Double Tax Treaties in Hong Kong to Prevent Double Taxation
Double tax treaties in Hong Kong (and many other countries) is in place to prevent double taxation.
It is these double tax treaties that have helped Hong Kong strengthen its position as a global, thriving economic hub. Hong Kong’s double tax treaties have also helped to break down tax barriers and eliminate the obstruction of the cross-border flow of trade and investment.
Double Taxation Explained
Double taxation is what happens when a taxpayer has the same income tax twice by two separate jurisdictions. The taxpayer’s income gets taxed in the jurisdiction where the income is derived, and the jurisdiction where the income is received.
Double Tax Agreements Explained
Also known as a DTA, this agreement is a bilateral agreement which exists between two countries. A DTA general overrules the domestic law. The purpose of the agreement is to eliminate the double taxation which occurs on income. DTAs also exist for the main purpose of modifying the tax rights of these respective jurisdictions.
Among the benefits of Hong Kong’s Double Tax Treaty Agreements are:
- Outlines the rules for division of revenue between two countries with clarity.
- Outlines how taxes should be imposed in each jurisdiction.
- Allow the taxpayers to know what the potential limits of their tax liability in the country.
- Allows taxpayers to claim relief for taxes paid overseas.
- Helps to enhance the integrity of a country’s tax system.
- Helps prevent tax evasion through a framework for the exchange of information between revenue authorities.
Income tax relief from the DTA is applicable only to Hong Kong resident individuals if they are not simultaneously residents of the contracting countries. For corporations, DTA relief is available for Hong Kong incorporated companies and companies which are managed and controlled in Hong Kong.
A Hong Kong resident individual is referred to as:
- An individual who stays in Hong Kong for more than 180 days during the relevant year of assessment, or
- An individual who ordinarily resides in Hong Kong. For example, they must have a permanent home or habitual abode in Hong Kong.
A company is considered a resident in Hong Kong if they are:
- Incorporated in Hong Kong or
- Incorporate outside Hong Kong but is controlled and managed from within Hong Kong.
What Is Included in a Hong Kong Double Tax Agreement?
Specific terms of a DTA differ based on the specific terms outline from one country to another. There are, however, certain general aspects of a DTA which are typically outlined in such an agreement. These aspects include:
- The scope of the DTA
- The taxes that are covered by the DTA
- Defining the concept of Permanent Establishment (PE)
- Dividend income which can be taxed in the source country
- The interest which gets taxed
- The royalties
- Income of employment
- Directors’ fees
- Business profits
- Airline or shipping profits
- Government payments
- Tax credit
- Income from immovable property
- The right to tax gains
How Double Taxation in Hong Kong Is Relieved
Double Taxation relief methods are outlined in Hong Kong’s domestic tax laws or under the specific DTA itself. There are four methods in which double taxation can be relieved, and that is through:
- Tax credit relief
- Tax exemption
- Tax rate reduction
- Relief via deduction
Current Tax Treaties Covered in Hong Kong
With 40 concluded DTAs, Hong Kong’s current tax treaties cover the following categories:
- Comprehensive DTAs: Belgium, Mainland China, Luxembourg, Vietnam and Thailand
- Airline and Shipping Income DTAs: Sri Lanka and Singapore
- Airline Income Only DTAs: Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Korea, Kuwait, Laos, Macau SAR, Mainland of China, Maldives, Mauritius, Mexico, Netherlands, New Zealand, Norway, Russian Federation, Seychelles, Sweden, Switzerland and the United Kingdom.
- Shipping Income Only DTAs: Denmark, Germany, Netherlands, Norway, United Kingdom and USA.
- Tax Information Exchange DTAs: Denmark, Faroes, Greenland, Iceland, Norway, Sweden and USA.