Withholding Tax: An Overview
Withholding tax, often referred to as retention tax, is a system governments use to collect income tax at source. This mechanism obliges the payer of income to withhold a portion of it and remit it directly to the tax authorities. In Hong Kong, like many other jurisdictions, withholding tax plays a crucial role in the taxation of various types of income and cross-border transactions.
Hong Kong operates under a territorial taxation system, which means it generally does not impose withholding tax within its jurisdiction. However, there are essential distinctions between residents and non-residents regarding taxing income derived from Hong Kong sources.
Non-Residents’ Tax Liability
Non-residents, whether individuals or companies, receiving income from Hong Kong sources are subject to taxation. Taxes are levied based on profits from trade, professions, or business activities within the country. Hong Kong has double tax treaties with over 30 countries to prevent double taxation, each with specific conditions for withholding tax agreements.
Understanding Withholding Tax
Withholding tax in Hong Kong applies exclusively to non-resident individuals or companies. It is imposed on payments for services or work conducted within Hong Kong. Non-resident individuals have lived and worked in Hong Kong for less than 180 days in a tax year. Not all payments are subject to withholding taxes; for example, dividends and interest are exempt.
Royalty Payments and Withholding Tax Rates
Royalty payments encompass various forms of intellectual property used in Hong Kong, including films, sound recordings, patents, designs, trademarks, and copyrighted material. The withholding tax rate on royalties depends on the affiliation of the non-resident entity with a Hong Kong company. Payments to non-resident companies associated with a Hong Kong entity are taxed at 16.5%, while those not associated are taxed at 4.95%. The rates for non-resident individuals are 15% for affiliated individuals and 4.5% for non-affiliated individuals.
Defining “Associates”
In Hong Kong, “associates” can be natural persons or corporations. Natural person associates include partners, relatives, partner’s relatives, directors, or principal officers of controlled corporations, and corporations controlled by a person. Corporate associates are entities controlled by individuals or other corporations, partners, directors, or principal officers of a controlled corporation, relatives of partners, or corporations with directors or principal officers who are partners in a Hong Kong partnership.
Withholding Tax on Non-Resident Entertainers or Sportsmen
Hong Kong imposes withholding taxes on fees paid to non-resident sportsmen or entertainers for services performed at commercial events, in videos, films, sound recordings, television broadcasts, or radio transmissions in the city. The withholding tax rate varies depending on whether the agreement is made directly with the non-resident (10%) or through an agent (11%).
