Hong Kong tax liability may seem a bit daunting but when broken down, it is much easier to understand.
In this article, we’ll discuss the different aspects of Hong Kong withholding tax such as what it is, who is required to pay this tax, and how it may be possible to reduce withholding tax.
Table of Contents
What is a Territorial Tax System?
There are five tax systems worldwide. These are the citizenship-based taxation, the territorial taxation, the residential taxation, the non-dom-system, and no direct taxes. Hong Kong follows the territorial system for tax.
This is a system that doesn’t tax foreign income but does tax domestic income. In other words, territorial taxation applies to income from a profession, business, or trade that is generated inside Hong Kong. This income is subject to tax.
Territorial systems are found in the Netherlands, Belgium, France, and Hong Kong. This implies that any nonresident who receives income from a Hong Kong source must pay withholding tax.
What is Hong Kong Withholding Tax?
Any nonresident, including a company or individual, who earns income from a source in Hong Kong is required to pay tax on any profit they make.
The individual or company that pays the nonresident for services or work performed in Hong Kong withholds a percentage of that payment.
That percentage is what is known as withholding tax. The tax that is withheld is then submitted to the Hong Kong Inland Revenue Department.
Who Pays Withholding Tax in Hong Kong?
As mentioned before, individuals or companies who are non-residents but earn income from a source in Hong Kong must pay withholding tax.
This refers to any non-resident who has a profession, trade, or business that provides services in Hong Kong.
Who is Considered a Non-Resident?
Now that you know non-residents are subject to withholding tax for any work or services performed in Hong Kong, it’s important to know who exactly is considered a non-resident. An individual or an entity can be considered a non-resident.
An individual is considered a non-resident if the foreign individual has worked or stayed under 180 days during a tax year in Hong Kong. A company is considered a non-resident if it is run or managed anywhere other than Hong Kong.
What Type of Income in Hong Kong Imposes Withholding Taxes?
Not all income requires tax to be withheld. Hong Kong withholding tax applies to any royalty or license fee paid to a nonresident entertainer or sportsperson for services performed in Hong Kong. This does not apply to dividends or interest.
What are Royalty Payments?
Royalty payments are paid to any nonresident for intellectual property that was used either outside or inside of Hong Kong.
This is basically a payment made for the use of another party’s property, therefore, referred to as intellectual property. These payments must have taxes withheld.
Royalty payments may be made as a fixed one-off amount, on a per use basis, or as a percentage of revenues.
The amount of the withholding tax depends on whether the non-resident receiving the royalty is a non-affiliate or associate of the company.
Tax Rates for Associates and Non-Associates
The tax rate varies for non-resident companies that are associates and non-resident, non-associate businesses.
The royalty payments withholding tax rate for a non-resident company that is an associate is generally around 16.5%. The withholding tax rate for non-resident companies that are non-associates runs around 4.95%.
Withholding Tax Rates for Affiliate vs Non-Affiliate
The withholding tax rate varies for affiliate nonresident individuals and non-affiliate, non-resident individuals.
For affiliate non-resident individuals, the tax rate on royalty payments is generally around 15%. For non-affiliate, non-resident individuals, the tax rate on royalty payments is around 4.5%.
Examples of Hong Kong Royalties
Royalties are used in various industries. Here is a breakdown of the different types of royalties:
- Intellectual property used either outside or inside of Hong Kong
- Copyright
- Sound recording
- Trademark
- Design
- Patent
- Any use of film, tape, or cinematography
- Advertising material in Hong Kong
Entertainers and Sportspeople
The Inland Revenue Ordinance defines an entertainer or sports person as an individual, not a corporation, who performs as an entertainer or in a sport in Hong Kong.
Performances are those that are live or recorded and that can be viewed by the public.
Examples of Payments for Entertainers and Sportspeople in Hong Kong
- Commercial event performances
- Special occasion performances
- Performances using sound recordings
- Film performances
- Video performances
- Radio performances
- Television performances
Who is Considered an Associate in Hong Kong?
According to the Inland Revenue Ordinance, the following are considered associates of an entity in Hong Kong.
The entity is a natural person:
- Someone who is related to the individual
- The individual’s partner and any relative of the partner
- A partnership where the individual is a partner of the Hong Kong entity
- A corporation controlled by the individual
- A controlled corporation’s principal officer or director of the Hong Kong company
The entity is a corporation:
- A partner in the partnership
- A partner’s relative
- A corporation controlled by the partnership, partner, or relative’s partner
- A controlled corporation’s principal officer or director of the Hong Kong entity
- A Hong Kong partnership whose principal officer or director is a partner of the Hong Kong company
Reducing the Tax in Hong Kong
In an attempt to reduce the withholding tax, Hong Kong has established Double Tax Agreements with other countries. In fact, they have signed Double Tax Agreements with over 40 countries.
Each treaty outlines the conditions for handling tax between the treaty country and Hong Kong. Therefore, the non resident’s final tax payment may be reduced in certain circumstances.
What is a Double Treaty Agreement?
Double tax treatments prevent cross-border income from being taxed twice. After all, you don’t want to pay tax twice on the same income to two different countries.
These treaties are a legal way to avoid double taxation. These agreements have placed Hong Kong as the economic hub of southeast Asia. They also have promoted investments and trade among countries.
Benefits of Double Tax Agreements
There are some key benefits of the Double Tax Agreements. These include the following:
- Double Tax Agreements spell out the guidelines and conditions for how income and taxes are to be treated between countries
- These tax agreements make taxpayers aware of their tax liability in each country so that they know what to expect
- Double Tax Agreements prevent tax fraud and tax evasion by allowing countries to exchange revenue information with each other
- These tax treaties allow taxpayers to claim some relief for working overseas
How to Reduce or Prevent Double Taxation in Hong Kong
There are four strategies for benefitting from the double taxation relief. These include the following:
- Tax Relief Credit. The Tax Credit Relief allows the tax payable in the foreign country or the country the money was earned to be deducted from the tax incurred on the same income in the residential country.
- Tax Exemption. Income that is foreign is exempt from domestic tax
- Lower Tax Rate. Typically, income from dividends, interest, and royalties are taxed at a lower rate
- Relief by Deduction. With relief by deduction, domestic tax is applied to the income that is foreign after deducting the tax from the foreign country
FAQ
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