Hong Kong tax authorities have gone through extensive ongoing efforts to eliminate double-taxation whenever it is feasible, which is evident by the myriad pieces of double-taxation relief legislation. These policies include domestic legislation providing unilateral relief, comprehensive double-taxation treaties, bilateral air services agreements, shipping income agreements, and advanced pricing arrangements.
Hong Kong relies on the territoriality basis of taxation, which stipulates that only income sourced within Hong Kong is subject to any kind of tax (profits or salary tax). This principle usually ensures that most individuals in Hong Kong do not suffer from double taxation.
Deduction on Hong Kong Income Taxed Overseas : Individuals and businesses subject to taxation overseas on their income in Hong Kong are permitted a deduction.
In spite of the low risk of double taxation in Hong Kong, the government has signed an extensive network of Comprehensive Double Taxation treaties due to the investor certainty and reduction of risk that they provide. Some of the benefits include the following:
For a full list of comprehensive double taxation treaties, see the website of the Inland Revenue Department. A list of comprehensive double taxation agreements currently being negotiated can be found here.
A comprehensive DTA usually covers the following provisions:
If you feel that you have not been given the appropriate relief from double taxation ensured by a Double Taxation Treaty, you may seek the assistance of the Hong Kong competent authority for the treaty. The Hong Kong competent authority is the Commissioner of Inland Revenue. This process is also known as the Mutual Agreement Procedure. The Hong Kong competent authority is responsible for the following issues:
The mutual agreement procedure happens in two stages:
Air services companies (such as passenger airlines, air freight, etc.) may be more vulnerable to double taxation due to the international nature of their businesses. Bilateral air services agreements have been established because they are much faster to negotiate and conclude than double taxation agreements. Hong Kong has concluded bilateral air services agreements with Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Kuwait, Laos, Macau SAR, Mainland of China, Maldives, Mauritius, Mexico, Netherlands, New Zealand, Norway, Russian Federation, Seychelles, South Korea, Sweden, Switzerland, and the United Kingdom.
Shipping businesses are at a particularly high risk of double taxation. Hong Kong’s legislation provides for reciprocal tax exception on shipping profits. Hong Kong has concluded shipping income agreements with Denmark, Germany, Norway, the Netherlands, the United Kingdom, and the USA.
Advanced pricing arrangements are another tool to help companies reduce the risk of double taxation. An advanced pricing arrangement is an agreement between a taxpaying company and the taxation authorities, in this case the Inland Revenue Department, regarding the transfer pricing methodology of a fixed schedule of transactions between related parties (e.g. a parent multinational corporation and its Hong Kong affiliate). They specify the following pieces of information:
The inland revenue department accepts applications for bilateral or multilateral APAs and requires annual reporting. In addition to acting as protection against double-taxation risk, they provide greater certainty of tax liability.
Tax information exchange agreements exist to promote international cooperation on tax matters and combat tax evasion. Many of Hong Kong’s double taxation agreements have exchange of information provisions written into them. Hong Kong has also signed a number of stand-alone tax information exchange agreements. They typically include the following provisions: