In the dynamic landscape of international finance and taxation, understanding Hong Kong tax treaties, or Double Taxation Agreements (DTAs), is paramount for both individuals and businesses.

DTAs offer a multitude of benefits, such as defining the tax rights of tax jurisdictions for transnational trade, clarifying tax liabilities abroad, solving tax disputes through mutual agreement procedures, granting of tax benefits and playing a pivotal role in preventing tax evasion and double taxation.

In this article, we explain DTAs, illustrating their significance and impact on fiscal responsibilities in Hong Kong.

What is Double Taxation?

Double taxation is when the same income is taxed in two jurisdictions: the source jurisdiction (where the income is earned) and the residence jurisdiction (where the taxpayer is resident in). It’s also called the “source-residence conflict”.

Hong Kong has a territorial source tax system, meaning businesses in general only need to pay taxes for the earnings arising in or derived from Hong Kong.

Double taxation may arise if a taxpayer is tax resident of a foreign tax jurisdiction and has income sourced in Hong Kong.

Please note that further to the introduction of the Foreign Sourced Income Exemption Regime (FSIE) in Hong Kong on 1 January 2023, foreign sourced passive income may also be subject to profits tax in Hong Kong, which may also result into double taxation.

Additionally, the HKSAR has entered into double tax treaties with several jurisdictions to avoid double taxation.

What is a Double Tax Agreement?

A DTA is a bilateral agreement between two countries, designed to, amongst others, prevent the same income from being taxed twice.

These agreements serve as a rulebook, overriding domestic laws and reshaping tax obligations to bring clarity and fairness to international economic activities.

Tax treaties like DTAs strengthen diplomatic and economic relationships between jurisdictions and are an effective way to curb tax evasion.

Who benefits from DTAs in Hong Kong?

DTAs primarily benefit Hong Kong resident individuals and corporations. By applying the relevant provisions in the DTAs, e.g. the tie-breaker rules, the tax residency of taxpayers with dual tax residency can be determined for the purpose of the application of the DTAs.

Individuals may simultaneously be tax residents of both Hong Kong and a foreign tax jurisdiction according to their respective local tax laws. For example, an individual is considered as “tax resident” in Hong Kong if he/she ordinarily resides in Hong Kong (e.g. having a permanent home or habitual abode) or has stayed in Hong Kong for more than 180 days during the relevant year of assessment or has stayed in Hong Kong for more than 300 days in two consecutive years, one of which is the relevant year of assessment concerned.

For corporations, they are regarded as tax resident in Hong Kong if they are incorporated in Hong Kong or they are incorporated outside of Hong Kong but normally controlled or managed from within Hong Kong.

What can be found in a Hong Kong tax treaty?

Each DTA that Hong Kong enters into, although unique, contains some common elements. They address the scope of the agreement, taxes covered, and the concept of Permanent Establishment (PE), which is pivotal in determining where business profits are taxed.

These treaties may cover income from employment, dividends, interest, royalties, business profits, director’s fees, and airline and shipping profits.

They also define the taxation rights on income from government payments, immovable property, and gains from the sale of shares.

Methods of double taxation relief

The way double taxation is relieved is either prescribed by a country’s domestic tax laws or the specific DTA. Generally, there are 3 main methods of double taxation relief:

1. Tax credit: Under the credit system a taxpayer’s foreign tax paid is credited against his domestic tax on the same income. In other words, the tax paid in the source jurisdiction is allowed to be deducted from the tax payable (on the same income) in the residence jurisdiction. This is usually the main method used.
2. Tax exemption: Full or partial exemption of domestic tax on foreign income.
3. Relief by deduction: Application of domestic tax on the foreign income after deducting foreign tax suffered.

Hong Kong tax treaties currently in force

Hong Kong’s commitment to fair taxation is evident in its extensive network of 45+ DTAs, which includes comprehensive agreements covering various types of income, as well as specific treaties for sectors like shipping and aviation.

See here the current list of Hong Kong DTAs in force.

HKWJ Tax Law can help

Understanding the impact and benefits of Hong Kong tax treaties is essential for anyone engaged in cross-border business or investment activities in Hong Kong. These agreements not only provide a safeguard against unfair tax burdens but also offer a clear and predictable framework for managing international tax liabilities.

Whether you are an individual navigating overseas income streams or a business entity expanding your global footprint, DTAs hold the key to efficient and compliant tax planning. However, the complexities and nuances of these agreements require a knowledgeable and experienced guide.

This is where our expertise comes into play. We invite you to reach out to our team of seasoned professional tax advisors for a comprehensive analysis of how DTAs can specifically benefit your unique situation.

Our bespoke tax consultation services are designed to provide you with solutions that align with your fiscal objectives, ensuring peace of mind and strategic advantage in your endeavors.