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Tax Treaty Considerations for Expats in Hong Kong

Submitted: April 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Hong Kong, and intend bring money earned from them into Hong Kong during your stay. They also apply if you build up some investments in Hong Kong during your stay, and intend to leave them here after you have left Hong Kong. Hong Kong has a network of tax treaties in force with over 20 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in Hong Kong; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

  • property income
  • business profits
  • dividends
  • interest
  • royalties
  • capital gains
  • employment income
  • directors fees
  • income from sports and entertainment
  • state and private pensions, alimony and child support
  • money for the full-time education of students, and
  • income from teaching.

Hong Kong does not charge withholding tax on income from dividends or interest arising in Hong Kong and paid to resident or non-residents. Withholding tax on royalties paid to non-residents is generally 4.95%.

Hong Kong’s treaties with other countries generally restrict the amount of withholding tax those countries can charge Hong Kong residents to 10% on dividends and interest, and to between 5 and 10% on royalties.

There is a table showing the different tax rates by treaty country here.

For the complete rules and rates it is necessary to read the treaty itself. A link to each Hong Kong treaty in force can be found here in a table here. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document. Towards the end of the tax treaty are sections dealing with income from artistic or sporting activities, followed by the treatment of students and teachers. There is also usually a section of the treatment of pensions.

Prior to arriving in Hong Kong you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-Hong Kong country to one with a more favourable tax treaty, thus reducing the tax rate applied.

If your home country has a generally lower rate of tax than Hong Kong, you may be able to use the residency definitions in the treaty to show that you are still a tax-resident in your home country.

If your home country has a generally higher rate of tax than Hong Kong, you may benefit by becoming tax-resident in Hong Kong as early as possible. At the end of your stay in Hong Kong, you can also rearrange your affairs to ensure that any ongoing income from Hong Kong employment or investments is also taxed at the lowest rate possible in the future.

 

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