This guide gives the general outlook on withholding tax laws in Hong Kong area, where are included the scope of these regulations, the types of payments, the rates of withholding tax, and some other important aspects.
Hong Kong is territorial taxation system based on which the business taxes are levied on the profits generated from trading, business or professional activities only within Hong Kong.
The principle states that no one is superior to the other regardless of their residency. Any entity or individual (other than a resident) who earns income which originates from the territory of Hong Kong ought to pay taxes in Hong Kong. For example, this may include provision of services or work conducted within Hong Kong.
In a scenario where a Hong Kong-based company or individual makes certain payments, say for services rendered in Hong Kong, to a non-resident entity, it is required to withhold and remit a portion of such payments to Inland Revenue Department of Hong Kong. This amount though is known as the withholding tax.
In Hong Kong, withholding tax is solely applicable to non-resident companies or individuals.
Keep in mind that the information here is strictly for general guidance and not to be taken as professional advice.
Content Outline
What Is Withholding Tax?
What Income Is Included In Withholding Tax?Withholding tax is a tax that is deducted from payments that a non-resident individual gets for services used in Hong Kong.
In Hong Kong, the Inland Revenue Department receives payments for withholding tax.
What Income Is Included In Withholding Tax?
Royalties and license fees paid to non-resident sports professionals or entertainers for their services rendered in Hong Kong will be subject to withholding tax. The withholding tax will not be applicable to dividends and interest.
Scope of Withholding Tax in Hong Kong
A non-resident entity, that derives income from a Hong Kong source for services provided or work done in Hong Kong, is liable for withholding tax, which is charged to the entity.
Any non-resident individuals who have been staying or working in Hong Kong for less than 180 days are all foreigners for tax purposes.
Companies that do not have their main management and control functions based in Hong Kong are those that have non-resident companies. The board of directors has a central management professional that does not involve interference from any other parties.
The withholding tax is applicable to only few categories of payments in Hong Kong, eg. royalty and fees paid to non-residents who have performed in Hong Kong as entertainers or sportsmen.
No withholding tax is levied on dividends and interest.
Withholding tax for royalties
Withholding tax is paid on royalty payments made to a non-resident company or individual for the use of intellectual property in and outside Hong Kong.
The royalty payment withholding tax rates depend on whether the non-resident recipients of the payments are associates or non-associates of the Hong Kong company.
Withholding tax for royalties due to companies that are non-residents
- Withholding Tax Rate for Royalty Payments to Associated Non-Resident Companies in Hong Kong: In most cases, the withholding tax rate for royalty payments to a non-resident company that is an associate of the Hong Kong entity is 16.5%. The purpose of imposing a 16.5% withholding tax rate is to ensure that the taxpayers do not reduce their Hong Kong tax liability by entering into transactions with associated persons.
- It should be noted that the 16.5% withholding tax rate has limitations. This rate does not apply to royalties paid to an associated Hong Kong company or person if the Inland Revenue Department confirms that no trade, profession, or business entity in Hong Kong has ever owned the relevant intellectual property wholly or in part. In such cases, the reduced withholding tax rate of 4.95% will apply.
- Withholding Tax Rate for Non-Associated Non-Resident Companies in Hong Kong: The withholding tax rate applicable to royalties owed to non-resident companies, which are not affiliated with the Hong Kong entity, is 4.95%.
Withholding Tax on Royalties for Non-Resident Individuals
- The 15% withholding tax is charged to any non-resident affiliate person who receives royalty payments from the company. This indicates that the affiliated persons may have a direct or indirect relationship with the company in terms of being shareholders, directors or key managers in the organization.
- Withholding tax rate for non-affiliated, non-resident individuals: The rate of withholding at 4.5% on royalties payments to individuals who hold unaffiliated non-residents is the same.
Royalty payments include
- Any income received in Hong Kong from the exhibition for the use of the films, tape recordings, sound recordings, or advertising related which was shown in Hong Kong specifically.
- Any income received through reserving the right to any patent, design, trademark, copyright material, secret formula, or any other similar property in or outside Hong Kong or through the use of it.
- Any income from receipts collected for the dissemination of information concerning the practical use of intellectual property in or out of Hong Kong.
Who Are The Withholding Taxpayers In Hong Kong?
Both non-resident individuals and corporations are subject to paying withholding tax for any services or work carried out in Hong Kong.
If any individual or entity meets any of the following conditions, they are considered a non-resident :
- A foreign resident who has physically stayed or worked in the territory less than 180 days in a tax year.
- If a company is managed outside of the territory of Hong Kong.
What are the Withholding Tax Rates?
The Hong Kong withholding tax rates for non-residents are:
| Payment types | Tax Rate for Non-Resident Individuals | Tax Rate for Non-Resident Corporations |
|---|---|---|
| Royalties from a Hong Kong associate | 15% | 8.25% – 16.5% |
| Royalties not derived from a Hong Kong associate | 4.5% | 2.475% – 4.95% |
| Payments directly received from entertainer/sports professional | 10% | 10% |
| Payments via non-resident person/partnership for performance | 10% | 10% |
| Payments via non-resident corporate agent/corporation | 11% | 11% |
Meaning of ‘associate’ in Withholding Tax
The term “associates” of a Hong Kong entity encompasses the following entities:
- If the entity based in Hong Kong is an individual:
- Relatives of the natural person who is the Hong Kong entity.
- Partners of the natural person, or relatives of those partners.
- Partnerships in which the natural person is a partner.
- Corporations controlled by the natural person.
- Directors or principal officers of corporations controlled by the natural person.
- If the Hong Kong entity is a corporation :
- An associated corporation; i.e.
- Corporations controlled by the Hong Kong entity.
- Corporations controlling the Hong Kong entity.
- A corporation that acts as the Hong Kong entity under the same controls as the other entity as well.
- An individual wielding authority within the corporation, or a partner linked to this influential figure, or a relative of either the person in control or the partner;
- A director or principal officer of the corporation (or any related entity), or a relative of these executives;
- A partner associated with the corporation, or a relative of said partner.
- An associated corporation; i.e.
- If the organization in Hong Kong is a partnership :
- Any partner within the partnership;
- A relative of any partner;
- A corporation under the control of the partnership, a partner, or any relative of a partner;
- A director or principal officer of a controlled corporation;
- A corporation whose director or principal officer is a partner within the Hong Kong partnership.
Withholding tax for fees of entertainers and sportsmen that are not resident in the country
For payments owed by a non-resident athlete or entertainer, tax withholding is required for:
- Taking part in a commercial event or function in Hong Kong
- Involvement in sound recordings, films, videos, radio transmissions, and television broadcasts, whether they are live or recorded.
This tax rate depends on whether the agreement was entered into directly with the non-resident entertainer or sportsman, or if it involves a non-resident’s representative, i.e. the agent of a non-resident entertainer or sportsman.
The withholding tax rates are as follows:
- For agreements arranged directly with a non-resident entertainer or sportsman, a withholding tax rate of 10% will be enforced.
- For agreements with a non-resident agent:
- If the non-resident agent is an individual or partnership, a withholding tax rate of 10% will be applicable
- If the non-resident agent is a company, a withholding tax rate of 11% will be applicable.
Double tax treaties and withholding tax
Hong Kong has entered into tax treaties with more than 30 countries to avoid the double taxation of income.
A tax treaty between Hong Kong and the concerned country contains specific rules of withholding tax.
How FastLane Group Can Help?
If you are considering to navigate Hong Kong’s withholding tax regulations, FastLane Group can help you with expert guidance to ensure your tax compliance and optimize tax strategy. Contact us today to stay ahead financially in the dynamic Hong Kong market.