A Guide to Hong Kong’s Double Tax Treaties
Hong Kong boasts a thriving economy with a business-friendly tax regime, including its Double Tax Treaties, which has attracted many entrepreneurs and investors alike.
If you have a business registered in Hong Kong or overseas, chances are that you have heard about Hong Kong's Double Tax Treaties. What exactly are Hong Kong’s Double Tax Treaties?
Read on to find out more.
What Is Double Taxation?
Double taxation is commonly known as source-residence conflict. It happens when two countries impose a tax on the same taxpayer, and in this context, it refers to a business. In other words, the company’s income is being taxed twice, with the first source from the country where income is generated, and the second being the country of residence where payment is made. The second-mentioned is typically the home country, or where the business is from.
Through domestic tax laws or tax treaties with other countries to avoid double taxation, countries can offer different tax relief types.
Hong Kong adheres to the territoriality basis of taxation, which means that only earnings or sourced income in Hong Kong are accountable for taxes. The earnings attained from a jurisdiction outside of Hong Kong by a resident is not subject to taxation in Hong Kong.
What Is a Double Tax Treaty?
A Double Tax Treaty, also known as the Double Tax Agreement (DTA), is a bilateral agreement between two countries to avoid the double taxation of property and income. The DTA is one of the Hong Kong administrative region government’s initiatives to mitigate the exposure of Hong Kong residents and that of its DTA partner to double taxation. DTAs are a powerful way to control fiscal evasion and double taxation while strengthening relationships between Hong Kong and the foreign tax administrations. Currently, Hong Kong has entered into 45 tax treaties with different jurisdictions.
What Are the Benefits of the Double Tax Treaties?
Hong Kong residents and residents of the DTA partner to double taxation can take advantage of the Double Tax Treaties.
Additionally, the DTAs offer a variety of benefits including:
- Provide certainty to taxpayers regarding their taxing rights of the contracting parties
- Avoid double taxation arising from tax jurisdictions overlap
- Enable taxpayers to determine their potential tax liabilities in the foreign territory
- Establish jurisdictional authority or tax rules that apply to transaction trade
- Prevent tax evasion and avoidance from different sources of income streams between Hong Kong and the DTA partners
How To Relieve Double Taxation in Hong Kong?
Tax exemption
Income obtained from a foreign territory can be qualified for tax exemption in Hong Kong. The exemption amount may be a part of the foreign earnings or entirely exempted.
The exemption is not automatically granted but an approval process will be gone through after you submit the claim with your profits tax return.
Tax credit relief
The condition in avoiding double taxation in Hong Kong is to credit foreign tax against overseas earnings' domestic tax. To relieve double tax, the tax payable in the foreign territory (where earnings were generated) will have to be offset from the tax payable in the home country. Nonetheless, the tax credit is not applicable to tax payable in the foreign territory and is limited to the home country.
Foreign tax relief
To avoid double taxation where earnings are obtained from a foreign territory that has not entered a tax treaty with Hong Kong, one-way relief (e.g. an exemption of the income from salaries tax) may be available if a staff has been subjected to tax similar to salaries tax in a foreign country for services rendered in that country and the foreign tax has been made. Starting from 2018/19, foreign income tax relief is applicable for taxes paid for services rendered in a non-Comprehensive Double Taxation Agreements (CDTA) jurisdiction.
While this income exemption applies to both Hong Kong and non-Hong Kong, the exemption may not be applicable since only the income gained from services delivered in Hong Kong is taxable.
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