Hong Kong: Double Tax Treaties
Under Article 151 of the Basic Law, Hong Kong is free to negotiate its own double taxation treaties independently of Mainland China (i.e. the rest of the People’s Republic of China) using the abbreviation Hong Kong, China. The territory may not take advantage of any double taxation treaties which China may enter into because only Mainland taxes are mentioned in these treaties. Nor will Mainland China impose the terms of any double taxation treaties on the territory, given that under articles 106-108 of the Basic Law it guaranteed Hong Kong the right to maintain an independent taxation system free of interference from the Mainland until the year 2047.
Legislation allows Hong Kong to enter into comprehensive DTAs, incorporating the Organisation for Economic Cooperation and Development (OECD) international standard on exchange of information. Until June 2001, Hong Kong had no comprehensive double taxation agreements in place. Since then, however the number of treaties has progressed quite rapidly.
In September 2012, the Inland Revenue Commissioner said that Hong Kong has taken "remarkable steps forward" in establishing its international tax treaty network since the amendment to the Inland Revenue Ordinance in March 2010, and since then, the tax treaty network of Hong Kong has expanded rapidly. As of March 2018, Hong Kong had a total of 37 comprehensive double taxation agreements in force.
Comprehensive double taxation avoidance treaties have been concluded between Hong Kong and the following countries (with 'in force' dates):
- Austria (1 January 2011, protocol effective from 3 July 2013)
- Belarus (30 November 2017)
- Belgium (7 July 2004)
- Brunei (19 December 2010)
- Canada (29 October 2013)
- People’s Republic of China (10 April 1998; protocols: first on 8 December 20016, second on 11 June 2008 third on 20 December 2010 and fourth on 29 December 2015)
- Czech Republic (24 January 2012)
- France (1 January 2011)
- Guernsey (5 December 2013)
- Hungary (23 February 2011)
- Indonesia (28 March 2012)
- Ireland (10 February 2011)
- Italy (10 August 2015)
- Japan (14 August 2011)
- Jersey (3 July 2013)
- Kuwait (24 july 2013)
- Latvia (24 November 2017)
- Liechtenstein (8 July 2011)
- Luxembourg (20 January 2009; protocol 17 August 2011)
- Malaysia (28 December 2012)
- Malta (18 July 2012)
- Mexico (7 March 2013)
- Netherlands (24 October 2011)
- New Zealand (9 November 2011)
- Pakistan (24 November 2017)
- Portugal (3 June 2012)
- Qatar (5 December 2013)
- Romania (21 November 2016)
- Russian Federation (29 July 2016)
- South Africa (20 October 2015)
- South Korea (287 September 2016)
- Spain (13 April 2012)
- Switzerland (15 October 2012)
- Thailand (7 December 2005)
- United Arab Emirates (10 December 2015)
- United Kingdom (20 December 2010)
- Vietnam (12 August 2009; protocol 8 January 2015)
In addition, there is a double taxation agreement between Hong Kong and Saudi Arabia that is currently pending.
There is also a memorandum of understanding with China under which:
- Chinese source income earned by Hong Kong based shipping, aviation and land transport operations is exempt from tax on the mainland;
- Hong Kong enterprises are only taxable in China if they have a permanent establishment there. (A permanent establishment is defined as an activity which continually lasts for more than 6 out of 12 months).
- Hong Kong resident individuals are not subject to tax for services rendered in mainland China so long as they do not reside more than 183 days in the country in any tax year.
- Hong Kong will give a tax credit for any tax paid in mainland China.
The following information provides brief details on certain key double tax avoidance agreements signed by the Hong Kong SAR.
Under the treaty, interest income withholding tax is set at zero in the country of the payer, while dividend income is set at a maximum of 10%. Withholding tax on royalty income is similarly limited to a maximum of 3%.
There are also special provisions for shipping and air transport, with profits from the operation of ships or aircraft in international traffic, including lease income and container leases, taxable only in the country of the owner.
There is also provision for the exchange of tax information, conforming to the internationally-agreed Organization for Economic Cooperation and Development standard.
Before the December 2003 agreement, royalties received by a Hong Kong resident from a Belgian source not attributable to a permanent establishment in Belgium were subject to a Belgian withholding tax at 15% on the gross amount of royalties less a 15% fixed deduction. Under the Agreement, the Belgian withholding tax has been reduced to 5% of the gross amount of royalties (without the 15% fixed deduction). In the case of interest received by a Hong Kong resident that arises in Belgium and which is not attributable to a permanent establishment in Belgium, the Belgian withholding tax has been reduced from 15% of the gross amount of interest to 10% under the Agreement.
Profits from international shipping transport earned by Hong Kong residents that arise in Belgium which were subject to income tax in Belgium are exempted under the Agreement. "The Agreement also formalises the tax relief being offered by the two tax authorities at present, thus providing a further level of certainty and stability to existing and potential investors alike," Mr Ma said.
"Many places in the region have already established a network of CDTAs. Having such a network in place for Hong Kong will put us on a par with other places in the region that already have one, thereby further enhancing our competitiveness in attracting foreign investment," Mr Ma explained.
Under the treaty, Hong Kong residents receiving interest from Brunei are subject to a 10% withholding tax instead of 15%. If the recipient is a bank or financial institution, the withholding tax rate will be further reduced to 5%. Brunei has also agreed to lower the withholding tax on royalties received by Hong Kong residents from Brunei from 10% to 5%.
In addition, under the DTA, Hong Kong airlines operating flights to Brunei will be taxed at Hong Kong's corporation tax rate (which is lower than Brunei's). Profits from international shipping earned by Hong Kong residents but arising in Brunei, which are currently subject to tax in Brunei, will enjoy tax exemption under the agreement.
The agreement was also the first DTA Hong Kong signed using the Organization for Economic Cooperation and Development standard on the exchange of tax information.
In August, 2006, the Chinese and Hong Kong Governments signed an agreement on avoiding double taxation that aims to provide investors and taxpayers in the two places certainty over tax liability and offer tax savings.
State Administration of Taxation Minister Xie Xuren signed the new arrangement on behalf of the Central Government, and Chief Executive Donald Tsang, accompanied by Financial Secretary Henry Tang and Secretary for Financial Services & the Treasury Frederick Ma, signed on behalf of Hong Kong.
The Arrangement for the Avoidance of Double Taxation on Income & Prevention of Fiscal Evasion extends the scope of the original agreement on business profits and income from personal services both parties signed in 1998.
The new pact covers direct income, such as operating profits and employment income, and indirect income, such as dividends, interest and royalties. It also ensures the same income will not be doubly taxed in the two places.
Under the new arrangement:
- Top rates for withholding tax for dividends a Hong Kong resident receives from Mainland investments were halved from 20% to 10%, and those rates for dividends a Hong Kong business receives were cut from 10% to 5% for Hong Kong businesses holding at least 25% of the capital of the Mainland enterprise. This will attract more overseas investments into the Mainland through Hong Kong.
- Top rates for withholding tax for interest a Hong Kong resident receives from the Mainland fell from 20% to 7%, and those for a Hong Kong business fell from 10% to 7%.
- Top rates for withholding tax for royalties a Hong Kong resident or business receives from the Mainland fell from the respective 20% and 10% to 7%. This will help promote creativity and innovation in industry as well as cultural and artistic activities on the Mainland and Hong Kong.
- The taxing right for gains a Hong Kong resident or business receives from the transfer of shares in a Mainland enterprise is allocated exclusively to Hong Kong. If the income does not amount to a trading receipt or is not sourced in Hong Kong, no profits tax is charged in Hong Kong. Where the assets of the Mainland enterprise are comprised mainly of immovable property on the Mainland or the shares transferred are equal to or exceed 25% of the shareholding of the Mainland enterprise, the income may be taxed in both places. A tax-credit arrangement ensures that the same income is not taxed twice.
The pact allows for the exchange of information between the State Administration of Taxation and Hong's Inland Revenue Department, to enable both parties carry out its provisions. As is the international norm, however, the exchange is limited, to ensure that the use of taxpayer information will not be abused.
Speaking with regard to the new agreement, Donald Tsang announced that:
"The conclusion of a comprehensive double-taxation arrangement with the Mainland, together with the Mainland & Hong Kong Closer Economic Partnership Arrangement, will provide added incentives for international investors to enter the Mainland market through Hong Kong. It will also enhance cross-border financing arrangements and the transfer of technical know-how and patent rights between the two places. These will help promote Hong Kong's economy, enhance our competitiveness and attract overseas capital."
The new arrangement came into effect with respect to Hong Kong taxes from the year of assessment beginning on or after 1 April 2007. With respect to Mainland taxes, it applies from the taxable year beginning on or after 1 January 2007.
In early 2008, Hong Kong and the Mainland signed the second protocol to the Arrangement for the Avoidance of Double Taxation & Prevention of Fiscal Evasion with respect to Taxes on Income.
The tax arrangement was formally signed on 21 August 2006, and launched on 8 December that year, but the two governments differed on the interpretation of certain parts of it. After negotiations, they agreed on the amendments and initialled the second protocol in September 2007.
The French treaty (ratified in December 2011) reduces withholding tax paid by Hong Kong residents receiving dividends from France not attributable to a permanent establishment in France from 25% to 10%. Also, Hong Kong residents receiving royalties from France will see withholding tax reduced from 33.33% in France to a maximum of 10%. The French interest withholding tax on Hong Kong residents will be reduced from of 18% to 10%.
Under the French CDTA, Hong Kong airlines operating flights to France will be taxed at Hong Kong's corporation tax rate (which is lower than that of France). Profits from international shipping transport earned by Hong Kong residents that arise in France, which are currently subject to tax there, will enjoy tax exemption under the agreement.
The Hong Kong/France CDTA also incorporates the latest Organization for Economic Cooperation and Development standard on the exchange of information for tax purposes.
Under the agreement:
- Luxembourg has eliminated double taxation by providing full exemption to profits of Luxembourg companies doing business through a branch in Hong Kong.
- Luxembourg withholding tax for dividends is reduced to 0% if the recipient of the dividends is a company holding 10% or more of the share capital of the paying company (or invested EUR 1.2 million or more therein), and to 10% in all other cases. The non-treaty withholding tax rate is 20% on the dividends.
- Income from operation of ships in international traffic earned by a Hong Kong resident in Luxembourg is exempt from Luxembourg income tax.
In November 2010, the Hong Kong/Luxembourg DTA was updated to include the exchange of information article so that the agreement conforms to the Organization for Economic Cooperation and Development’s international standard.
The new article requires the contracting parties, upon receiving a request for information, to exchange information even when there is no domestic tax interest involved. It does not permit either party to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity. This protocol came into force in August 2011.
Under the agreement, Hong Kong residents receiving dividends from New Zealand not attributable to a permanent establishment in New Zealand are subject to a reduced 15% rate of withholding tax. The withholding tax rate is further lowered to 5% or 0% for qualifying beneficial owners. Hong Kong residents receiving royalties from New Zealand pay a withholding tax capped at 5%.
New Zealand-based interest withholding tax on Hong Kong residents is reduced from 15% to 10%. The Hong Kong/New Zealand DTA also incorporates the latest Organization for Economic Cooperation and Development international standards on the exchange of tax information.
Under the agreement, Switzerland exempts from double taxation. In addition,the such withholding tax rate has bee reduced to 10%.
Hong Kong airlines operating flights to Switzerland are taxed at Hong Kong's corporation tax rate (lower than of Switzerland’s). Profits from international shipping transport earned by Hong Kong residents that arise in Switzerland, which are currently subject to tax there, are exempted under the agreement.
The Hong Kong-Switzerland DTA also incorporates the latest Organization for Economic Cooperation and Development standard on exchange of tax information.
Under the agreement, profits remitted by a branch office in Thailand to its Hong Kong head office are exempt from the 10% withholding tax in Thailand.
Thai withholding tax for royalties received from Thailand by a Hong Kong resident but not attributable to a permanent establishment in Thailand can be reduced to 5% if paid for the use of, or the right to use, any copyright of literary, artistic or scientific work (films taxable under this head); and 10% if paid for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process. The non-treaty rate is 15% on the gross amount of royalties.
In the case of interest received by a Hong Kong resident (when the interest arises in Thailand and is not attributable to a permanent establishment), the current Thai withholding tax is 15% of the gross amount. Under the Agreement, the Thai withholding can be reduced to 10% if interest is paid to a financial institution or insurance company, or if interest is paid with respect to indebtedness arising from the sale on credit of equipment, merchandise or services.
Income from operation of aircraft in international traffic earned by a Hong Kong resident in Thailand is exempt from Thai income tax. Finally, Thai income tax for ship operations in international traffic by a Hong Kong resident can be reduced by 50%.
In June 2001, Hong Kong entered into a limited agreement with the United Kingdom covering shipping transport. The agreement is limited to revenues from international shipping transport and provides that profits derived from such business by an enterprise of the UK or the SAR are exempt from tax in the territory of the other contracting party. Entering into force on 3 May 2001, the provisions of the agreement applied in the UK from 1 April 2002, for corporation tax, and from 6 April 2002, for income tax and capital gains tax. It applied in the SAR from 1 April 2002.
An updated UK/Hong Kong Double Taxation Agreement was signed on 21 June 2010 and entered into force on 20 December 2010.
The updated treaty reduced withholding tax on Hong Kong residents receiving dividends from UK Real Estate Investment Trusts from 20% to 15%. Also, withholding tax on Hong Kong residents receiving royalties and interest from the UK is capped at 3%, instead of the non-treaty rate of 20%. The Hong Kong/UK CDTA supersedes the existing limited double taxation avoidance agreements for airline income and for shipping income.
The agreement also serves an Exchequer protection role by including provisions to combat tax avoidance and evasion – partly by measures providing for the exchange of information between revenue authorities. All of the UK’s recent double taxation agreements largely follow the approach adopted in the Organization for Economic Cooperation and Development’s (OECD) Model Tax Convention on Income and on Capital. The Arrangements scheduled to the Order continue that approach.
The agreement is effective in the United Kingdom from 1 April 2011 for corporation tax, and from 6 April 2011 for income tax and capital gains tax. It is effective in Hong Kong from 1 April 2011.