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.
Here, we provide a rundown of tax relief options in Hong Kong so you can expand quickly, efficiently, and legally secure.
Advantages & Considerations of Registering a Company in Hong Kong
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.
Comprehensive Double Taxation Agreements (DTA) in Hong Kong
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:
- Taxation Rights Comprehensive DTAs help to promote investment relations between countries by giving investors greater clarity on their taxation rights when investing overseas. This encourages investment by reducing the risk profiles of potential investments between Hong Kong and the treaty partner.
- Tax Liabilities Comprehensive DTAs provide clarity regarding investors’ potential tax liabilities. This allows for better planning and, thus, helps to encourage investment.
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.
Provisions of Comprehensive DTAs
A comprehensive DTA usually covers the following provisions:
- Determining the Country of Source (The country of source is defined as the country of permanent establishment. The DTA defines how the country of permanent establishment is determined. This may rely on information such as the primary location of decision-making, operations, or other factors)
- Treatment of Income Tax (Corporate and Personal)
- Treatment of Dividends
- Treatment of Interest
- Treatment of Royalties
- Treatment of Airline Profits
- Treatment of Shipping Profits
- Treatment of Capital Gains
- Treatment of Government Payments
Hong Kong Competent Authority
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:
- Resolution of double-taxation issues
- Exchange of information
- Bilateral advance pricing arrangements
Mutual Agreement Procedure
The mutual agreement procedure happens in two stages:
- Presentation of Case: The Hong Kong competent authority will consider the legitimacy of the claim upon the presentation of the case.
- Joint Resolution: The competent authority of Hong Kong, together with the treaty partner’s competent authority will review and exchange position papers and possibly meet to negotiate the dispute. Upon the Competent Authorities’ agreement, you will be presented with the result. You will be asked of your approval or disapproval of the result. In the event of disapproval, the treaty partners’ competent authorities will table the dispute without an agreement.
Bilateral Air Services Agreements
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 Income Agreements
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 (APA)
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:
- Transactions covered by the arrangement
- The pre-approved transfer pricing method
- Compliance particulars
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.
Exchange of Information Agreements
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:
- Requirement of Hong Kong authorities to provide information upon the receipt of a request from the relevant counterparty within the government of a treaty partner (such as a tax bureau).
- Authorizes the exchange of information related to taxation covered by the agreement.
- Discloses information for any period of time following the ratification of the agreement.
- Provides for notice to be given to the counterparties prior to the exchange of information.