Double Taxation Agreements (DTAs) in Hong Kong

Double Taxation Agreements Explained

A Double Taxation Agreement (DTA) is a bilateral tax treaty between two jurisdictions that prevents income from being taxed twice—once in the source country and again in the country of residence. DTAs aim to:

• Define which country has taxation rights over specific types of income.
• Prevent double taxation on business profits, salaries, dividends, interest, and royalties.
• Encourage international trade and investment by reducing tax burdens.
• Establish mechanisms for resolving tax disputes between jurisdictions.
• Improve transparency and cooperation in tax matters between Hong Kong and treaty partners.

Hong Kong’s Extensive DTA Network

Hong Kong has signed comprehensive DTAs with over 50 countries, including major trade partners like Mainland China, Singapore, Japan, the UK, and France. Hong Kong’s double taxation agreement negotiations with several other jurisdictions are ongoing, expanding tax benefits for businesses and individuals operating internationally.

Below is a table summarizing the maximum withholding tax rates applicable to Hong Kong residents under the Comprehensive Double Taxation Agreements (DTAs) that Hong Kong has concluded with various countries/regions. The table includes the maximum tax rates for Dividends, Interest, Royalties, and Technical Fees.

Tax Categories Covered Under Hong Kong’s DTAs

DTAs define which country has the right to tax specific types of income. The double taxation agreement in Hong Kong concluded with specific countries only applies to an individual or business considered a Hong Kong tax resident. The main categories include:

Residency-Based Taxation

A taxpayer’s country of residence determines their tax obligations. You are considered an HK resident if you have a permanent home in Hong Kong or spend more than 180 days in the city during the tax year.

Hong Kong’s territorial tax system means only income earned within its borders is taxable. But DTAs clarify tax liabilities in cases where residency is split between jurisdictions.

Permanent Establishment (PE) Taxation

A Permanent Establishment (PE) refers to a fixed place of business in a country, such as an office, branch, or factory. Companies incorporated in Hong Kong or managed and controlled from Hong Kong fall under this category. Under a DTA, income is taxable in Hong Kong only if a foreign company has a substantial business presence in the city.

Taxable Income

DTAs determine where and how different types of income are taxed, ensuring fair treatment and avoiding double taxation.

• Business Profits: Taxed in the country where the business has a permanent establishment (PE). If a company does not have a PE in a treaty partner country, its profits are generally not taxable there.
• Dividends: Hong Kong does not impose withholding tax on dividends. However, suppose a Hong Kong business or individual receives dividends from a treaty country. In that case, DTAs may lower the foreign withholding tax rate, reducing overall tax costs.
• Interest Income: Interest payments are not taxed in Hong Kong, but some treaty countries impose withholding taxes. DTAs often provide reduced rates, making cross-border lending more tax-efficient.
• Royalties & Technical Fees: Payments for intellectual property (IP), technology, and services may qualify for lower withholding tax rates under DTAs, reducing tax costs for businesses receiving or paying these fees internationally.

One of the biggest advantages of a double taxation agreement in Hong Kong is the reduction of withholding tax rates on cross-border payments. Some common benefits include:

How DTAs Eliminate Double Taxation in Hong Kong

DTAs provide structured mechanisms to benefit individuals and businesses in Hong Kong operating across borders. These ensure that income is taxed fairly between jurisdictions and prevent excessive tax burdens.

• Tax Residency Rules: A key mechanism of DTAs is that they clarify where a person or business is considered a tax resident. If both jurisdictions claim tax residency, DTAs provide tie-breaker rules to determine the country with primary taxing rights. For instance, if a Hong Kong company operates in Germany and both jurisdictions claim taxation rights, the Hong Kong-Germany DTA establishes residency rules to prevent double taxation.
• Exclusive Taxing Rights: DTAs eliminate double taxation through exclusive taxing rights on certain types of income. In many cases, business profits are only taxed in the country where the company is resident unless it has a PE in the other country. For example, a Hong Kong trading firm selling goods to Australia without a PE would be taxed only in Hong Kong, as stipulated under the Hong Kong-Australia DTA.
• Tax Credits: The foreign tax paid in one jurisdiction can be credited against tax liabilities in another. Suppose a Hong Kong business earns royalties from the UK and pays a 10% tax there. In that case, the Hong Kong-UK DTA ensures that Hong Kong grants a foreign tax credit for the tax already paid, preventing double taxation.
• Reduced Withholding Tax Rates: DTAs significantly reduce withholding tax rates on cross-border payments such as dividends, interest, and royalties. Without a DTA, a Hong Kong investor receiving dividends from Japan might face a 20% withholding tax, but under the Japan-Hong Kong DTA, this could be reduced to 5%, making international investments more tax-efficient.

Practical Applications of DTAs in Hong Kong

DTAs are not just for tax experts—they can help businesses and individuals reduce taxes, avoid disputes, and follow tax rules more easily. Here are three key ways people can use DTAs in real-life situations:

International Transactions

Companies doing business across borders often sell goods or services to their branches in other countries. Tax authorities may question if the prices used in these transactions are fair, which can lead to disputes and double taxation.

To avoid this, businesses can set up an Advance Pricing Arrangement (APA) with the tax authorities in both Hong Kong and the other country. This agreement pre-approves pricing methods for these transactions, so there are no surprises or extra taxes later.

Example: A Hong Kong company sells products to its branch in Germany. By getting an APA, the company knows in advance how the tax authorities will treat these transactions, avoiding future tax disputes.

Tax Disputes

Suppose a company or individual is being taxed unfairly in both Hong Kong and another country. In that case, they can request help through the Mutual Agreement Procedure (MAP). This process allows the tax authorities from both places to negotiate and fix the issue so the person or company doesn't pay tax twice on the same income.

Example: A consultant who lives in Hong Kong but works in Japan is asked to pay taxes in both countries. By applying for MAP under the Hong Kong-Japan DTA, the tax authorities decide which country should tax the consultant, preventing double taxation.

Financial Transparency

DTAs also include Exchange of Information (EOI) rules, which allow tax authorities from different countries to share financial information when needed. That helps prevent tax evasion while still protecting privacy and confidentiality.

Example: If a Hong Kong business owner has a hidden bank account in a foreign country, the foreign country's tax authorities may report it to Hong Kong's Inland Revenue Department (IRD) under EOI rules. That ensures that the business owner is following tax laws properly.

How to File for DTA Benefits

To benefit from tax relief under a DTA, businesses and individuals in Hong Kong must follow specific filing procedures set by the Inland Revenue Department (IRD). These steps ensure eligibility and compliance with treaty provisions.

1. Obtain a Certificate of Resident Status (CoR)

Obtain a Certificate of Resident Status (CoR) from the IRD, confirming your Hong Kong tax residency. To apply, companies must submit Form IR1313A, while individuals file Form IR1313B. 

Supporting documents, such as tax filings, business registration certificates, and proof of Hong Kong-based operations, must be provided. If approved, the CoR is issued for one tax year and must be renewed annually if continued eligibility is required.

2. Apply for DTA Tax Relief

Once you get the CoR, the next step is to apply for tax relief in the foreign jurisdiction under the relevant DTA. You must submit the CoR and the required tax relief application forms for that country to the foreign tax authority. 

Additional documentation may be needed to verify eligibility, such as contracts, invoices, and tax payment records. The requirements vary depending on jurisdiction and the type of income being claimed for tax relief.

3. Claim Foreign Tax Credit (FTC) in Hong Kong

Suppose income earned abroad is taxed in both the foreign country and Hong Kong. In that case, taxpayers may apply for a Foreign Tax Credit (FTC) to prevent double taxation. 

FTC claims should be made when filing the Profits Tax Return (BIR51/BIR52) for businesses and Salaries Tax Return (BIR60). The claim should be clearly stated in the "Other Deductions" section of the return.

Supporting documents, including foreign tax assessments and payment receipts, must be submitted to the IRD. If approved, the foreign tax paid is credited against the taxpayer’s Hong Kong tax liability, reducing the overall tax burden.

4. Request for MAP

In cases where double taxation arises due to disputes between Hong Kong and another jurisdiction, taxpayers can seek resolution through the MAP. 

Submit a written request to the IRD explaining the nature of the tax dispute and providing copies of tax assessments from both jurisdictions. The IRD will then negotiate with the foreign tax authority to determine a fair resolution and eliminate double taxation.

Making the Most of Hong Kong’s DTA Benefits

Hong Kong's wide network of DTAs makes it an ideal place for businesses and entrepreneurs to manage their taxes efficiently and expand internationally. By understanding how DTAs work, companies can reduce tax costs, follow international tax rules, and avoid paying unnecessary taxes, ultimately increasing their profits.

If you're unsure how Hong Kong’s DTAs apply to your business, consulting an expert likeAir Corporate can help you handle tax obligations and benefits efficiently.