Hong Kong Tax: Hong Kong SAR Signs Comprehensive Double Taxation Agreements with U.K. and Ireland
The Hong Kong Special Administrative Region of the People's Republic of China ("Hong Kong") continues to expand its treaty network, having concluded comprehensive double taxation agreements (DTAs) with the U.K. (HK-UK DTA) on 21 June 2021 and with Ireland (HK-Ireland DTA) on 22 June 2010. To date, Hong Kong has signed a total of 13 double taxation agreements (the other double taxation agreements are with Austria, Belgium, Brunei, Hungary, Indonesia, Kuwait, Luxembourg, Netherlands, Thailand and Vietnam, plus the double taxation arrangement with Mainland China).
The DTAs will bring about tax savings and greater certainty regarding tax liabilities arising from cross-border economic activities and should encourage closer economic and trade links between Hong Kong and the two countries. With the double taxation agreements in place, U.K. and Irish resident companies will have an additional incentive to utilize Hong Kong as a gateway for investment into Mainland China, with the potential to enjoy the unique benefits under Hong Kong's double taxation arrangement with Mainland China. Similarly, companies in Hong Kong with ambitions to expand in Europe will be able to invest in Ireland and the U.K. and utilize their extensive tax treaty networks for other investments in Europe.
Double taxation agreements will come into force once the ratification procedures are completed by each jurisdiction. On the Hong Kong side, the Chief Executive in Council is required to make an order under the Inland Revenue Ordinance, which is subject to negative vetting by the Legislative Council.
Some of the main features of the two new double taxation agreements are as follows:
HK-UK double taxation agreement
- As is standard for a comprehensive double taxation agreement, the HK-UK double taxation agreement specifies that business profits of an enterprise of a contracting party will be taxable in the other contracting party only if the enterprise carries on business through a permanent establishment (PE) in the other contracting party. This will not have any substantial effect on the exposure of Hong Kong enterprises to U.K. taxation, since U.K. domestic tax law generally determines the taxation of nonresident enterprises based on a PE definition that is similar to that included in the HK-UK double taxation agreement. However, it will clarify the circumstances in which a U.K. enterprise will be subject to Hong Kong Profits Tax because the double taxation agreement's PE concept is narrower than the concept of "carrying on a trade, profession or business in Hong Kong," which is the basis for the charge to Profits Tax under Section 14 of the Inland Revenue Ordinance.
- Similar to the Hong Kong-Indonesia double taxation agreement, anti-abuse measures are included in the HK-UK double taxation agreement. In this case, the relevant tax authorities may refuse to grant relief under the dividend, interest, royalty and other income articles of the HK-UK double taxation agreement if "the main purpose or one of the main purposes" of the creation or assignment of the shares, debt claim or rights in respect of which the relevant income is paid is to take advantage of the HK-UK double taxation agreement. This wording is standard in recent U.K. double taxation agreements and it is the second time anti-abuse measures have been included in one of Hong Kong's double taxation agreements. However, unlike the Hong Kong-Indonesia double taxation agreement, the HK-UK double taxation agreement does not include an article permitting the contracting parties to apply their domestic anti-avoidance provisions to prevent the application of treaty benefits in treaty shopping structures. However, because "the main purpose or one of the main purposes" test is not defined under Hong Kong tax law, it remains to be seen how the Hong Kong Inland Revenue Department (IRD) would apply this test, although in practice such challenges are perhaps more likely from the U.K. tax authorities, given that the U.K. imposes withholding tax more commonly than Hong Kong under its domestic law.
- Although, under U.K. domestic rules, there generally is no withholding tax on dividends paid by a U.K. resident company, a 20% withholding tax applies to dividends paid to non-U.K. residents by U.K. Real Estate Investment Trusts (REITs). This rate will be reduced to 15% under the HK-UK double taxation agreement.
- Subject to certain conditions, which are primarily designed to ensure that the benefits of the interest article can flow only to beneficial owners of interest resident in Hong Kong and not to parties resident elsewhere (i.e. tocounter treaty shopping), the withholding tax rate for interest derived from the U.K. will be reduced from 20% (non-DTA rate) to 0%.
- The withholding tax rate for royalties will be capped at 3%, which is in line with Hong Kong's double taxation agreements signed with Austria, Ireland, Luxembourg and the Netherlands. The 3% rate will give rise to savings for U.K. residents and Hong Kong residents.
- For airlines and shipping corporations currently enjoying benefits under the existing limited double taxation agreements for airline income and shipping income, the HK-UK DTA will supersede the limited DTAs but maintain the same level of benefits.
- Income from U.K. employment derived by a Hong Kong resident will be exempt from tax in the U.K. provided the customary DTA conditions are satisfied, namely that:
. The recipient is present in the U.K. for a period or periods not exceeding 183 days in any 12-month period commencing or ending in the taxable period concerned;
. The remuneration is paid by, or on behalf of, an employer that is not a resident of the U.K.; and
. The remuneration is not borne by a PE the employer has in the U.K.
However, there is an additional requirement that the remuneration should be taxable in Hong Kong if it is to be exempt in the U.K. This may affect some individuals whose employment income is not taxable in Hong Kong under Hong Kong tax law (e.g. individuals claiming time apportionment on the portion of their income that is attributable to services rendered outside Hong Kong). In such a case, they will not be exempt from U.K. taxation under the HK-UK double taxation agreement.
HK-Ireland double taxation agreement
- As in the case of the HK-UK double taxation agreement, the business profits and PE articles of the HK-Ireland double taxation agreement will make clearer the circumstances in which an Irish enterprise will be subject to Hong Kong Profits Tax.
- The withholding tax rate for dividends derived from Ireland will be reduced from 20% (non-DTA rate) to 0%.
- Where the domestic exemptions do not apply, the Irish withholding tax on interest paid to beneficial owners resident in Hong Kong will be generally reduced to 10%, compared to the non-DTA rate of 20%. Certain classes of enterprise will be exempt from withholding tax on interest under the HK-Ireland double taxation agreement. (In the case of the Hong Kong SAR, these are: the government; the Hong Kong Monetary Authority; a statutory body, institution or fund wholly or mainly owned or appointed by the government of the Hong Kong SAR as may be agreed from time to time between the competent authorities of the contracting parties; a bank or similar financial institution; or an enterprise established to provide benefits under pension arrangements recognized for tax purposes in Hong Kong.) Withholding tax will also not apply to interest paid with respect to indebtedness arising from the sale on credit of equipment, merchandise or services or to interest paid by a bank or similar financial institution.
- Withholding tax on royalties will be capped at 3%. The 3% rate will give rise to savings for Irish residents and Hong Kong residents.
- The capital gains article has the effect that gains arising on the disposal of shares in a company deriving more than 50% of its value from immovable property in Ireland will continue to be taxable in Ireland, leaving the Irish domestic taxation of capital gains unchanged. Gains arising on the disposal of shares in other Irish companies generally would not be taxable for a Hong Kong resident under Irish domestic law, which is in line with the position taken in the HK-Ireland double taxation agreement.
- Unlike the HK-UK double taxation agreement, the HK-Ireland double taxation agreement does not include specific anti-abuse provisions. However, the dividend, interest and royalty articles all require claimants to be the beneficial owner of the income in question, so it will be open to the tax authorities to challenge claims under the HK-Ireland double taxation agreement where the claimant is not the true beneficial owner.
Exchange of information (EOI)
Earlier this year, Hong Kong passed legislation (effective 12 March 2022) to enable it to adopt the more liberal version of the OECD's model EOI article. Previously, Hong Kong tax law did not permit the IRD to collect tax information in which it had no domestic tax interest, nor to exchange such information with another jurisdiction. This was an obstacle to Hong Kong negotiating comprehensive double taxation agreements with other jurisdictions that required the updated 2004 version of the OECD standard EOI article to be included in their double taxation agreements. Following the necessary legislative changes, Hong Kong has been able to negotiate more double taxation agreements and support the international effort in enhancing tax transparency. Both the HK-UK double taxation agreement and the HK-Ireland double taxation agreement adopt the updated EOI standard, which makes it clear that a jurisdiction cannot refuse a request for information solely because it has no domestic tax interest in the information or solely because the information is held by a bank or other financial institution.
Where information is exchanged under the double taxation agreements, it will be subject to strict confidentiality rules. The double taxation agreements specifically provide that information communicated will be treated as secret and that it can be used only for the purposes provided for in the agreements. The Hong Kong IRD issued Departmental Interpretation and Practice Notes No. 47 on 9 June 2021 to explain the safeguards to protect taxpayers' confidentiality and privacy rights, and its administrative practice in relation to EOI with treaty partners.
Comparison of the tax treatment of dividends, interest and royalties under Hong Kong's DTAs with key European holding jurisdictions
Withholding tax rates (%)
Dividends Interest Royalties
HK Non-DTA rate 0 0 4.95 
UK Non-DTA rate 0  20  20 
HK-UK DTA rate 0  0 3
Ireland Non-DTA rate 20  20  20 
HK-Ireland DTA rate 0 10 3
HK-Belgium DTA rate 0/5/15  10 5
HK-Lux DTA rate 0/10  0 3
HK-NL DTA rate 0/10  0 3
1 The 4.95% rate applies provided (a) the royalty is not paid to a related party, or (b) if paid to a related party, the licensed intellectual property has never been owned in whole or in part by a person carrying on business in Hong Kong.
2 As discussed, the U.K. continues to impose a 20% withholding tax rate on dividends paid to non-U.K. residents by U.K. REITs despite the general domestic exemption for dividends.
3 An exemption applies if the interest is paid to a related company within the EU in accordance with the EC Interest and Royalties Directive.
4 An exemption applies if the royalties are paid to a related company within the EU in accordance with the EC Interest and Royalties Directive.
5 The DTA will reduce to 15% the 20% withholding tax on dividends paid by U.K. REITs.
6 Dividends paid to a nonresident company are generally subject to a 20% withholding tax unless the rate is reduced under a treaty; domestic exemptions are available where dividends are paid to residents of an EU Member State or a double taxation agreement country, or paid to a nonresident company where 75% of the shares are held directly or indirectly by a company listed on a recognized stock exchange.
7 Interest is generally subject to a 20% withholding tax in Ireland. An exemption applies if interest is paid to a tax resident company in an EU country or a country that has signed a double taxation agreement with Ireland, the interest is not paid to the company in connection with a trade or business carried out in Ireland and that country generally imposes tax on such interest receivable from sources outside that country. An exemption also applies if the interest is paid to a related company within the EU in accordance with the EC Interest and Royalties Directive.
8 A 20% withholding tax is imposed on patent royalties and annual payments paid to nonresident companies. Other types of royalties are not subject to withholding tax. An exemption applies if all of the following conditions are satisfied:
(a) the royalties are paid to a company resident in the EU or a country that has signed a double taxation agreement with Ireland; (b) it is not paid in connection with a trade or business carried out in Ireland; (c) it is paid for bone fide commercial reasons; and (d) the country in which the recipient is resident generally imposes a tax on royalties received from sources outside that country. An exemption also applies if the royalties are paid to a related company within the EU in accordance with the EC Interest and Royalties Directive.
9 No withholding tax is levied if the beneficial owner of the dividends is a company that is resident in Hong Kong and at the time the dividends are paid holds, for an uninterrupted period of at least 12 months, shares representing directly at least 25% of the capital of the payer company. A 10% holding results in a maximum source tax of 5%. In all other cases, the upper limit of source tax will be 15% of the gross dividends. Note, however, that Belgian domestic law provides for a withholding tax exemption for dividends distributed by a Belgian resident company to a parent company residing in a treaty country, provided the recipient holds (at the time the dividends are paid) for an uninterrupted period of at least 12 months, at least 10% of the capital of the Belgian subsidiary. Since Belgian domestic law provides a lower holding requirement for a withholding tax exemption than the double taxation agreement, it is possible for taxpayers to rely on Belgian domestic law rather than the double taxation agreement.
10 No withholding tax is levied if the beneficial owner of the dividends is a company that holds directly at least 10% of the capital of the company paying the dividends or a participation with an acquisition cost of at least EUR 1.2 million.
11 A 0% withholding tax rate applies to dividends received by a company that holds at least 10% of the share capital of the paying companies, provided that certain conditions are satisfied, such as the recipient is listed on a recognized stock exchange or is a subsidiary of a company that is listed on the recognized stock exchange and the listed parent company is a resident of Hong Kong or Netherlands or an EU Member State, as well as dividends received by banks and insurance companies, pension funds, headquarters companies and other qualifying entities. The rate in all other cases is 10%.
The new double taxation agreements will provide investors in the U.K. and Ireland with greater certainty as to their tax liabilities in connection with cross-border investments in Hong Kong and vice versa. Including the two new double taxation agreements, Hong Kong has now signed nine double taxation agreements (the others being with Austria, Brunei, Hungary, Indonesia, Kuwait, the Netherlands and Mainland China) using the OECD's updated 2004 EOI standard and is close to achieving the goal of signing at least 12 such double taxation agreements, which will enable it to refute any suggestion that it is a non-cooperative jurisdiction. At the time of writing this article, negotiations have been completed with other jurisdictions, including France, Japan, Liechtenstein and Switzerland, and these double taxation agreement are pending signature by the relevant governments.