Withholding Tax in Hong Kong

Hong Kong tax system is based on a territorial framework, under which tax are only applied to income derived from trade, commerce, or professional activities conducted within the territory of Hong Kong.

This geographical principle's fundamental does not depend on how people are divided into residents and non-residents. Instead, it includes both non-resident persons and businesses that get revenue from a source within Hong Kong as a result of duties performed or activities carried out there, which in return results in tax obligations in Hong Kong.

When a Hong Kong-resident person (foreigners who spent no more than 180 days in Hong Kong during the tax year) or company (a company managed and controlled outside of Hong Kong) pays a non-resident entity for services rendered inside of Hong Kong, a predetermined portion of the payment is required to be withheld and then transmitted to the Hong Kong Inland Revenue Department. The withholding tax is known as this portion that was withheld.

It is crucial to recognise that non-resident persons or organisations are the only ones who must pay withholding tax.

Let’s make an example to simplify the concept:

Let's say a Hong Kong-based consulting firm, XYZ Consulting Ltd., hires a non-resident marketing agency, GlobalAds Inc., to run an advertising campaign targeting Hong Kong customers. GlobalAds Inc. is based in the United States and has no physical presence in Hong Kong.

Under Hong Kong's territorial tax system, any income generated from services provided within Hong Kong is subject to taxation. In this case, the marketing services were performed within Hong Kong's territory.

Now, as per Hong Kong tax regulations, when XYZ Consulting Ltd. makes a payment to GlobalAds Inc. for their marketing services conducted within Hong Kong, they are required to withhold a portion of the payment. This withheld amount is known as the withholding tax.

Type of income subject to withholding tax

Understood the basic concept of withholding tax, let’s dive into the different scenario when this tax applies.

Royalties

Payments made for the utilization of intellectual property rights, encompassing patents, copyrights, and trademarks, might potentially attract withholding tax in specific circumstances. The withholding tax percentage varies based on whether the non-resident recipients are connected or unconnected to the Hong Kong entity.

The following entities are deemed as connected:

In the case of a Hong Kong entity being a natural person:

Relatives of the individual;
Partners of the individual, or their relatives;
Partnerships where the individual is a partner;
Corporations controlled by the individual; or
Directors or principal officers of controlled corporations.

In the case of a Hong Kong entity being a corporation:

Associated corporations, which encompass:

A corporation controlled by the Hong Kong entity;
A corporation that exercises control over the Hong Kong entity; or

Corporations under the same control as the Hong Kong entity.

Persons controlling the corporation, or partners or relatives of the controller;
Directors or principal officers of the corporation (or any associated corporation), or their relatives;
Partners of the corporation, or their relatives.

In the case of a Hong Kong entity being a partnership:

Any partner within the partnership;
Relatives of any partner;
Corporations controlled by the partnership, a partner, or any relative of a partner;
Directors or principal officers of controlled corporations;
Corporations whose directors or principal officers are partners within the Hong Kong partnership.

Interest Payments

Hong Kong refrains from imposing withholding tax on interest payments made to non-residents, with the exception of interest disbursed to authorized institutions.

Dividends

In Hong Kong, the imposition of withholding tax on dividend payments has always been absent, regardless of whether the beneficiary is a resident or non-resident.

Starting from January 2023, Hong Kong has introduce the Foreign Sourced Income Regime (FSIE Regime) to impose taxes on certain types of income (dividends included) to Multinational Enterprises (MNE) that don’t respect at least one of the below 3 main requirements:

The Economic Substance Requirements;
The Participation Exemption
Nexus Requirements

To have more info, check the IRD website.

Hong Kong Double Tax Agreements

The withholding tax varies according to the different types of income, and it’s even subject to restriction or wave for income derived from activities with certain foreign jurisdictions. These agreements are designed to prevent double taxation and promote global trade and investment.

When income is subject to withholding tax, it is the payer's responsibility to withhold the necessary tax at the source and send the money to the Hong Kong Inland Revenue Department. To maintain compliance with tax laws, it is crucial to keep correct records and submit comprehensive reporting.

Conclusion

Evidently, withholding tax in Hong Kong is typically confined, positioning it as an alluring arena for cross-border business transactions. While certain income streams such as royalties and particular interest payments may be subject to withholding tax, Hong Kong's comprehensive array of tax treaties and its business-friendly tax framework coalesce to foster a favorable milieu for international trade and investments. The pursuit of comprehensive knowledge regarding pertinent tax regulations and the pursuit of professional counsel can equip businesses with the prowess to proficiently navigate their withholding tax responsibilities.

Back to blog