Double taxation agreements in Hong Kong would be one of the most concerns if you are running business overseas and do expect the avoidance of taxes across country borders.
Not only does Hong Kong offer people a high standard of living to be tailor-made for its fast-changing economy, but also you can gain a wide range of merits from its business-friendly tax regime, including taxation relief policy – which is the key pull factor for most investors and entrepreneurs.
The below article will cast light upon key features of double taxation relief for Hong Kong businesses.
1. An overview of Double Taxation Agreements in Hong Kong
The case in which the taxpayer is levied twice on the same profit/income item by two or more tax jurisdictions is termed double taxation.
For residents in Hong Kong which follows a territorial tax system, they do not suffer burdens of double taxation. Only income derived from Hong Kong is in charge of taxes while that of a source outside Hong Kong by local residents is not liable to taxes. That is the reason why incorporated businesses in Hong Kong are commonly not subject to double taxation of income. Some other countries, on the other hand, can require their residents on a worldwide basis to pay taxes.
You can get more information by reading our related post: Hong Kong Tax System – General Guide For Entrepreneurs
It is also noteworthy that this jurisdiction offers foreign entrepreneurs favorable conditions to expand their business through the provisions of Hong Kong tax treaty, which helps to eliminate the tax obstacles in terms of cross-border investments as well as creates ease for the sake of offshore sourced businesses in Hong Kong.
You are also advised to know about forms of relief from being taxed twice either on a unilateral basis under their domestic tax laws or on a bilateral basis under the double taxation agreements (DTAs) that Hong Kong concluded. In what follows, we will focus on the latter – Double taxation agreements (DTAs).
2. Double Taxation Agreements (DTAs)
2.1. What is DTA?
Double Tax Agreement (DTA), also referred to as tax treaties, is a bilateral (two-party) agreement made by two countries to avoid the double taxation of income and property. DTAs play a role as a powerful tool to restrain double taxation and fiscal evasion and strengthen relationships between Hong Kong and other international tax administrations. Please be noted that DTAs will only have an effect on you in case you are Hong Kong’s residents or the other DTA jurisdiction.
2.2. Benefits of DTAs
According to the Hong Kong Special Administrative Region Government (HKSARG), double taxation agreements (DTAs) brings a wide range of advantages:
- Bring certainty to taxpayers on the taxing rights of the contracting parties;
- Helps taxpayers to well perceive their potential tax liabilities in the other country;
- Prevent double taxation deriving from the overlap of tax jurisdictions;
- Eliminate the tax avoidance and evasion with respect to different forms of income flows between Hong Kong and the DTA partners;
- Identify the tax rules/jurisdictional authority that will apply to transaction trade;
- Offer added incentive for overseas businesses in Hong Kong and for Hong Kong companies to conduct business in other jurisdictions;
2.3. Countries and types of DTA that Hong Kong has concluded
Hong Kong has entered into Comprehensive Double Taxation Agreements (DTAs) with more than 40 jurisdictions. For a detailed list of DTAs, you can click HERE
Exclusive of Comprehensive DTAs, Hong Kong has also actively engaged the trading partners in negotiating DTAs, which include various types of income. Noticeably, airline income and shipping income are two aspects of concern that deserve its priority in addressing double taxation given its openness to this matter and long awaiting time of comprehensive DTA to be concluded. Both are listed as in the category of Limited Double Taxation Agreements.
Aircraft operations bear the international nature, and this results in its people – airline operators being likely to be easily influenced by double taxation in comparison with other taxpayers. Hong Kong, to minimize the susceptibility in such cases, has offered a policy on double taxation relief arrangements for airline income in the bilateral Air Services Agreements with the aviation partners.
Another income type that may draw your attention is shipping income. An amendment of reciprocal tax exemption since 1 April 1998 for shipping income has been made by this jurisdiction to benefit ship operators. Accordingly, ship operators are not subject to taxes provided by places with similar reciprocal tax exemption legislation. Hong Kong has also engaged in negotiations of the double tax relief arrangement with other legislation in which reciprocal tax exemption is not in place.
3. Double taxation relief methods in Hong Kong
A glance at double taxation relief methods as below will help you to get insights into Hong Kong taxation policy.
Four popular methods of relieving double taxation include:
- Tax exemption: Foreign sourced income is not subject to the domestic tax, but whether it is applied for the whole or just a part of foreign income depends on specific cases.
- Foreign tax credit: The tax paid in the jurisdiction where the income arises is deducted from tax payable on the same income in the jurisdiction where the income is received.
- Tax deduction: Hong Kong allows domestic tax to be applied on the foreign income after a deduction for foreign tax on turnover basis.
- Reduced tax rate: This allows income to be taxed at a lower rate and more often than not, is applicable to interest, dividends, and royalties. You can find a summary of cap on tax rate chargeable to Hong Kong residents for payments of interest, dividends, royalties, and technical service fees HERE
If your profits are derived from sources outside of Hong Kong, you could be eligible for an offshore claim – exemption of profits tax.
Our Hong Kong Offshore Claim Tool helps you determine the tax status of your income types and ascertain your eligibility for making an offshore claim.
Hong Kong appears as a top of choice with vantage ground for both expatriates and for corporations thanks to its great system of taxation. The key benefit of minimizing a large tax burden makes double taxation agreements in Hong Kong, among others, being worth taking into consideration when choosing the best place for business operations.
Should you have any questions to start a business in Hong Kong, do not hesitate to contact us by dropping a chat message or sending an email via firstname.lastname@example.org!