If you wish to move to Hong Kong, you’d do well to note how the region’s taxation system works. For instance, you should learn about the system of withholding tax Hong Kong uses. This system means that tax is levied on profits arising from a business activity, trade or occupation in Hong Kong.
The territorial tax system is unique because it doesn’t distinguish between residents and non-residents. A non-resident that derives income from activities (i.e. goods or services sold) will be liable to pay withholding tax Hong Kong.
When a resident company in Hong Kong pays for goods or services to another non-resident company, a certain portion of this amount will be sent to the Inland Revenue Department (IRD). This amount is referred to as the withholding tax Hong Kong.
The truth is that many entities are still unclear about the meaning of withholding tax in this jurisdiction. This guide will reveal all the essential information about this taxation to you.
What is Withholding Tax?
Simply put, the withholding tax Hong Kong charges is a levy charged on payments made to a non-resident company in Hong Kong. However, this tax only applies to income derived in Hong Kong.
This payment may be made by will be made by a resident company. This taxation is sent to the Inland Revenue Department.
You’d do well to note that this levy is on charges on non-resident companies and individuals. Non-residents are companies or individuals who stayed in Hong Kong for less than 180 days during that tax year.
This type of company will have its central management situated outside Hong Kong. Central management means the topmost level of authority in the entity, such as the board of directors.
Not all payments are subject to the regulations of withholding tax Hong Kong follows. You’ll need to identify which payments fall into this category to avoid falling short of the law.
Types of Income Subjected to Withholding Tax in Hong Kong
The types of income subject to the system of withholding tax Hong Kong uses include royalties and fees paid to entertainers and athletes. This tax will be charged on performances that occur in Hong Kong. You must note that withholding tax does not apply to dividends and interest.
Royalty payments to non-residents for using their intellectual property will be subjected to the system of withholding tax Hong Kong uses. Common examples of royalties include:
- Compensation for the use or exhibition of video production, tapes or television film
- Compensation for the use of Musical Recordings
- Compensation for the use of content that’s related to advertising material in Hong Kong
- Compensation for the use of Trademark, Design, copyright material, patent, performer’s right or formula
- Compensation for Intellectual property used inside and outside Hong Kong
The rates of withholding tax Hong Kong uses for royalty payments depend on whether the non-resident entity is an associate or non-affiliate of the resident firm.
Who is an associate or affiliate?
The following defines the meaning of associates or affiliates of Hong Kong firms:
- If the Hong Kong entity is an individual:
- A relative of the entity
- The entity’s partner or relative of the partner
- A partnership agreement
- A firm controlled by the entity
- A director or principal officer of an entity
- If the entity is a corporation:
- Any associate firm – firms controlled by the entity, firms that control the entity, or a firm controlled by the same parent as the entity
- Anyone who controls the corporation, a partner to the controller, or any relative of the partner or controller
- A partner of the corporation, or any relative of this partner
- If the entity is a partnership:
- Any of the partners in this partnership
- A relative of any of the partners
- Any firm that is controlled by the partnership, by a partner or by relatives of the partner
- A director or principal officer of any entity controlled by the partnership
- Any entity whose director or principal officer is a partner of the partnership
- If the Hong Kong entity is an individual:
Who Must Pay Withholding Tax in Hong Kong?
You’re expected to pay the withholding tax Hong Kong charges if you’re a non-resident company or individual selling goods or services in Hong Kong. A non-resident Hong Kong company or individual is anyone that:
- Has stayed or worked in Hong Kong for less than 180 days during the financial year
- Is managed or controlled outside Hong Kong
Hong Kong Withholding Tax Rates
This table describes the rates of withholding tax Hong Kong levies in the region:
Withholding Tax Rates
Royalties from a Hong Kong associate
● Non-resident individuals – 15%
● Non-resident firms – 8.25% – 16.5%
Royalties from a non-affiliate entity in Hong Kong
● Non-resident individuals – 4.5%
● Non-resident corporations – 2.475% – 4.95%
Payments made directly to entertainers and athletes for performances in Hong Kong
Payments made directly to non-resident individuals or companies for athletes and entertainers
Payments made directly to non-resident corporate agents or corporations for athletes and entertainers
1. Withholding Tax Rate For Non-Resident Companies
The following rates of withholding tax Hong Kong uses apply to non-resident companies in Hong Kong:
- Withholding tax rates for associate non-resident companies: Any associate non-resident company that receives royalty payments will be charged at a tax rate of 16.5%. The IRD charges a rate of 16.5% to make it more difficult for taxpayers to minimize their Hong Kong tax liability. They won’t enjoy any special tax benefits by dealing with associated companies.
- However, you should note that the withholding tax rate of 16.5% applies only in certain scenarios. This tax rate does not apply to associate companies classified by the IRD as having at any point of time fully or partially owning any relevant intellectual properties. The rate of withholding tax Hong Kong charges for these companies is 4.95%.
- Withholding tax rate for non-associate, non-resident companies: Royalty payments made to non-associate, non-resident companies will be taxed at a rate of 4.95%.
2. Withholding Tax Rate For Non-Resident Individuals
The following withholding tax rates apply to payments to non-resident individuals in Hong Kong:
- Withholding tax rate for affiliate non-resident individuals: Payments made to affiliate non-resident individuals are charged at 15%.
- Withholding tax rate for non-affiliate non-resident individuals: Payments made to non-affiliate non-resident individuals are charged at 4.5%
3. Withholding Tax Rate For Payment Made To Non-Resident Athletes and Entertainers
Withholding tax will be charged for the following payments made to athletes and entertainers;
- Performances at commercial events within Hong Kong
- Any role played in the production of films, radio transmissions, television broadcasts, videos, and sound recordings (live or recorded)
The tax rate will depend on whether the entertainer entered an agreement directly with the non-resident entertainer or athlete or dealt with a non-resident agent (representative of the athlete or entertainer).
The rates for withholding tax Hong Kong uses are as follows for entertainers and athletes:
- Any agreements made with non-resident entertainers and athletes will be charged at a withholding tax rate of 10%
- Any agreements with non-resident agents will be charged at a withholding tax rate of:
- 10% if the non-resident agent is an individual
- 11% if the non-resident agent is a company
Hong Kong Double Tax Treaties
Double taxation occurs when their income of non-resident companies are taxed in Hong Kong and in the jurisdiction where they are controlled. This is referred to as a source of residence conflict and occurs in companies found in more than one country.
Double taxation slows down the development of companies operating across borders. To prevent the occurrence of this scenario, Hong Kong has gone into a double tax treaty or agreement. The tax treaty will specify the tax conditions between Hong Kong and the treaty country.
A double tax agreement (DTA) is a bilateral agreement that will help to eliminate the occurrence of double taxation. This tax agreement will modify the tax rights of several jurisdictions. Double Tax Agreements will override domestic tax laws in the region.
What are the Benefits of Double Tax Treaties?
The benefits of double tax agreements include:
- These agreements lay down the principles for the division of revenues between affected countries, and laws on taxation. The define the jurisdiction on business activities that cut across borders.
- These tax agreements allow taxpayers understand their total tax liabilities in both countries.
- These tax agreements enhance the integrity of a country’s taxation policies and prevent tax evasion. They ensure that both countries have a clear exchange of information between authorities.
- These agreements make it easier for bilateral firms to claim tax relief from both countries.
Hong Kong has one of the most active tax treaties worldwide. There are currently 40 Double Tax Agreements between Hong Kong and several other jurisdictions. These tax agreements are categorized as:
- Comprehensive DTAs: This a bilateral agreement that prevents double taxation of different types of income. Hong Kong currently has comprehensive DTAs with Thailand, Luxembourg, Mainland of China, Belgium, and Vietnam.
- DTAs for airline and shipping income. Hong Kong has this type of DTA with Singapore and Sri Lanka.
- DTAs designed strictly for airline income. Hong Kong has airline DTAs with Canada, Denmark, Belgium, Bangladesh, Croatia, Ethiopia, Estonia, Finland, Fiji, Israel, Iceland, Germany, Kenya, Kuwait, Macau SAR, Laos, Jordan, Netherlands, Maldives, Mainland of China, Mexico, Russian Federation, Norway, New Zealand, Sweden, Switzerland, Seychelles, and the United Kingdom.
- DTAs designed strictly for shipping income. Countries part of this treaty include Germany, Denmark, Netherlands, United Kingdom, Norway, and the USA.
- DTAs for Tax Information Exchange. Countries part of this treaty include Greenland, Denmark, Faroes, Norway, Sweden, and the USA.
How SJH Global Can Help - Our Taxation Services
There’s no doubt that starting a company in Hong Kong is a great decision. There are several benefits that non-resident companies will enjoy. And that’s why you’ll find many entities spreading their operations to the region.
While the company is a fair to non-resident entities, they need to learn how to deal with the system of withholding tax Hong Kong uses.
That’s where SJH Global comes in. We are top-rated business consultancy firm. We can help your company handle all activities related to withholding tax. Our experts have all the information you need to know about the regulations for withholding tax Hong Kong follows.
It doesn’t matter whether you’re a non-resident from a treaty country or not; we know how to keep you on the right side of the law.
SJH Global also offers other comprehensive services in Hong Kong, including accounting, tax compliance, visa, and company incorporation services. We offer our clients high-quality services at a reasonable price. You’ll have access to our exclusive list of industry professionals.
Contact us today and get in touch with our experts. We pride ourselves as a company that creates custom solutions for its clients. Let us help you with your taxation needs today!
Withholding Tax Hong Kong – Frequently Asked Questions
The withholding tax Hong Kong residents are taxed on is a levy that non-resident companies pay. This is usually taxed on payments made to a non-resident entity by a resident entity. Hong Kong tax laws clearly state which payments qualify for this taxation.
There are several withholding tax rates, depending on the category of the non-resident entity. The rate for withholding tax Hong Kong charges is 15% for payments made to non-resident individuals.
Withholding taxes are not charged on all payments between Hong Kong companies. This tax has charged on:
- Royalties from a Hong Kong associate
- Royalties from a non-affiliate entity in Hong Kong
- Payments made directly to entertainers and athletes for performances in Hong Kong
- Payments made directly to non-resident individuals or companies for athletes and entertainers
- Payments made directly to non-resident corporate agents or corporations for athletes and entertainers
The rate for withholding tax Hong Kong charges is higher for associate non-resident companies because the Inland Revenue Department is trying to ensure that taxpayers do not associate with these companies as a means of tax evasion.
However, companies classified as “no person carrying on a trade, profession or business in Hong Kong has at any time wholly or partly-owned the relevant intellectual property” pay a discount tax rate of 4.95%.