incorporated overseas with a branch in Hong Kong where only the management or control of the Hong Kong branch, but not the management or control of the overseas bank as a whole, is exercised in Hong Kong. The IRD also noted that the relevant paragraphs of DIPN 44 referred to above would be amended accordingly.