Introduction
Hong Kong imposes the same tax obligations on resident and non-resident businesses. Both must pay taxes on profits earned within or originating from Hong Kong. When a company based in Hong Kong pays for services provided by a foreign entity, a portion of that payment must be withheld and remitted to the Hong Kong Inland Revenue Department (IRD). This is known as withholding tax.
Payments Subject to Withholding Tax in Hong Kong
Not all payments in Hong Kong are subject to withholding tax. Interest and dividends from investments, deposits, and shareholding are exempt. However, royalties and certain service fees for performances are subject to withholding tax.
Royalties: Fees for using, distributing, or exhibiting copyrighted materials, patents, trademarks, and other intellectual property.
Service Fees: Fees paid to non-residents for performances, such as those by entertainers and sportsmen.
Withholding Tax Rates
Different withholding tax rates apply to various types of payments and recipients:
Royalties Paid to Non-Resident Enterprises:
Associated/affiliated non-resident companies: 16.5%
Non-affiliated non-resident companies: 4.95%
Royalties Paid to Non-Resident Individuals:
Associated non-resident individuals: 15%
Non-affiliated non-resident individuals: 4.5%
Performance Service Fees:
Direct contracts with non-resident performers: 10%
Contracts via non-resident individual or partnership agents: 10%
Contracts via non-resident company agents: 11%
Category | Payment Type | Rate (%) |
Royalty Payments | Non-resident companies (associates) | 16.5% |
Royalty Payments | Non-resident companies (non-affiliated) | 4.95% |
Royalty Payments | Non-resident individuals (associates) | 15% |
Royalty Payments | Non-resident individuals (non-affiliated) | 4.5% |
Entertainers or Sportsmen | Direct contracts with non-resident performers | 10% |
Entertainers or Sportsmen | Contracts via non-resident individual or partnership agents | 10% |
Entertainers or Sportsmen | Contracts via non-resident company agents | 11% |
Dividends and Interest | Not Applicable | Not Applicable |
Eligibility for Withholding Tax
Non-resident enterprises and individuals earning income from Hong Kong for services rendered in the city must pay withholding tax. Non-resident enterprises are managed and controlled outside Hong Kong, while non-resident individuals have stayed or worked in Hong Kong for less than 180 days during the tax year.
Definition of “Associate”
Entities considered 'associates' of a Hong Kong entity vary depending on the entity type:
Natural Persons:
Relatives of the individual
Partners of the individual, or relatives of those partners
Partnerships in which the individual is a partner
Corporations controlled by the individual
Directors or principal officers of a corporation controlled by the individual
Corporations:
Any corporation controlled by the Hong Kong entity
Any corporation that controls the Hong Kong entity
Corporations under common control with the Hong Kong entity
Individuals or entities that control the corporation, including their partners and relatives
Directors or principal officers of the corporation or any associated corporation, and their relatives
Partnerships:
Any partner in the partnership
Relatives of any partner
Corporations controlled by the partnership, or by a partner or their relatives
Directors or principal officers of a corporation controlled by the partnership
Corporations whose directors or principal officers are partners in the Hong Kong partnership
Compliance and Reporting Requirements
Filing Requirements: Companies must file and report withholding tax payments to the IRD, adhering to deadlines and submitting necessary documentation.
Penalties for Non-Compliance: Penalties and interest can be imposed for late or incorrect withholding tax payments, including fines or additional interest charges.
Exemptions and Reliefs
Small Business Exemptions: Specific exemptions or reliefs may be available for small businesses or particular industries.
Tax Credits: Foreign tax credits can help mitigate double taxation on the same income.
Practical Examples
Case Studies: Hypothetical or real-life examples can illustrate how withholding tax is applied in various scenarios, such as international consulting services, royalties for software use, and performance fees for entertainers.
Calculations: Provide sample calculations to show how withholding tax amounts are determined for different payment types.
Double Tax Treaties
Double tax treaties can offset taxes withheld if a treaty exists between the foreign jurisdiction and Hong Kong. Hong Kong has signed 45 treaties with various jurisdictions, with withholding tax rates generally ranging from 2.475% to 4.95%.
Withholding Tax Rate (%) | Jurisdictions |
2.475 to 3 | Austria, Belarus, Finland, Ireland, Liechtenstein, Luxembourg, Macau, Malta, Netherlands, Romania, Russia, Switzerland, United Kingdom |
2.475 to 4 | Guernsey, Jersey |
2.475 to 4.95 | Belgium, Brunei, Cambodia, Canada, China, PRC, Czech Republic, Estonia, France, Georgia, Hungary, India, Indonesia, Italy, Japan, Korea, Kuwait, Malaysia, Mexico, New Zealand, Pakistan, Portugal, Qatar, Saudi Arabia, Serbia, South Africa, Spain, Thailand, United Arab Emirates, Vietnam, Non-Treaty |
Practical Advice for Businesses
Tax Planning Strategies: Provide guidance on effective tax planning to minimize withholding tax liabilities, including structuring transactions, choosing appropriate jurisdictions for contracts, and leveraging double tax treaties.
Consultation with Tax Professionals: Highlight the importance of consulting tax professionals or advisors to ensure compliance and optimize tax planning.
This was a comprehensive guide on withholding tax in Hong Kong, offering valuable insights and practical advice for businesses and individuals alike
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