Under Hong Kong’s territorial taxation principle, resident and nonresident companies are treated alike, facing tax responsibilities for income sourced in Hong Kong. When a Hong Kong entity remits funds to a non-resident enterprise or person as payment for services provided in Hong Kong, the law requires that a percentage of the amount be withheld and paid to the Inland Revenue Department. Hong Kong withholding tax only applies to nonresident companies and individuals. Part of the purpose of Hong Kong’s withholding tax laws is to address the use of controlled foreign companies to circumvent Hong Kong profits tax since Hong Kong companies do not pay local taxes on foreign sourced income.
Who has to pay withholding tax in Hong Kong?
Non resident individuals and companies that earn income from Hong Kong entities for services provided in Hong Kong are charged withholding tax. Non resident individuals are defined as persons who have spent less than 180 days in the territory during the tax year. Non resident companies are defined as businesses where the executive management operates from overseas. Not all payments in Hong Kong face withholding tax requirements; interest and dividends from investments, deposits and shareholding are not subject to withholding tax in Hong Kong. Royalties and performance service fees, however, have to follow the withholding tax procedures.
Withholding tax for royalties
Royalties include payments for the use, distribution or exhibition of copyrighted materials (recorded music, books, films, marketing materials) patents and trademarks, and intellectual property.
Royalty payments to nonresident individuals who are affiliated with the payer face a withholding tax rate of 15%. Royalty payments to associate companies face a withholding tax rate of 16.5%, or a reduced rate of 4.95% if the intellectual Property has never been owned by any other business interests in Hong Kong.
Payments to unaffiliated nonresident individuals are subject to a 4.5% withholding tax rate. Payments to nonresident unassociated companies are taxed at 4.95%.
If a Hong Kong entity has ever held ownership over Intellectual Property that has been the subject of royalty payments to a nonresident company, the entirety of the royalty payment could be considered part of the Hong Kong company’s taxable income.
If the Hong Kong entity is a person, relatives, partners, partner’s relatives, controlled companies and their directors are all considered to be associated or affiliated with the Hong Kong entity for withholding tax purposes.
If the entity is a Hong Kong tax resident corporation, any associated corporation under the Hong Kong entity’s control or controls the Hong Kong entity is considered an associate company. Companies which share a controlling entity are also considered to be associated, and all such cases face the 16.5% withholding tax rate for payments. All individuals that have control over the company, as well as their relatives and partners, are considered to be affiliated with the company and payments made to such persons face the affiliated individual withholding tax rate of 15%.
In the case of partnerships, all partners, their relatives, companies under any such individual’s control and directors of such companies will be considered to be associates of the Hong Kong tax resident company making the payment.
Withholding tax for service fees
Fees paid to non-residents that provide performance services, including entertainers and athletes, are subject to withholding tax in Hong Kong. The rate is determined by the nature of the contract signed between the event organizer and the performer.
For direct agreements between the performer and organizer, the rate is set at 10%. Service fees payments in cases where the performance agreement was made through a nonresident third party face a withholding tax rate payment of 10% if the agent is an individual and 11% if the agent is a corporation.
Withholding taxes may be offset by double tax treaties if the jurisdiction has a double tax treaty with Hong Kong. Rates vary according to the treaty and country, but in most cases the rate is between 2.475 and 4.95%. Hong Kong already has double tax treaties with over 53 countries.
Here to help
Hong Kong remains one of the world’s premier tax efficient financial hubs, strategically positioned for business in Asia. Should you have any enquiries regarding taxation in Hong Kong or the ideal company set up strategy, our Hong Kong tax services can assess your liabilities and help you determine the ideal structuring and compliance strategy.