Still get confused about what withholding tax is in Hong Kong and who are required to pay this? Keep reading this article and then find out the answer.
As the jurisdiction has followed a territorial system of taxation, any income earned within the territory is subject to tax. Likewise, any non-resident (whether it is a company or an individual) in Hong Kong that receives income for carrying on a trade, profession or business in the country is responsible for paying taxes.
What is Hong Kong’s withholding tax and who are required to pay it?
1. Overview of withholding tax in Hong Kong
A non–resident who participates in trading, professing or doing business inside Hong Kong will be liable to the Profit Tax regarding profits arising in or derived from this jurisdiction.
When a company or individual considered “ordinarily residing” in Hong Kong has to pay a non-resident entity for some specific types of payments which are related to services or works, a part of the payment, corresponding to tax liability of such a non-resident, will be kept in order to pay to the Hong Kong’s Inland Revenue Department. The percentage presents this amount of cash is called the withholding tax (WHT).
2. Types of payment subject to withholding tax
Scope of withholding tax in Hong Kong
Withholding tax is charged to a non-resident that receives income from a Hong Kong source for services provided or work done in Hong Kong. Therefore, it is crucial to know what a non-resident is in Hong Kong. How can we tell? Keep reading!
For the purpose of taxation, foreigners, who stay and work in Hong Kong for no longer than 180 days in the tax year, are considered as non–resident individuals. Moreover, companies that incorporate, or got their central management and control exercised outside Hong Kong, are also considered as non–residents.
Normally, it is thought that there are many types of payments that are the targets for the withholding tax in Hong Kong. However, in fact, there are just only some specific ones as listed below:
- Royalties or license fees made to non-residents.
- Payments received for the performance in Hong Kong of non-resident entertainers or sportsmen.
Exceptionally, dividends and interests paid to non-residents are not subject to withholding tax.
Royalty is the required payment that is made for the right to use intellectual property of non–residents inside and outside of Hong Kong. The withholding tax rates vary, depending on whether the non–resident is related to a Hong Kong entity or not.
Royalties or license fees include:
- Payments for the exhibition or use in Hong Kong of cinematography or television film or tape, any sound recording, or any advertising material connected with such film, tape or recording; and
- Payments for the use, or the right to the use, in Hong Kong, 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; and
- Payments for imparting or undertaking to impart knowledge directly or indirectly connected with the use in Hong Kong of any such 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.
Entertainer or sportsman payment
As the Inland Revenue Ordinance of Hong Kong has clearly described, the term “entertainer or sportsman” means a person (other than a corporation), who gives performances whether alone or with other persons in his character as an entertainer or sportsman in any kind of entertainment or sport, including:
- Performing activity (recorded or live)
- Performing activity can be observed or heard by the public whether for making income or not.
Hong Kong withholding tax is the portion of the payments withheld from the fees that must be paid to non-resident entertainers or sportsmen. The payments are made for the following services by these individuals:
- Payments for any appearance of the entertainers or sportsmen by way of or in connection with the promotion of any commercial occasion or event
- Payments for any participation by the entertainers or sportsmen in or for sound recording, films, videos, radio, television or other similar transmissions (whether live or recorded).
3. Withholding tax rates for non-resident individuals and companies
a. Royalty Payment
As it is mentioned above, WHT for royalties will vary significantly depending on whether the payment is derived from an associate.
If payments to non-residents are derived from “an associate” in Hong Kong:
- The tax amount for royalties chargeable to non-resident individuals is calculated at a tax rate of 15%.
- The tax amount for the sums received by non-resident corporations will be calculated at the effective tax rate of 8.25%-16.5% on the assessable profits under two-tier profits tax regime.
If payments to non-residents are not derived from “an associate” in Hong Kong:
- The tax amount for royalties chargeable to non-resident individuals is calculated at an effective tax rate of 4.5%.
- The tax amount for the sums received by non-resident corporations will be calculated at the effective tax rate of 2.475% - 4.95% on the assessable profits under two-tier profits tax regime.
How can we tell who is considered as an “associate”? Under Inland Revenue Ordinance (amended in 2004) 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 person’s relative
- A person’s partner and any relative of that partner;
- A partnership in which a person is a partner;
- Any corporation controlled by the person, by a person’s partner, or by a partnership in which the person is a partner.
- Any director or principle officer of any such corporation listed above;
If the Hong Kong entity is “a corporation”:
- A corporate company; i.e:
- A corporation over which the Hong Kong entity has control
- A corporation that has control over the Hong Kong entity; or
- A corporation under the same control as the Hong Kong entity
- A person who controls a corporate company and any partner of that person, and, where either that person is a natural person, any relative of that person;
- A director or principal officer of that company or corporate company of that company; and any relative of any such director or officer;
- Any partner of the company and, where such partner is a natural person, any relative of such partner;
If the Hong Kong entity is “a partnership”:
- Any partner of the partnership and where such partner is a partnership any partner of that partnership, any partner with the partnership in any other partnership and where such partner is a partnership any partner of that partnership and where any partner of, or with, or in any of the partnerships mentioned in this sub-paragraph is a natural person, any relative of such partner;
- Any corporation controlled by the partnership or by any partner thereof or, where such a partner is a natural person, any relative of such partner;
- Any corporation of which any partner is a director or principal officer;
- Any director or principal officer of a corporation referred to in sub-paragraph two;
(The listed information above is referenced from section 15 (3) of the Inland Revenue Ordinance of Hong Kong. You can find out more in detail through this link)
b. Entertainer or Sportsman Payment
In regard to WHT for entertainers or sportsmen, this type of WHT is also varied. The payment is depended on whom the non-resident entertainers or sportsmen made their agreement directly with (individuals or through a corporate agent or a corporation). The WHT responsibility of non-resident entertainers or sportsmen is calculated based on the gross amount received less deductible expenses and subject to the aforementioned tax rate.
However, the Hong Kong taxpayer should retain a certain portion of the gross sum payable to ensure that there will be sufficient amount for tax payment as guided below:
- If the performance is obtained directly with the entertainer/sportsman: withholding rate is at 10%
- If the performance is obtained through a non-resident agent who is
- an individual person or a partnership: withholding rate at 10%
- a corporate agent or a corporation: withholding rate at 11%
4. DTA to reduce withholding tax
With the main purpose to seek and avoid the Double Taxation of income, as well as adjust the tax rights between Hong Kong and other jurisdictions, Hong Kong has concluded over 40 Comprehensive DTAs (Double Tax Agreements) under which residents of participating countries can enjoy tax relief and reduction for tax liability levied on the same type of income.
To sum up, the withheld tax amount is only applied to 2 types of payment: on royalties or license fees and payments paid to entertainers/sportsmen. Furthermore, to reduce the withholding tax, taxpayers can make use of available comprehensive DTAs that Hong Kong has signed with many other countries. Hopefully, this article brings you a good view and understanding of Hong Kong Withholding tax.
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