Withholding Tax in Hong Kong
Withholding tax generally refers to income tax paid to the government by the payer of the income instead of the recipient of the income. As implied by its name, the tax is withheld or deducted from the payment made to the recipient.
Which Payments are Subject to Withholding Tax in Hong Kong?
- Royalty / licence fee made to a non-Hong Kong resident for the right to use or the use of certain intellectual properties in Hong Kong or if such payment is tax-deductible by the Hong Kong payer
- Sums made to a non-Hong Kong resident performer or organiser for an assignment of, or agreement to assign, a performer’s right in relation to a performance given by the performer in Hong Kong
- Final salary made to an employee who is about to depart from Hong Kong for good
- Remuneration made to a non-Hong Kong entertainer or sportsman for performance in Hong Kong
- Proceeds from the sales made on behalf of a non-Hong Kong resident in Hong Kong
How Much Tax Should Be Withheld?
|Type of payment||Withholding rate / amount|
|Royalty / licence fee||4.95% (corporation) / 4.5% (unincorporated business) Note|
|Sums for assignment of performer’s right||Actual assessable profits / A percentage of the amount as agreed with the Hong Kong Inland Revenue Department (“IRD”)|
|Salary to an employee who is about to depart from Hong Kong for good||The whole amount of final payment until a letter of release is issued by the IRD|
|Remuneration to non-Hong Kong entertainer or sportsman||10% if the procurement is directly from the entertainer or sportsman or an unincorporated agent / 11% if the procurement is from an incorporated agent|
|Proceeds of consignment sales||1% of the sale proceeds (a lesser amount may be acceptable by the IRD in practice)|
Note: There are anti-tax avoidance rules under which the rates will be increased to 16.5% for corporate and 15% for unincorporated under certain circumstances.
What are the Tax Reporting and Filing Obligations?
In addition to withholding the above-mentioned tax out of the payments made to a non-resident, a Hong Kong payer is also required to perform certain tax filing and reporting obligations with the IRD as follows.
|Type of payment||Tax return / form / letter to be filed||Deadline|
|Royalty / license fee||A notification letter informing chargeability Profits Tax Return – In Respect of Non-Resident Persons||Within 4 months from the end of the basis period for the relevant year of assessment2 months from issue date (further extension may be allowed)|
|Salary to a departing employee||Employer Return IR56G||At least 1 month before the expected departure date of an employee.|
|Remuneration paid to non-Hong Kong entertainer or sportsman||Form IR623||Immediately after the entertainer’s or sportsman’s arrival in Hong Kong|
|Proceeds from consignment sales||A notification letter informing chargeability Profits Tax Return of Sales of Goods received on Consignment BIR52B||Within 4 months from the end of the basis period for the relevant year of assessmentThe due date as specified in the BIR52B|
What are the Consequences for Failing to Withhold the Tax and Performing the Reporting and Filing Obligations?
For the above specified payments made to non-Hong Kong residents, the Hong Kong Inland Revenue Ordinance provides that the non-residents shall be chargeable to tax in the name of the person who pays or credits such sums to them. In other words, the Hong Kong payer shall be responsible for fulfilling all the required tax filing obligations and paying the taxes on behalf of the non-resident. Failure to do so may render him/her liable to penalty and/or prosecution in the same way as if it is his/her own tax liability.
An employer who fails to file the Employer’s Return IR56G and/or withhold the final salary payment for his / her employee who is about to leave Hong Kong for good may also be liable to penalty and/or prosecution.
Can the Withholding Tax Be Reduced?
The final tax payable by the non-resident may potentially be reduced in certain circumstances. Examples include:
- Hong Kong has entered into a double tax treaty (“DTA”) with the other jurisdiction which the royalty / license fee recipient is a tax resident, and such DTA provides a lower withholding tax rate for royalty / license fee.
- The non-resident is entitled to Hong Kong’s two-tiered profits tax rates regime under which the first HKD 2 million of assessable profits is subject to one-half of normal tax rate only.
- The actual amount of assessable profits of the non-resident can be ascertained and agreed by the IRD which results into a lower effective tax rate.
However, the reduction of a non-resident’s tax liability requires the filing of tax return and/or additional information, or further negotiation with the IRD. As the final outcome is uncertain, the statutory amount or the amount prescribed by the IRD should still be withheld at the time of making payments to a non-resident.