Navigating the intricacies of international taxation can be challenging. For businesses in Hong Kong, understanding how foreign tax credits work is important to optimise your tax obligations/benefits, especially when you have income sources from other countries and pay tax there.

Tax credit claim is applicable to both corporates and individuals in Hong Kong, In this article, we look into the concept of foreign tax credits in Hong Kong and its implications for corporate taxpayers.

What are foreign tax credits?

One of the methods of relieving double taxation on the same income charged in different tax jurisdictions is through tax credits.

Under the credit system a taxpayer’s foreign tax is credited against his domestic tax on the same income.

In other words, the tax paid in the source jurisdiction is allowed to be deducted from the tax payable (on the same income) in the residence jurisdiction.

Applicability

Foreign tax credits are in general available for jurisdictions that have entered into a Comprehensive Double Tax Agreement (CDTA) with Hong Kong.

CDTAs are bilateral agreements that provide relief from double tax to certain types of income as prescribed in such agreements. At the moment, Hong Kong has concluded CDTAs with 46 jurisdictions and is in negotiations with 17 jurisdictions.

Furthermore, for the credits to apply in Hong Kong, the income type must be the same in both jurisdictions. In addition, the taxpayer has to be satisfied as a Hong Kong tax resident pursuant to the relevant CDTA, and the tax concerned has already been paid in the relevant foreign tax jurisdiction.

Usually, the taxpayer is required to supply, amongst others, the relevant foreign income tax returns and tax payment receipts to the Hong Kong Inland Revenue Department (IRD) for the application for the tax credit.

Which type of income is eligible for tax credits?

The credit typically applies to income types covered by the CDTA, such as business profits, dividends, interest, and royalties.

Foreign taxes paid by a Hong Kong tax resident on specific foreign-sourced income, which is also chargeable to Hong Kong profits tax under the refined FSIE regime, can benefit from foreign tax credits in Hong Kong. This is true even if the foreign taxes come from a jurisdiction without a CDTA with Hong Kong SAR.

Taxpayers are required to take all reasonable steps to minimise the foreign tax payable before making a claim for tax credit in Hong Kong.

The foreign tax credit amount will be the lower of:

• The tax paid on that income in the foreign jurisdiction, or
• The tax charged in Hong Kong on that income.

This means that the foreign tax credit cannot exceed the amount of Hong Kong tax payable on the same income.

If a taxpayer claims a deduction for foreign tax paid in calculating the assessable profits in Hong Kong, they cannot also claim a foreign tax credit for the same tax.

Having said that, under the Hong Kong profits tax rules, tax deduction on foreign tax expenses is allowed only for those taxes paid on certain specified interests or gains in a foreign tax jurisdiction, with which Hong Kong has not entered into a double tax treaty. Moreover, if the foreign tax credit available in a year exceeds the Hong Kong tax payable for that year, the surplus credit cannot be carried forward to subsequent years.

Hong Kong tax incentives

Any available Hong Kong tax incentives can be enjoyed by both foreign and local Hong Kong companies.

Corporate tax incentives are available for several sectors (such as R&D) and come in different forms, for instance depreciation allowances, tax deductions and tax reductions.

While Hong Kong does not offer specific incentives targeting foreign investment, offshore funds might qualify for profits tax exemptions under certain conditions.

Tax Reserve Certificates in Hong Kong

In the context of Hong Kong’s taxation landscape, Tax Reserve Certificates (TRCs) serve as a unique tool for taxpayers.

When a taxpayer anticipates future tax liabilities but wishes to delay the immediate outlay, they can opt to purchase TRCs from the IRD. These certificates, essentially a form of deposit, not only help in setting aside funds for future tax payments but also earn interest over time. The interest is calculated based on prevailing rates set by the IRD.

Once the actual tax becomes due, the taxpayer can use the TRC, along with the accumulated interest, to settle their tax bill.

It’s a strategic way for businesses and individuals in Hong Kong to manage their tax payments while benefiting from the accrued interest.

HKWJ Tax Law can help

Understanding your tax obligations and potential credits can lead to significant savings. However, dealing with foreign income sources and international taxation can be complex. A tax professional can assist you with tax planning and ensure you are staying compliant with relevant regulations.

Our team at HKWJ Tax Law & Partners has years of expertise in guiding individuals and businesses through the intricacies of Hong Kong’s tax system.

If you need assistance, do not hesitate to get in touch regarding:

• Questions about foreign income sources.
• Clarity on your tax obligations.
• Eligibility for tax credit or other relief.
• Applying for tax credit/relief with the IRD.
• Other tax-related inquiries.

We are to provide guidance and answers so you are informed and confident in your financial decisions.

Reach out to us via the form below or email [email protected].