Hong Kong follows a territorial system of taxation, where only income or profit that is sourced in Hong Kong is subject to tax in Hong Kong. Therefore, it is only Hong Kong sourced income that can benefit from the double taxation relief under a DTA. The Hong Kong tax treaties apply to individuals and companies that are Hong Kong residents for tax purposes. For a company, that means only incorporated companies in Hong Kong and companies that are managed and controlled in Hong Kong are entitled for the tax relief.
For individuals, if you are paid to work in Hong Kong, the income you receive will be taxable. However, if you have stayed or will be staying in Hong Kong for less than 60 days, you will be exempted from paying tax.
An individual is tax resident in Hong Kong if:
- The individual has a permanent home in Hong Kong and lives there.
- The person has stayed in Hong Kong for more than 180 days during the year of assessment.
A company is deemed as a Hong Kong resident if:
- The company is incorporated in Hong Kong.
- The corporation is incorporated outside of Hong Kong but is managed and controlled inside of Hong Kong.
A permanent establishment (PE) is a fixed place of business in a country through which the company carries on its business. A company is not considered as having a PE if the business activities are conducted in a treaty jurisdiction through an intermediary or agents acting in the ordinary course of their business.
If a non-Hong Kong resident is a tax resident of a jurisdiction which has a DTA with Hong Kong, provisions of the DTA will proscribe whether the non-Hong Kong resident has a PE in Hong Kong. Generally, a PE will be taken to exist in Hong Kong if the taxpayer has a fixed place of business and business activities are conducted in Hong Kong. The fixed place of business includes, but is not limited to a branch, a factory, an office, a place of management, a workshop and a mine, an oil or gas well or any other place of natural resources extraction.
Income from immovable property
Income will be taxed in the country that the property is located.
Profits are only taxable in the country in which the company is a resident. If a Hong Kong resident gains business profits from a PE in a treaty jurisdiction, the Hong Kong resident may be subjected to tax in both the treaty jurisdiction and Hong Kong. However, there will not be double taxation as Hong Kong follows a territory system for taxation, and income from a foreign PE will be treated as income sourced outside of Hong Kong. If a resident of a treaty jurisdiction derives income that is taxable in Hong Kong, then the company will be able to claim a tax credit in its home jurisdiction for the tax paid in Hong Kong.
Income from ships and aircraft
Income is only taxable in the country that the airline or ship is resident.
Dividends, interest and royalties
Hong Kong does not charge withholding tax on dividends or interest income, so the DTA will not apply to a tax treaty resident who is receiving dividends or interest from a Hong Kong resident. However, a Hong Kong resident receiving dividends, interest or royalties from a treaty country will be eligible for a lower rate of withholding tax on payments made from that country. Royalty income from Hong Kong received from a tax treaty resident is subject to withholding tax, and the tax treatment will vary based on the DTAs signed with different countries.
Income from employment
Employment income will be subjected to tax in Hong Kong unless:
- The employee has not stayed in Hong Kong for more than 180 days
- The employer is a resident of a DTA jurisdiction
- The salary is not from a PE in Hong Kong of a business of a contracting country
Salary, wages, pensions or other rewards paid by the government of the contracting country to an individual in Hong Kong is exempted from tax in Hong Kong and will be taxed in the contracting country.
Directors’ fees of a director are taxed in the country of residence of the company.
Elimination of double taxation
Double taxation can be eliminated by a tax credit relief. Tax payable from the source country is available as a credit against the tax payable on the same income in the residence country. If the income is exempt from tax in the home jurisdiction, no tax credit is available. In this case, elimination of double taxation has been achieved as the income is only subject to tax in the source country.
Exchange of information
The exchange of information agreements are to promote tax transparency and tackle tax avoidance and evasion. All of Hong Kong’s DTAs have exchange of information rules, and Hong Kong has also signed several separate tax information exchange agreements, where a more comprehensive DTA is not in place. Contracting countries may request details from the Hong Kong IRD on taxpayers under their jurisdiction. There are set protocols that each taxing authority needs to follow in both requesting information and then releasing information when a request is received.
Mutual agreement procedure
If you are a Hong Kong resident or a resident of a DTA jurisdiction and tax has been incorrectly imposed on your income or not in accordance with the DTA regulations, you can file an objection to relevant government authorities under the Mutual Agreement Procedure (MAP) Article of the DTA. If your request cannot be resolved by the Hong Kong authorities, the case will be discussed with the authorities of the DTA jurisdiction and try to settle the case according to the DTA.
Hong Kong’s double tax treaties have brought a variety of benefits to individuals or companies that derive income both in and outside of Hong Kong. If you need more information on reduced treaty rates or tax exemption, Acclime has a professional tax team ready to provide advice.