Hong Kong Withholding Tax – Everything you need to know
Planning to set up your business in Hong Kong, but not sure about the withholding tax rules and who is required to pay? In general, there is no requirement of paying withholding taxes in Hong Kong, which makes it an attractive location to do international business. However there are special cases that arise where withholding tax in Hong Kong is required.
This article will provide an overview of Hong Kong’s withholding tax rate rules, including the scope of withholding tax, payments that are subject to withholding tax, and their tax rates.
What is Hong Kong withholding tax?
In general, withholding tax is the tax charged on sales or services to other countries or companies in other jurisdictions. A percent of the total amount is “withheld”, and varying tax regulations determine if all or a part of this tax is returned to the company. In Hong Kong there is no general withholding tax on sales or services.
However, there are certain situations in which an organization may have to make a payment to foreign associates (non-resident individuals or business entities). In such a case, this is considered as a Hong Kong source of income that needs to be taxed.
Who is required to pay withholding tax?
When a non-resident business entity derives income from a Hong Kong source, it is liable to pay taxes in Hong Kong. Likewise, any non-resident individual in Hong Kong who receives income for carrying out the trade, profession, or business is responsible for paying withholding taxes.
Also when a Hong Kong resident (whether it is an individual or business entity) makes a specific type of payment for the services offered by a non-resident entity in Hong Kong, a certain portion of the payment is taxed. The percentage of the amount withheld is the withholding tax and must be paid to the Hong Kong’s Inland Revenue Department (IRD). Generally, withholding tax is only applicable to non-resident companies or individuals.
Scope of withholding tax in Hong Kong
Withholding tax is the percentage of the amount derived by non-residents for the services provided or work done in Hong Kong. So, it becomes important to know for non-residents and which type of payments will be considered under this tax rate.
For tax purposes, people who have lived and worked for less than 180 days in Hong Kong are considered as non-resident individuals. And companies that incorporate or manage their main office outside Hong Kong are also considered as non–resident corporations.
Usually, it is mentioned that many types of payments are considered under the withholding tax rate in Hong Kong. But in actuality, there are a few specific ones which have been shared below:
- Royalties or license fees made to non-residents.
- Payments received for the performance in Hong Kong of non-resident entertainers or sportspeople.
What Constitutes as A Royalty Payment?
Royalties or license fee include payments which are received from:
- Payments received for the usage or exhibition of a television film, cinematography, or tape. It also included the recording of any sound, advertising materials connected with such film, tape or recording; and
- Payments for undertaking or imparting knowledge directly or indirectly in the area of such patent, design, trademark, copyright material, layout-design of an integrated circuit, performer’s right, plant variety right, secret process, or formula, or other property or right.
- Payments for the usage of any patent, design, trademark, copyright material, layout-design (topography) of an integrated circuit, performer’s right, plant variety right, secret process or formula, or other property or right of a similar nature.
Hong Kong Withholding tax for Royalties
Withholding tax for royalties is the required payment made to non-resident individuals or corporations from Hong Kong. This is charged for the use of intellectual property both in and outside of Hong Kong. The withholding tax rate for royalty payments depends upon whether the non-resident recipients are non-affiliates or associates of the Hong Kong company.
Withholding tax rates for non-resident individuals and companies
As mentioned above, the withholding tax rate for royalties significantly varies on whether the payment is derived from associates or non-associates. Below are some of the tax rates for non-resident individuals and companies that you should know.
If payments to non-residents are derived from “an associate” in Hong Kong:
- Hong Kong withholding tax for royalties charged to non-resident individuals is 15% in general for affiliated individuals.
- The withholding tax rate for royalty payments, which are charged to non-resident corporations, is at an effective tax rate of 8.25%-16.5% on the assessable profits.
If payments to non-residents are not derived from “an associate” in Hong Kong:
- For non-residents individuals that are not associates of Hong Kong, the tax amount for royalties chargeable is 4.5%.
- Under the two-tier profits tax regime, the withholding tax rate for the non-resident companies that are non-associates will be calculated at the effective tax rate of 2.475% – 4.95% on the assessable profits.
What is the meaning of an ‘Associate’?
Under Inland Revenue Ordinance (IRO) of Hong Kong, the following entities are regards as “associates” of a Hong Kong entity:
If the Hong Kong entity is a natural person:
- A corporation which is controlled by the person
- A director or principal officer of a controlled corporation
- A person’s relative or partner
- A partnership in which the person is a partner
If the Hong Kong entity is a corporation:
- An associated corporation:
- A corporation over which the Hong Kong entity has control;
- A corporation that has control over the Hong Kong entity; or
- A person who controls the corporation, or a partner and relative of the controller
- A corporation under the same control as the Hong Kong entity.
- A director or principal officer of the corporation
- A partner of the corporation, or a relative of the partner.
If the Hong Kong entity is a partnership:
- Any partner in the partnership;
- A partner’s relative
- A director or principal officer of a controlled corporation;
- A corporation whose director or principal officer is a partner in the Hong Kong partnership.
- A corporation that is controlled by the partnership, or by a partner or any relative of a partner;
Hong Kong Withholding tax for Entertainers or Sportsmen
Under the IRO of Hong Kong, the term “entertainer or sportsman” means a person, other than the corporation, who:
- Performing recorded or live
- A performing activity can be observed or heard by the public, whether to make a profit or not.
Whether the person performs alone or in a group in any kind of entertainment or sports are liable to pay the withholding taxes in Hong Kong. So, non-resident entertainers or sportsmen of Hong Kong have to pay withholding tax on their fees. The payments are made for the following services:
- If the entertainer or sportsman participates in sound recording, television, radio, films, or other similar transmissions (whether live or recorded);
- For any appearance of the entertainers or sportsmen for promotion of any commercial occasion or event.
Withholding tax on Entertainer or Sportsman payments
The withholding tax rate depends upon whether the non-resident Hong Kong promoter or sponsor agreed directly with the non-resident entertainer or sportsman. The WHT of non-resident entertainers is measured on the gross amount received less deductible expenses and subject to the aforementioned tax rate.
The withholding tax rates are as follows:
- When the entertainer or sportsman performed directly, withholding tax rate is 10%
- When the entertainer or sportsman comes under the agreement of non-resident agents, are:
- A withholding tax rate of 11% will be applied if the non-resident agent is a corporate agent or a corporation.
- A withholding tax rate of 10% will be applied if the non-resident agent is an individual person or a partnership
Double tax agreement to reduce withholding tax
To avoid the double taxation of income, and to adjust the tax rights between Hong Kong and other jurisdictions, Hong Kong has come up with over 40 Comprehensive DTAs (Double Tax Agreements). Every comprehensive DTA’s will specify the conditions for the withholding tax between Hong Kong and the treaty countries.
The treaty countries of the residents can enjoy the relief from double taxation and reduction from the tax liabilities levied on the same type of income.
How does Startupr help you?
By now, you may have a better idea about withholding taxes in Hong Kong. The withholding tax amount is applied to the two types of payments: on royalties or license fees and payments paid to entertainers or sportsmen.