A Guide to Why Double Taxation Agreements in Hong Kong Matter

What are the Double Taxation Agreements in Hong Kong?

Double taxation agreements are made between countries to protect taxpayers from being taxed on the same income twice by two separate jurisdictions. The Hong Kong Inland Revenue Department has negotiated such treaties with various countries around the world to encourage bilateral trade and foster strong ties with foreign governments.

While the terms and conditions may vary from one agreement to another, most are signed with the intention of simplifying the cost of doing business and driving economic growth.

To be eligible for relief from double taxation in Hong Kong, the law states that you must be a Hong Kong resident. As for corporates, only companies that are incorporated in Hong Kong or managed and controlled from Hong Kong may claim tax benefits

The Benefits of Double Taxation Agreements Explained

Capitalizing on the benefits of double taxation agreements in Hong Kong can boost business performance. Most importantly, familiarizing yourself with your nation’s tax code can give you a greater sense of control over your finances. Here’s a brief overview of the benefits of double taxation agreements for you to consider:

• Greater Security

As with any official document, DTAs describe what your business is entitled to clearly. This is especially crucial when doing business overseas where laws and practices may differ greatly from Hong Kong. As a result, DTAs can safeguard against misunderstandings about the division of revenue between two separate jurisdictions.

• Upholds Lawfulness

Clearly defined DTAs enhance the integrity of a country’s tax system, ensuring businesses abide by laws and deter instances of tax evasion and tax avoidance.

• Saves Essential Financial Resources

Tax treaties grant you the privilege to claim tax relief measures overseas, while saving you additional overhead costs that may be cutting into your profit margins in the process.

• Drives Economic Prosperity

Eliminating double taxation caused by overlapping tax jurisdictions has led to a flurry of activity in the form of cross-border investment, trade and the sharing of technological innovation as well as human resources.

How to Claim Relief from Double Taxation in Hong Kong?

You can refer to your domestic tax laws or review specific DTAs to find more detailed information about the tax benefits you are entitled to when doing business with a particular jurisdiction. Typically, the methods of applying for relief from double taxation fall into four distinct categories:

1. Foreign Tax Credit

Businesses can receive a tax credit from local authorities on income that is taxable in a jurisdiction that has an existing DTA with Hong Kong in place. This means you would only be paying the amount leftover after deducting your domestic tax rate from the foreign jurisdiction’s rate.

2. Tax Exemption

Under the tax exemption framework, individuals or businesses that earn income overseas may be exempted from declaring the amount when filing their tax returns in Hong Kong. Depending on the terms of the agreement, either the entire amount or just a portion of the amount may be exempted.

3. Reduced Tax Rate

Sometimes, you may still be required to pay tax on foreign income, but at a reduced rate. Usually, a reduced tax rate may apply to income from overseas investments, dividends or royalties.

4. Relief By Deduction

This method stipulates that you pay the difference between the foreign tax rate and the domestic tax rate to local authorities.

Types of Double Taxation Agreements in Hong Kong

As of October 2022, Hong Kong has successfully entered 45 tax treaties with different jurisdictions. The following is a categorical overview of the double taxation agreements currently in place:

• Comprehensive Double Taxation Agreements

Under this form of agreement, you can claim tax relief from double taxation on all types of income.

Countries that have signed a comprehensive double taxation agreement with Hong Kong include Austria, Belgium, Canada, France, Indonesia, Japan, Korea, Mainland China and Vietnam, among others.

The most up-to-date information on the list of countries that have a comprehensive double taxation agreement with Hong Kong can be found on the Inland Revenue Department website.

• Airline and Shipping Income Double Taxation Agreements

These agreements are designed for airline and shipping companies who generate profits from conducting their business overseas. Currently, only Singapore and Sri Lanka have such a treaty in place with Hong Kong.

• Air Services Income Double Taxation Agreements

These double taxation agreements benefit airline companies, ensuring they don’t get taxed twice when conducting cross-border business. Countries, such as Denmark, Germany, Mainland China, Mexico and Russia, have signed an Air Services Income Agreement with Hong Kong and many others can also be found on the Inland Revenue Department website.

• Shipping Income Double Taxation Agreements

Currently, Hong Kong has shipping income tax treaties with six countries, namely Denmark, Germany, Netherlands, Norway, UK and USA.

• Tax Information Exchange Agreements (TIEAs)

Through the sharing of tax information between jurisdictions, the Hong Kong government can enforce domestic tax more efficiently and combat the growing issue of tax evasion. Currently, Hong Kong has seven existing TIEAs, namely with Denmark, Faroes, Greenland, Iceland, Norway, Sweden and USA.