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How to avoid double taxation with IRD in Hong Kong

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When two jurisdictions tax their residents on worldwide income, it could be a case of double taxation.  Luckily, Hong Kong has signed Double Taxation Agreements (DTAs) with several countries and adopts the territoriality basis of taxation. This means tax accrues only on the income sourced in Hong Kong.  In most cases, profit sourced outside of Hong Kong by a resident is not subject to taxation. Tax treaties are a means to foster cooperation with other tax administrations and to prevent double taxation as well as fiscal evasion. 

As a local resident, you will be subjected to DTA rules in order to avoid double taxation in Hong Kong. This is meant to:

  • Reduce double taxation, which could result in the case of overlapping tax jurisdictions
  • Prevent tax evasion between Hong Kong and its DTA partners
  • Provide security about tax rules applicable to specific foreign transactions
  • Lay down rules that help resolve conflicting claims about a taxpayer’s residential status and income source
  • Provide a taxpayer with an opportunity to forward their concern to the relevant tax administration in the event of double taxation contrary to the terms of a DTA
  • Provide certainty for investors on their taxation rights

Additionally, investors are better able to assess their potential tax liabilities in Hong Kong. Overseas companies can conveniently do business in Hong Kong without worrying about double taxation. Alternatively, Hong Kong companies can freely do business overseas and not worry about being taxed twice.

Benefits of DTA

DTA is an initiative of the Hong Kong administrative region government to minimise the exposure of its residents and that of its DTA partner countries to double taxation. Commonly referred to as source-residence conflict, double taxation occurs when you are charged twice on the same profit or income.

 

When the rules for the division of revenue are clearly outlined between two jurisdictions, there is no risk of double taxation. DTA also lays down how the tax will be imposed, guiding taxpayers about the potential limits of tax liability. Taxpayers are eligible to claim relief for taxes already paid overseas. Not only does DTA prevent double taxation, but also tax evasion.

 

A Hong Kong resident, who is not the resident of the contracting country, is eligible to claim relief from income tax. Hong Kong incorporated companies to qualify for relief. Companies managed and controlled in Hong Kong can also claim relief from income tax.

 

A company incorporated in Hong Kong or managed and controlled from the special administrative jurisdiction of Hong Kong is considered a resident. Taxes on income and property are covered under the DTA.

How to relieve double tax in Hong Kong

Tax credit relief

 

When it comes to avoiding double taxation in Hong Kong, the criteria used is to credit foreign tax against the domestic tax on overseas income. This calls for the deduction of tax payable in the source jurisdiction from the tax payable in the residence jurisdiction on the same income. However, the tax credit does not extend to tax payable in the source jurisdiction and is limited to the residence jurisdiction.

 

Tax exemption

 

When you earn income in a foreign country, it is eligible for tax exemption in the residence jurisdiction.  The exemption may be given on the entire or part of the foreign income.

 

In most treaties signed by Hong Kong, residents can avoid double taxation by means of a tax credit.

 

Foreign tax relief

 

Hong Kong residents can enjoy tax relief on foreign income sourced in a jurisdiction that has signed a CDTA with Hong Kong.

 

Beginning 2018/19, foreign income tax relief is available where you have paid tax for services rendered in a non-CDTA jurisdiction. Before filing a claim for tax credit within the jurisdiction of Hong Kong, salaried taxpayers must take reasonable steps to minimise tax payable overseas on foreign income.

 

This income exemption is applicable to everyone, including Hong Kong and non-Hong Kong employment. However, in the case of overseas employment, such exemption may not be practically applicable as only the income earned from services delivered in Hong Kong is taxable.

IRD Amendment: How to avoid double taxation in Hong Kong

As per the new amendment, if you are a Hong Kong tax resident who has paid foreign tax on interest and gains in a DTA country, you are eligible for tax credit, not tax deduction.

 

Following the IRD amendment enactment (No. 6), tax on profits is not deductible, as it is not an expense on generating chargeable profits.

 

Hong Kong has signed 40 DTAs or bilateral agreements with Mainland of China, Thailand, Belgium, Luxembourg, and Vietnam.

Under the new legislation, a salaries taxpayer in Hong Kong, who is subject to foreign tax for services rendered in that country having a DTA signed with Hong Kong may be eligible for a tax credit for the amount of tax paid in that jurisdiction. However, it is not applicable to the unilateral income exclusion claim that omits the income for services rendered in a foreign land of which overseas tax has been paid.

 

That means you are eligible for the income exclusion claim only where overseas tax has been paid in a non-DTA jurisdiction for services rendered on that foreign land.

Next steps

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