Double taxation relief

Double taxation means the same income is subject to tax of Hong Kong as well as to tax of a jurisdiction outside Hong Kong.

Double taxation relief is the relief granted to certain taxpayers suffering from double taxation. The relief is usually provided by the various Double Taxation Agreements signed by the HKSAR Government with other tax jurisdictions. Among them, the most important one concerning ordinary taxpayers is that made between Hong Kong and mainland China.

Hong Kong has entered into a number of Double Taxation Agreements with other tax jurisdictions. Because of the restrictive conditions of such agreements, more than 90% taxpayers do not benefit from such agreements. In fact, the taxpayers getting the tax relief under DTAs are mostly the big transportation companies, such as airline and ship corporations, with substantial operations in and out of Hong Kong. Generally speaking, the DTAs are of very little value to ordinary taxpayers, even though they have paid overseas tax.

Apart from the Double Taxation Relief, there are other tax relief or exemption under the Inland Revenue Ordinance which can, in most cases, offer greater tax benefits --- for example the Section 8(1A)(c) exemption to employment taxpayers, the offshore claim of profits and the deduction of mainland's / foreign tax to business taxpayers. Because of no double taxation relief, the application of other tax relief or exemption under the IRO make the Double Taxation Arrangement Relief useless to most ordinary taxpayers.

Application for tax credit under DTA must be made within 2 years after the end of the relevant year of assessment. On the other hand, as the IRO does not specify a time limit for Section 8(1A)(c) exemption, the time limit of Section 70A applies --- that is to say: a taxpayer can make a claim within 6 years after the end of the relevant year of assessment.

If you want to read the DT Agreement with mainland China, please visit IRD's homepage and read Departmental Interpretation and Practice Notes No. 29 and 32: by clicking [English] > [Publications] > [Departmental Interpretation and Practice Notes].

According to the mainland Agreement, tax credit is granted to two kinds of mainland's taxes: (a) Individual Income Tax and (b) Corporate Income Tax or Foreign Enterprises Income Tax --- if a taxpayer is a Hong Kong resident; and has paid the tax on the same income, he may apply for a tax credit to reduce his Hong Kong tax payable. In the event that the income is not taxable in Hong Kong, no tax credit will be granted.

Since Hong Kong adopts territorial taxation principle, the income derived from mainland is generally not taxable. On the other hand, the Mainland imposes tax on a person, including an enterprise, if he has a permanent establishment in mainland and derived profits attributable to that permanent establishment.. Therefore, in most cases, double taxation will not occur.

Nevertheless, a taxpayer should claim tax-credit under Double Taxation Agreement if all the following conditions are satisfied.

1. The taxpayer pays income tax of Hong Kong and mainland on the same income.

2. Where the taxpayer pays Salaries Tax, he is not entitled to Section 8(1A)(c) exemption or the tax reduction under Section 8(1A)(c) is less than that under tax-credit computation.

3. Where the taxpayer pays Profits Tax, the income attributable to mainland's operation is not excluded by the source principle or by the 50:50 apportionment.

The taxpayer should make the claim in his tax return and the IRD will compute the tax credit by a computer software.

Where a taxpayer is a Hong Kong resident as well as a mainland resident, he can enjoy the benefits of the Double Taxation Arrangements concerning the mainland's income tax. Briefly speaking, such benefits include: (a) only his income attributable to services rendered in the mainland is chargeable to Individual Income Tax and (b) he will be exempt from the Individual Income Tax if all the following conditions are satisfied.

The Hong Kong resident stays in China for a period or periods not exceeding in the aggregate of 183 days in the 12 months falling in the calendar year concerned; and
The income is paid by, or on behalf of, an employer who is not a resident of China; and
The income is not borne by a permanent establishment or a fixed base which the employer has in China.

The China's Individual Income Tax is computed on calendar year basis, that is from 1 January to 31 December. For counting of days, the day of departure or arrival is counted as a whole day respectively. If a person is required by the mainland tax authorities to prove his Hong Kong resident status, he needs a "Certificate of Hong Kong Resident Status". This certificate is issued by Hong Kong IRD upon application. To apply for the certificate, the person should first obtain a referral letter from the mainland tax authorities stating such requirement.

Working in China How does DTR apply to Profits Tax How does DTR affect Salaries Tax