Is Dividend Income Taxable in Hong Kong?

Dividends are parts of a company's profits that it gives to its shareholders and are not considered part of your taxable income in Hong Kong. 

When you buy stocks in a company, you become a shareholder, which means you own a small part of the company. 

As a shareholder, you are entitled to receive these payouts, which are called dividends. 

Dividends can be issued quarterly, annually, or at the company's discretion. 

Getting dividends is a nice way to make extra money from your investments.

You don't have to do anything special to earn these payouts once you own the stocks. 

This is why dividends are considered a form of passive income. But with any income, there's the question of taxes.

So, the big question is: Is the dividend income subject to tax in Hong Kong?

Read more for the answer!

What is Hong Kong's Tax System on Dividends?

Hong Kong is an excellent place for investors who want to earn money from dividends because of its unique tax system and the way it treats dividends.

Tax Regulations on Investment Income

Hong Kong has a territorial tax system. This means that the government taxes only income earned within Hong Kong, such as business income.

If you receive dividends from companies outside of Hong Kong, you generally do not have to pay any Hong Kong taxes on that income.

This is true whether you live in Hong Kong or not.

Because of this, you can invest in many different dividend-paying companies worldwide without worrying about extra taxes from Hong Kong.

Tax Treatment of Interest Income

Interest income earned in Hong Kong is typically not taxed, similar to dividends.

This exemption applies to interest earned on deposits held with banks and other financial institutions in Hong Kong.

Tax Exemption

In Hong Kong, dividends received as a shareholder are usually exempt from tax liability, significantly reducing your tax burden because, unlike income subject to salaries tax, dividends are not included in your net chargeable income for tax purposes.

This applies to everyone, both people living in Hong Kong and those who don't.

Whether the dividends come from companies based in Hong Kong or from foreign companies, you typically don’t have to pay taxes on them.

However, the Hong Kong company that pays the dividends must have already paid taxes on its profits.

This rule helps make Hong Kong an attractive place for both companies and investors.

Withholding Taxes on Foreign Dividends

Some countries impose withholding taxes on dividends paid to foreign investors. In this scenario, the company paying the dividend withholds a portion of the dividend income to remit to the source country's tax authorities.

Profits Tax and Dividends

To prevent the same money from being taxed twice, Hong Kong companies pay tax on their profits before they give out dividends.

This is known as profits tax.

Since the company's profits have already been taxed, the dividends you receive from those profits are not taxed again.

This system ensures that investors are not taxed twice on the same money, making investing in dividend-paying stocks in Hong Kong more appealing.

Hong Kong's territorial tax system and favorable treatment of dividends make it a great place for dividend investors. 

You can invest in companies around the world without worrying about extra taxes on your dividend income, and the dividends you receive are generally not taxed in Hong Kong.

This makes Hong Kong an attractive destination for both companies and investors seeking to maximize their returns.

Note that if your company operates from Hong Kong as an offshore company (meaning with no local business conducted in Hong Kong), then (i) its profits, and (ii) the dividends it distributes are not subject to tax in Hong Kong. 

What are the Exceptions to Non-Taxable Dividends in Hong Kong?

While most dividends received by individual investors in Hong Kong are not taxed, there are a few key exceptions to be aware of.

Do I Need to Pay Tax on Dividends from a Hong Kong Company?

Hong Kong's tax system prevents dividends from being taxed twice for most people, whether they live in Hong Kong or not. This means that if a company has already paid taxes on its profits, its dividends are usually not taxed again. However, it is important to be aware of possible exceptions and other tax issues.

Foreign-Sourced Income Exemption (FSIE)

Starting January 1, 2023, changes were made to the FSIE rules.

These changes mean that some dividends received from foreign companies within a Multinational Enterprise (MNE) group might be taxed in Hong Kong.

This situation is specific and generally does not affect individual investors or standalone local companies.

Double Taxation Agreements (DTAs)

Hong Kong has agreements with various countries to prevent the same income from being taxed twice.

These agreements can affect the tax treatment of foreign dividends received in Hong Kong.

Double taxation agreements help by allocating the right to tax between countries.

For example, a DTA might reduce or eliminate foreign withholding tax on dividends. However, it does not mean that these dividends will be taxed in Hong Kong.

Instead, DTAs are designed to make sure investors do not pay tax on the same income in both countries.

While most dividends in Hong Kong are not taxed, it is important to be aware of specific situations where exceptions apply, such as changes to the FSIE for MNE groups and the impact of DTAs.

What are the Differences Between Capital Gains and Dividends?

The main difference between capital gains tax and dividend tax is the event that triggers the tax:

• Capital gains tax applies to the profit you make from selling an investment, and is typically realized when you sell the investment.
• Dividend tax applies to the income you receive from holding an investment. Dividend tax is paid on the income you receive throughout your ownership.

Capital Gains Tax

Capital gains tax is a tax on the profit you make when you sell an investment for more than you bought it for.

This could be stocks, bonds, real estate, or other investments.

To figure out your capital gain, subtract the original purchase price (including buying fees) from the selling price (minus selling fees).

The important thing to note is that Hong Kong does not currently have a capital gains tax.

This means that any profits you make from selling investments like stocks are generally not taxed in Hong Kong.

There are exceptions, such as if the profits are part of a business's disposal or options, but capital gains are not taxed for most individual investors.

Dividend Tax

Dividend tax is a tax on the income you receive from owning an investment.

This income is a portion of a company's profits distributed to its shareholders, called dividends. Dividends are usually paid out regularly, such as every three months or once a year.

The amount you receive depends on how many shares you own and the dividend amount declared by the company.

In Hong Kong, dividends received from local companies are not taxed.

The reason is that the company already pays a profits tax on its earnings before distributing dividends to shareholders. This system prevents the same income from being taxed twice.

Hong Kong's absence of capital gains tax and exemption for dividends from local companies makes it an attractive location for investors seeking to maximize their returns.

Ready to Invest in Hong Kong?

Hong Kong's tax system offers significant advantages for dividend investors.

With its territorial tax system and exemption for most dividends, you can invest globally and keep more of your returns.

Air Corporate can help you navigate the complexities of dividend investing and ensure you take full advantage of Hong Kong's favorable tax environment.

Contact us today to learn more about our services and how we can help you achieve your financial goals.