Explore Double Taxation Agreement Hong Kong Tax Treaties

Explore Double Taxation Agreement Hong Kong Tax Treaties

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Hong Kong tax treaties, or Double Taxation Agreements (DTAs), are a critical aspect of the dynamic world of international finance and taxation, with significance for both individuals and businesses.

Double Taxation Agreement Hong Kong (DTAs) provide a number of benefits including definition of tax rights of tax jurisdictions for transnational trade, clarification of tax liabilities for taxation in a foreign country, resolution of tax disputes via mutual agreement procedures, granting of tax benefits and an important role in prevention of tax evasion and double taxation.

This article gives an overview of DTAs, demonstrating the importance of them and their effect on fiscal duties in Hong Kong.

What does Double Taxation mean?

Double taxation is when the same income is taxed in two jurisdictions: the source jurisdiction (where the income is earned) and the residence jurisdiction (where the taxpayer is resident). It is also known as the “source-residence conflict”.

Territorial source tax system is adopted in Hong Kong, which implies the fact that usually, businesses are only liable to pay tax on profits generated in or derived from Hong Kong.

The double taxation can occur when the taxpayer is a resident of a foreign tax jurisdiction and has income earned in Hong Kong.

Kindly note that, after the introduction of the Foreign Sourced Income Exemption Regime (FSIE) in Hong Kong on 1 January 2023, foreign sourced passive income may be subject to profits tax in Hong Kong, which may lead to double taxation.

Furthermore, HKSAR has signed double tax treaties with a number of jurisdictions to prevent double taxation.

Related Article: 2024 Tax Filing Season: Tax Deadline 2024 in Hong Kong You Need To Know About

What does a Double Taxation Agreement Hong Kong entail?

A DTA is a treaty between two countries, intended to, among other things, prevent the same income from being taxed twice.

These pacts act as a code, prevailing over the local legislation and redefining fiscal liabilities for the international economic operations, making them more transparent and just.

Tax treaties such as DTAs help in strengthening diplomatic and economic relations between jurisdictions and are a good tool to prevent tax evasion.

Who Can Benefit from Double Taxation Agreement Hong Kong?

The main beneficiaries of DTAs are the resident individuals and corporations in Hong Kong. Applying the relevant provisions under the DTAs, such as the tie-breaker rules, the tax residency of dual tax residency taxpayers can be ascertained for the purpose of the application of the DTAs.

The local tax laws of Hong Kong and other tax jurisdictions in the world may treat the same person as a tax resident. For instance, a person is deemed as a “tax resident” in Hong Kong if he/she has an ordinary residence in Hong Kong (e.g. having a permanent home or habitual abode) or has been in Hong Kong for more than 180 days during the relevant year of assessment or has been in Hong Kong for more than 300 days in two consecutive years, one of which is the relevant.

For companies, they are deemed to be tax resident in Hong Kong if they are incorporated in Hong Kong or they are incorporated outside of Hong Kong but usually controlled or managed from within Hong Kong.

What does a Hong Kong Tax Treaty Typically Include?

Every single DTA entered into by Hong Kong, although distinctive, has some common characteristics. They include the coverage of the agreement, taxes covered and the Permanent Establishment (PE), which is crucial to the determination of where business profits are taxed.

These treaties can also embrace income from employment, dividends, interest, royalties, operational profits of a business, directors’ fees, and profits of airlines and shipping companies.

They also establish the tax chargeability on the income derived from government payments, real property as well as profits from the sale of shares.

Approaches to Relieving Double Taxation

The relief of double taxation is either provided by the domestic tax laws of a country or the particular DTA. Generally, there are 3 main methods of double taxation relief:

  1. Tax credit: Under the credit system, foreign tax paid by a taxpayer is credited against his domestic tax on the same income. That is, the tax paid in the source jurisdiction is subtracted from the tax payable (on the same income) in the residence jurisdiction. This is mostly the main principal exercised.
  2. Tax exemption: Domestic tax relief for foreign income.
  3. Relief by deduction: Credit method of domestic tax on the foreign income after subtraction of the foreign tax paid.

Current Hong Kong Tax Treaties in Effect

Hong Kong’s dedication to fair taxation is reflected in its wide range of over 45 DTAs, which comprise of full agreements on different types of income, and specific treaties to sectors like shipping and aviation.

How FastLane Group can Help?

Fastlane Group is an established corporate services, accounting, audit and tax advisory services provider in Hong Kong. Our forte lies in helping clients who have international operations and they provide customized solutions that cater to their specific requirements. 

We provide a complete package of services – company incorporation, accounting and bookkeeping, payroll administration, and corporate secretarial services. Contact us now.

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