When Hong Kong Holding Companies May Be Denied China’s 5% Dividend Tax Preference

Recent tax enforcement has highlighted the risks facing Hong Kong holding companies claiming China’s preferential 5% dividend withholding tax rate. We examine the beneficial ownership test, principal purpose test, post-filing reviews, and practical steps businesses can take to assess historical exposure and protect future treaty claims.

What the Hello Group disclosure reveals

Hello Group, formerly known as Momo, disclosed the adjustment in its results for the second quarter of 2025. The company stated that Momo Beijing received a notice from Chinese tax authorities on 27 August 2025. The notice required the company to withhold tax at the standard 10 per cent rate rather than the 5 per cent rate that it had previously applied to dividends payable to Momo Hong Kong.

Hello Group consequently accrued an additional RMB 547.9 million, equivalent to US$76.5 million. Of that amount, RMB 356.1 million related to dividends paid in 2024 and the first half of 2025. Hello Group remitted this amount in September 2025. Another RMB 191.8 million related to undistributed retained earnings at Momo Beijing as of 31 March, 2025. The company also said it would use the 10 per cent rate for future dividends.

The disclosure confirms only the revised rate, tax amounts, and affected periods. It neither identifies beneficial ownership as the basis for the adjustment nor explains the tax authority’s reasoning.

Subsequent practitioner commentary offers one possible explanation. A Withers analysis linked the adjustment to limited independent control, a single director, and the transfer of dividends to the listed parent within three working days. Although these details illustrate conduit risk, they do not appear in Hello Group’s disclosure or in any publicly available official decision. They therefore serve as risk indicators rather than verified facts about the assessment.

Why China’s 5% dividend withholding tax is not automatic

The Hello Group adjustment did not change the Mainland and Hong Kong tax arrangement. China generally applies a 10 per cent enterprise income tax rate to dividends paid to a non-resident enterprise when the income has no effective connection with a mainland establishment. The arrangement reduces the rate to 5 per cent when a Hong Kong resident company qualifies as the beneficial owner and directly owns at least 25 per cent of the mainland payer.

The recipient must also complete the required reporting process. A certificate of resident status supports the residence claim, but does not establish beneficial ownership or commercial purpose. The practical risk lies in assuming that incorporation, direct shareholding, and a residence certificate are sufficient to establish eligibility. Tax authorities can still examine who controls the income, what the Hong Kong company does, and why the group placed it in the ownership chain.

The beneficial owner test for Hong Kong companies

State Taxation Administration (STA) Announcement No. 9 of 2018 defines a beneficial owner as a person who owns and controls the income, or the rights or property that generate it. The announcement requires a comprehensive review of the facts and circumstances. It expressly applies to dividend claims under the Mainland and Hong Kong arrangement.

The test looks beyond the shareholder register. Authorities may review financial statements, capital flows, board resolutions, personnel, expenditure, functions, and risks. The central question is whether the entity genuinely manages its investment and controls the dividend, or whether it simply receives funds under a predetermined arrangement.

Announcement No. 9 recognises investment holding and management as a qualifying business activity when the applicant performs genuine functions and assumes corresponding risks. The assessment focuses on whether the entity’s staffing, authority, and decision-making correspond with its stated role. Formal records carry limited weight when actual conduct shows that another group company controls material decisions or funds.

Adverse indicators, safe harbours, and look through relief

Announcement No. 9 identifies several factors that weigh against beneficial owner status. The most relevant indicator for dividends arises when the applicant must pay at least 50 per cent of the income to a resident of a third jurisdiction within 12 months of receipt. The rule covers both contractual obligations and payments that occur in practice without a written obligation.

Other adverse factors include an absence of substantive business activities and the imposition of no tax, an exemption, or a very low effective tax rate on the income. Authorities consider these indicators collectively rather than treating any single factor as determinative.

Safe harbours allow certain recipients to establish beneficial owner status without undergoing the full adverse factor analysis. Under the Mainland and Hong Kong arrangement, the covered categories include the Hong Kong SAR government, qualifying Hong Kong listed companies, Hong Kong resident individuals, and applicants wholly owned by one or more such persons. Intermediate holding companies must also satisfy the relevant residence conditions.

Safe harbour status resolves only the beneficial owner question. It does not override the dividend article’s separate conditions. For example, a Hong Kong resident individual may qualify as a beneficial owner but cannot access the 5 per cent company rate, which requires a Hong Kong resident company to hold at least 25 per cent of the payer directly.

Look-through relief can help an intermediary that does not independently pass the test. An applicant may receive deemed beneficial owner status when its direct or indirect 100 per cent owner qualifies. The rule applies when that owner resides in the applicant’s jurisdiction. It can also apply when every relevant person in the chain could obtain the same or more favourable treaty treatment.

Beneficial ownership vs. the principal purpose test

Beneficial ownership and the principal purpose test address different questions. The beneficial owner test asks whether the Hong Kong recipient owns and controls the dividend and performs functions consistent with that position. The principal purpose test asks why the group created or used the arrangement.

The Fifth Protocol to the Mainland and Hong Kong arrangement introduced a principal purpose test across the arrangement. The test can deny a benefit when obtaining that benefit formed one of the principal purposes of an arrangement or transaction. However, the benefit remains available when granting it accords with the object and purpose of the relevant provisions. Announcement No. 9 confirms that authorities may apply this test or China’s general anti-avoidance rules even when an applicant qualifies as a beneficial owner.

Passing one test does not cure a failure under the other. Groups therefore need separate evidence of control over the income and the structure’s commercial rationale.

How post-filing reviews create historical tax exposure

China no longer requires advance approval before a non-resident claims treaty benefits. Under SAT Announcement No. 35 of 2019, the taxpayer conducts its own assessment and claims the benefit through the relevant filing. In a withholding situation, the non-resident submits an information reporting form to the mainland payer, which attaches it to the withholding return. Tax authorities may later request residence certificates, contracts, resolutions, payment records, and beneficial ownership evidence to verify eligibility.

An adverse review can extend to earlier distributions. Under Announcement No. 35, an ineligible claimant must pay the underpaid tax and bear the resulting late payment consequences. Tax teams therefore need to examine the relevant filing dates and quantify any potential surcharge. Withholding agents may also face exposure if they failed to complete the required reporting or withholding procedures.

This enforcement model predates the Hello Group adjustment. In an official example published by the Guangdong tax authority in 2021, a Hong Kong company held 45 per cent of a mainland enterprise and claimed the five-percentage point on RMB 30.6 million in dividends. A subsequent review found that the recipient did not qualify as the beneficial owner. The case produced RMB 1.53 million in additional tax, exactly the five-percentage-point difference. The example confirms that post-filing scrutiny reflects an established framework, even if recent large adjustments have raised its visibility.

Historical exposure can affect cash flow, reported earnings, audit positions, and future distribution planning. This breadth of impact makes a pre-distribution review commercially important rather than merely procedural.

Reviewing existing Hong Kong holding structures

Because eligibility depends on the circumstances of each recipient, a group-level assessment may overlook important differences within the holding structure. An entity by entity review can account for the functions performed and income arrangements of each Hong Kong company.

A review may cover the ownership chain, dividend history, and movement of funds, with particular attention to any obligations or established practices that transfer income elsewhere. Treasury records can help establish who decided whether to retain, reinvest, lend, or distribute the funds.

Governance analysis can focus on whether genuine decision-making occurs at the Hong Kong level. Relevant evidence includes board minutes, email instructions, bank mandates, approval policies, and director conduct. Retrospective documentation cannot compensate for control exercised by the parent in practice.

Each Hong Kong entity’s resources also warrant consideration in relation to its stated role. Evidence may include directors with appropriate authority, qualified personnel, suitable premises, operating expenditure, and active investment monitoring. No universal staffing threshold applies. Authorities will examine whether these resources correspond with the functions performed and risks assumed in Hong Kong.

Tax teams may assess the adverse indicators, safe harbours, and look-through rules alongside the beneficial ownership evidence. A separate analysis of the structure’s commercial rationale can identify potential exposure under the principal purpose test.

The review findings can then support the quantification of exposure from earlier distributions and inform decisions concerning financial statement provisions, disclosures, or corrective action. Where supporting evidence remains weak, strengthen the Hong Kong entity’s operations before declaring another dividend.

Recent enforcement shifts the focus from ownership structure to evidence quality. Groups that treat treaty eligibility as an ongoing governance matter rather than a filing exercise will be better placed to defend historical distributions and plan future profit repatriation.

How Dezan Shira & Associates can help

Assessing eligibility for China’s reduced dividend withholding tax rate requires more than confirming shareholding levels and Hong Kong tax residence. As recent enforcement actions demonstrate, tax authorities are increasingly examining beneficial ownership, substance, control over income, commercial purpose, and historical dividend arrangements.

Dezan Shira & Associates helps multinational groups review, defend, and optimize their China-Hong Kong holding structures by:

• Conducting beneficial ownership assessments to evaluate whether Hong Kong intermediary companies meet the requirements under SAT Announcement No. 9 and the Mainland-Hong Kong tax arrangement.
• Reviewing dividend repatriation structures to identify risks related to conduit arrangements, back-to-back payments, centralized treasury functions, and limited decision-making authority.
• Assessing principal purpose test (PPT) exposure and documenting the commercial rationale for existing holding and financing arrangements.
• Evaluating safe harbour and look-through eligibility and determining whether alternative treaty claims may be available.
• Performing historical risk reviews to quantify potential withholding tax shortfalls, late payment liabilities, and financial reporting implications arising from prior dividend distributions.
• Supporting treaty benefit filings and tax authority inquiries, including the preparation of residence, governance, operational substance, and beneficial ownership documentation.
• Strengthening Hong Kong substance and governance frameworks through recommendations on decision-making processes, board oversight, staffing, treasury management, and record-keeping practices.
• Designing tax-efficient profit repatriation strategies that align with evolving Chinese tax enforcement trends while supporting broader regional investment objectives.

With offices across the Chinese Mainland, Hong Kong SAR, and Asia, Dezan Shira & Associates provides integrated tax, legal, and corporate advisory support to help businesses manage dividend withholding tax risks, defend treaty positions, and structure cross-border investments with greater certainty. Contact us to arrange a consultation with our local experts.