Understanding double taxation agreements and treaties are important, especially to how it may apply to you personally and possibly your business.
In this article, we cover Hong Kong’s double taxation agreement and treaties with other countries, particularly methods on how you can reduce these taxes with the reliefs that are available to you.
Table of Contents
What is double taxation
Double taxation refers to a taxation system where a similar item of income is taxed twice.
At the international level, double taxation occurs when two jurisdictions impose taxes on the same income. This happens due to jurisdiction overlap, otherwise referred to as source residence conflict. In this instance, income is taxed twice, from where it is earned as well as where it is received.
Note that foreign investments develop well in a reasonable and stable international business environment. This highlights the importance of creating a fairly predictable business environment through DTAs.
In recent years, Hong Kong entered into DTAs with other jurisdictions, making the city even more desirable to foreign investors.
Methods to reduce double taxation
The adoption of a double taxation agreement is justified on the basis that doing away with double taxation promotes the free flow of goods and services.
Double taxation agreements also allow for a more efficient movement of people, technology, and capital across borders by reducing tax burdens and inconveniences.
Double Taxation Agreements
Countries across the globe entered into double tax agreements to avoid double taxation. The signatory states agree to limit the taxes imposed on international businesses to eliminate double taxation and facilitate global trade in the process.
In line with its economic goal, Hong Kong signed DTAs or tax treaties with other countries. These treaties prevent double taxation and fiscal evasion, while it promotes cooperation between HK and other contracting states through the enforcement of tax laws.
Typical contents of DTAs signed by Hong Kong
Scope of the DTA. The scope of the contract includes an arrangement that this treaty applies only to residents of HK and residents of the contracting country in the particular agreement. The residents may only need to show certification to prove their status.
Taxes affected by the tax agreement. The agreement typically includes provisions on income and property taxes.
Definition of Permanent Establishment. Permanent establishment (PE) defines whether you are liable to pay income tax. As per the Hong Kong Internal Revenue Ordinance, a PE is a fixed place of business, where the activities of a company are carried on.
The permanent establishment, therefore, becomes the basis for deciding the source of business income for taxation purposes.
Tax on dividend income. In some instances, dividend income is taxed both in the country of source as well as the country of the company’s residence.
Fortunately, HK does not impose a tax on dividends. This means that regardless of whether there is an existing DTA, you will not need to pay taxes on your dividend income in Hong Kong.
Employment income. An income derived from employment in Hong Kong will be taxed unless the following circumstances are present:
- an employee is not present in HK for over 18 days within the tax year
- the employer resides within the jurisdiction of the contracting state
- the salary is not paid by the permanent establishment in HK
Business profits. The profits derived from business are taxable within the business residence.
Tax treaties, foreign tax reliefs, and other means of relieving double taxation in HK
If you are a taxpayer in Hong Kong, you are fortunate enough not to bear the burden of double taxation.
Hong Kong SAR’s territorial tax system obliged taxpayers to pay taxes only on income derived from Hong Kong. In other words, you are not liable to pay taxes from income derived outside of Hong Kong SAR.
Moreover, the Hong Kong government deemed it necessary to adopt domestic tax laws and conclude a comprehensive double taxation agreement with other jurisdictions.
With comprehensive DTAs, you can reduce your taxes or possibly relieve yourself from double taxation through the following schemes:
Tax credit relief. The underlying concept is that residents remain liable to pay taxes in their home country regardless of whether the income is derived from another jurisdiction. However, under the tax credit relief system, taxes paid on an income derived from a foreign jurisdiction are credited against the domestic taxes computed on similar income.
Tax exemption. This taxation scheme includes partial or full tax exemption for income derived from foreign sources.
The source country has the exclusive right to tax. This means, your income derived from a foreign source shall be excluded from your tax base when computing for your income tax liability in your home country.
Tax rate reduction. This tax relief includes the imposition of taxes on income at a lower rate. It is most applicable to royalties, dividends, and interest income.
Tax deduction. Taxpayers can also avail of this course of action, where domestic tax is computed only after deducting the foreign income tax.
Benefits of double taxation agreement
Here are the benefits of double tax agreements:
- Adoption of comprehensive rules that define how and where tax should be imposed. This is especially necessary to avoid confusion in computing the taxes payable to businesses involved in transnational trade.
- With tax treaties, taxpayers are in a better position to determine the extent of their tax liabilities in the host country.
- DTAs help maintain the integrity of a state’s tax system. A well-defined tax agreement prevents tax evasion, as revenue authorities can take advantage of a framework that facilitates the efficient sharing of information.
- DTA’s fosters the prevention of fiscal evasion
Tax treaties allow taxpayers to benefit from tax reliefs.
International trade is beneficial to the world economy, hence it should be encouraged. Tax treaties prevent double taxation, which can bring the following advantages:
Encourage greater people movement across markets. Excessive taxes can become barriers that prevent entrepreneurs to explore foreign markets. With a tax treaty that prevents double taxation, it is easier for business people to travel from one jurisdiction to another.
Promote innovation. Innovation is considered the main factor that contributes to global economic growth. A DTA agreement between jurisdictions enhances cooperation and increases
Support foreign investments. With the signing of DTAs, foreign taxpayers do not end up paying excessive taxes.
Double tax relief and tax information exchange agreements
The Tax Information Exchange Agreements (TIEA) is a tool used by the HK government to address tax evasion.
The idea is for the contracting parties to assist each other by exchanging information associated with respect to taxes. So, a sovereign state signs taxation and information exchange treaties to protect their taxing rights and prevent attempts of tax evasion.
For example, Hong Kong signed an exchange of information agreement with Japan, which states that both parties shall provide information relevant in carrying the provisions of their domestic laws concerning taxes.
Hong Kong comprehensive taxation agreements concluded
In recent years, Hong Kong SAR contracted DTAs with different jurisdictions including the following countries:
- Austria
- Belgium
- Vietnam
- Japan
- Indonesia
- Korea
- Switzerland
- Mainland China
- Malaysia
- New Zealand
- India
- Italy
- Singapore
Categories of recent tax treaties
Comprehensive DTAs. Comprehensive DTAs refer to a bilateral agreement that fosters double taxation relief on all types of income. Hong Kong recently concluded a comprehensive DTA with the following states:
- Belgium
- Mainland of China
- Thailand
- Luxembourg
- Vietnam
Airlines and shipping income DTAs. The Hong Kong government concluded an airline and shipping agreement with Singapore and Sri Lanka.
DTAs for airline income only. Hong Kong also concluded airline income treaties in recent years with several states, including:
- Russian Federation
- Bangladesh
- Germany
- Iceland
- Israel
- Canada
- Croatia
- Denmark
- Estonia
- Korea
- Kuwait
DTAs for shipping income only. Income tax treaties on income associated with shipping were also concluded with Denmark, Germany, Norway, Netherlands, UK, and the USA.
FAQs
Who is a Hong Kong tax resident?
A Hong Kong tax resident refers to a person who resides in Hong Kong for more than 180 days during a specific year.
Residence in Hong Kong for more than 300 days in two consecutive years of assessment may also qualify a person as a Hong Kong resident for tax purposes.
Does having a Hong Kong Permanent Identity Card automatically qualify one as a Hong Kong resident?
No. A Hong Kong Permanent Identity card does not necessarily qualify a person as a resident in the city.
Is there double taxation in HK?
When two or more tax jurisdictions overlap, the same item of profit is taxed twice.
Fortunately, businesses operating in Hong Kong generally do not have to worry about double taxation as HK SAR follows the territoriality principle of taxes. That is, only income generated in Hong Kong is taxed, while income derived from outside, even by a local resident is seldom taxed as per the provisions of the Internal Revenue Ordinance.
Does HK have a double tax treaty with the UK?
On June 21, 2010, the governments of Hong Kong Special Administrative Region and the United Kingdom of Great Britain and Northern Ireland signed a new double tax treaty and protocols that went into effect on December 20, 2010.
The treaty entered into by these two countries was justified on the basis of their goal to prevent double taxes.
In the case of Hong Kong, the agreement applies to profit tax, salary tax, and property tax.
In the case of the United Kingdom, the agreement covers income tax, corporation tax, and capital gains tax.
Do you need help with your Hong Kong corporate taxes?
Let ReachTop KSHK CPA Limited guide your further.
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