Withholding Tax in Hong Kong
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Hong Kong abides by its territorial system and may not have any withholding tax in its jurisdiction.
Due to this kind of system, there is a clear difference between non-residents and residents. Any non-resident in Hong Kong that receives an income from Hong Kong is obliged to pay taxes.
Taxes are levied based on the profits derived from trade, a profession, or business in the region. Additionally, Hong Kong prevents income from being taxed double by tax treaty agreements with more than 30 countries.
But what is the case with specific payments to non-residents? Is there a way for the IRD to take a percentage of it as a withholding tax?
- What Is Withholding Tax?
- What Constitutes A Royalty Payment?
- Is Bond Interest Taxable in Hong Kong?
- Double Tax Agreements
What Is Withholding Tax?
A non-resident person that trades or has any business relation inside Hong Kong shall be liable to the Profit Tax regarding profits acquired in or derived from this jurisdiction. If a company or an individual is deemed to be ordinarily residing in Hong Kong and the entity has to pay a non-resident for a service, a part of the payment is kept to reimburse the Hong Kong Inland Revenue Department. This portion that is kept from the whole payment is what legal authorities refer to as the withholding tax (WHT).
Withholding tax in Hong Kong is only applicable to individuals or companies that are considered non-resident and this tax is charged to non-residents for any work or service that has been conducted and provided in Hong Kong. To be classified as a non resident, one has to live and work for no less than 180 days in a tax year in Hong Kong. Companies that incorporate or get their central management and control exercised outside Hong Kong are also deemed to be non-resident.
The payment types that are subjected to withholding taxes include royalties and any fees paid to non-resident sportsmen and entertainers for their services conducted in the country.
On the other hand, dividends along with interests are not subjected to this tax.
What Constitutes A Royalty Payment?
Royalty payments are payments received from a set of sources, including use of:
- Sound recordings
- Exhibition of films
- Related advertising material in Hong Kong
- Tape recordings
- Copyrighted material
- Designs or trademarks
- Any knowledge concerning the intellectual property both inside and outside of Hong Kong
It is clear that royalty payments made to a non-resident company or person for the use of intellectual property both in and outside Hong Kong are subjected to the tax. However, the Hong Kong withholding tax rates for royalties vary depending upon whether the non-resident recipients of royalties for intellectual property are associates or non-affiliates of the company from Hong Kong.
Non-Resident Associate Companies
The withholding tax rate for non-resident companies that are associates stands at 16.5% in general. This is to prevent taxpayers from minimizing tax liability by entering into arrangements with associated companies or individuals.
Do know that this tax rate (16.5%) is restricted in its application. It does not apply to royalty payments made to an associate Hong Kong company or individual if the Inland Revenue Department is satisfied that no person carrying on a trade, profession, or business in Hong Kong has at any time wholly or partly-owned the relevant intellectual property.
If that happens to be the case, a reduced withholding tax rate of only 4.95% applies. Also, keep in mind that the withholding tax rate for royalties due to non-resident companies that are not associates of the Hong Kong company is 4.95%.
The withholding tax rate for affiliate non-resident individuals stands at 15%.
When it comes to non-affiliate, a rate of 4.5% applies to royalty payments.
What Is Considered As An ‘Associate’?
To better understand the ins and outs of the withholding tax, it is important to distinguish what makes an entity an associate of the Hong Kong entity.
If the Hong Kong entity is a real person, an associate is:
- Relative of the person
- Partner of the person or a relative of the partner
- Partnership in which the person is a partner
- Corporation controlled by the person
- Director or principal officer of a controlled corporation
If the Hong Kong entity is a partnership, an associate is:
- Any partner in the partnership
- Relative of a partner
- Corporation controlled by the partnership, a partner, or any relative of a partner
- Director or principal office of a controlled corporation
- Corporation whose director or principal officer is a partner in the Hong Kong partnership
If the Hong Kong entity is a corporation, an associate is:
- Associated corporation
- Corporation having control over the Hong Kong entity
- Corporation managed by the Hong Kong entity
- Corporation under the same control as the Hong Kong entity
- Person that controls the corporation or a partner of the controller or a relative of the controller or partner
- Director or principal officer of the corporation, or a relative of the director or officer
- Partner of the corporation, or a relative of the partner
Withholding Tax Hong Kong For Entertainers & Sportsmen
According to the Inland Revenue Ordinance of Hong Kong, the term entertainer or sportsman refers to a person that renders performances alone or with other individuals in their character as an entertainer or a sportsperson. This applies to all types of entertainment or sports.
The tax applies for non-resident individuals that fit the description for:
- Performances at a commercial event or occasion in Hong Kong
- Any participation in sound recordings, films, videos, radio transmissions, and television broadcasts
The tax rate varies depending on whether the Hong Kong promoter or sponsor agreed directly with the non-resident entertainer or sportsman. It also varies if the agreement was made with a non-resident agent (the representative of a non-resident entertainer or sportsman).
Now, let’s take a look at the figures for entertainers’ and sportsmen’s withholding tax:
- For agreements made directly with a non-resident entertainer or sportsman, a withholding tax of 10% applies.
- For agreements made with a non-resident agent a withholding tax rate of 10% applies if the non-resident agent is an individual or partnership, or a withholding tax rate of 11% applies if the non-resident agent is a company.
Is Bond Interest Taxable in Hong Kong?
Bonds are generally regarded the same as standard corporate loans when it comes to corporate taxation purposes.
However, for corporate borrowers to claim an interest deduction for bonds, the deduction that is claimed has to be in respect of interest payable by it on:
- Debentures listed on a recognized stock exchange
- Debt instruments issued, either
- Bona fide and in the course of carrying on business, and marketed in HK or another major financial hub
- Under any arrangements where the issue of an advertisement, invitation, or document concerning the agreement or arrangements to the public has been authorized by the Securities and Futures Commission
- Money borrowed from an associated corporation of the borrower where the money borrowed in the hands of the associated corporation arises:
- Completely from the proceeds of an issue by the associated corporation of debentures or instruments described above;
- In an amount not exceeding the interest payable by the associated corporation to the holders of such debentures or instruments.
Interest on and any profits made when it comes to a bond issued under the Loans Ordinance(Cap. 61) or the Loans (Government Bonds) Ordinance(Cap. 64) is excluded from the assessable profits.
Specific rules apply when the bond falls under the definition of Specified Alternative Bond Scheme as provided in Schedule 17A to the Inland Revenue Ordinance (Cap.112).
When it comes to other payable taxes on the issue or transfer on the bond, the situation is a bit different. Where the instrument for the transfer of bond is in registered form, the transfer might attract stamp duty. Moreover, the transfer of convertible bonds may give rise to stamp duty issues since the conversion into Hong Kong stock is subject to stamp duty.
Finally, take a look at the available exemptions. This is a non-exhaustive list of exemptions to the stamp duty obligation:
- Where the bond is neither denominated nor redeemable in Hong Kong dollars
- Qualified bond arrangements under section 47E of the SDO
- Intra-group transfers under section 45 of the SDO
- Qualified investment arrangements under section 47F of the SDO
- Plant and machinery leasing
Double Tax Agreements
Hong Kong has signed over 40 comprehensive DTAs (Double Tax Agreements) with the main purpose of avoiding double taxation of income.
This initiative also helps with adjusting the tax rights between Hong Kong and other jurisdictions. Under these agreements, residents of each participating country can use tax relief and reduction for tax liability levied on the same type of income.
Double tax agreements bring along great benefits for signing parties:
- DTAs clearly stipulate the rules for the division of income between two countries and how tax is to be imposed in each. In simpler terms, DTAs define the jurisdictional authority on transnational trade.
- DTAs help taxpayers of one country determine the potential limits of their tax liabilities in the other country.
- Double taxes agreements improve the integrity of a country’s tax system and prevent tax evasion with the help of a framework for the exchange of information between revenue authorities.
- DTAs enable taxpayers to claim for relief for taxes paid overseas.
At the moment, relief from income tax can only be used by Hong Kong resident individuals who are not at the same time residents of a contracting country.
In the case of corporations, only companies incorporated in Hong Kong and those companies that are managed and controlled in Hong Kong can apply for tax relief.
The bottom line is that the withholding tax only applies to two types of payment. As it was mentioned, the payments in question are made on royalties or license fees and payments paid to entertainers or sportspeople.
If you’d like to reduce Hong Kong withholding tax, you should make use of DTAs that the region has signed with many other countries.
On the other hand, should you still feel uncertain about withholding tax and how to approach it, you should seek services of expert accountants in Hong Kong to save as much money as possible and remain compliant.