Understanding Hong Kong Withholding Tax: Penalty for Default and More
Hong Kong Withholding Tax (WHT) is a specific tax that must be deducted and remitted to Hong Kong’s Inland Revenue Department (IRD). This tax applies exclusively to non-residents of Hong Kong.
As an individual, you are not required to be a tax expert, but understanding the key financial obligations is essential. Tax regulations, compliance, and responsibilities are three simple words that have a significant impact on your business journey.
Among these, withholding tax is a crucial concept that every Hong Kong business owner should be aware of. In this comprehensive blog, we will discuss the basic concept, who is liable to pay, tax rates, payment deadlines and more.
What is Hong Kong Withholding Tax?
Hong Kong follows a territorial tax system, meaning that only profits derived from business activities conducted within Hong Kong are subject to taxation. Under this system, both residents and non-residents are equally liable.
If a non-resident individual or company earns income from a Hong Kong source by providing services or products within the territory, they are liable to pay withholding tax HK.
When a Hong Kong-based company or individual makes certain payments to a non-resident entity for services rendered within the city, a portion of the payment must be withheld and remitted to the Inland Revenue Department (IRD).
Who is Subjected to Withholding Tax (WHT) in Hong Kong?
Withholding tax in Hong Kong applies exclusively to non-resident individuals or entities. This tax is levied on non-residents for any services or work they perform within Hong Kong.
You must have to fulfill the following terms to qualify as a non-resident,
- In a tax year, individuals must not reside or work in Hong Kong for more than 180 days.
- Companies that have control and central management or incorporation outside Hong Kong are non-residents.
The responsibility for withholding the tax lies with the Hong Kong taxpayer, which means:
- Businesses in Hong Kong: Companies that operate in Hong Kong fall under the same obligation when making payments to eligible non-residents.
- Residents of Hong Kong: Any business or individual based in Hong Kong that makes a qualifying payment to a non-resident is required to withhold the relevant tax.
Which Payments Are Liable for Withholding Taxes?
In Hong Kong, withholding tax is levied on royalties and licensing fees paid to non-resident sportspeople and entertainers for services rendered within Hong Kong. However, the Hong Kong withholding tax on dividends or interest payments is zero.
Royalty Payments
Any royalty payments made to non-residents for the use of intellectual property, both within and outside of Hong Kong, are subject to Hong Kong withholding tax. Examples of royalty withholding tax HK:
- Related promotional materials used in Hong Kong.
- Intellectual property such as performers' rights, trademarks, designs, patents, copyrights, or formulas.
- Royalties paid for the use of sound recordings are also subject to withholding tax.
- The exhibition or use of films, television shows, or tapes.
- Knowledge or information regarding intellectual property, both inside and outside of Hong Kong.
Payments to Entertainers and Sportspeople
Under the Inland Revenue Ordinance, the term “entertainer” or “sportsperson” refers to an individual (excluding corporations) who performs, either solo or as part of a group, in their role as an entertainer or athlete, in any form of entertainment or sport.
Such performances may include:
- Events that are publicly visible or audible, whether or not there is a fee.
- Activities that are either recorded or live.
Examples of payments made to sportspeople and entertainers include:
- Participation in videos, sound recordings, radio broadcasts, films, and television transmissions.
- Performances at commercial events or other occasions held in Hong Kong.
HK Withholding Tax Rates
For different payment categories, these are the Hong Kong withholding tax rates:
| Category | Payment Type | Rate |
|---|---|---|
| Entertainers or Sportsmen | Via non-resident company agents | 11% |
| Royalty Payments | Non-resident companies (associates) | 16.5% |
| Entertainers or Sportsmen | Via a non-resident individual or partnership agent | 10% |
| Royalty Payments | Non-residents who are not associates | 4.5% |
| Royalty Payments | Companies that are non-resident and unaffiliated | 4.95% |
| Interest and dividend tax in Hong Kong | Not Applicable | Not Applicable |
| Royalty Payments | Non-resident associates | 15% |
| Entertainers or Sportsmen | Directly with non-resident sportsmen or entertainers | 10% |
What is the Deadline for Filing Withholding Tax Returns in Hong Kong?
The deadline for submitting withholding tax returns in Hong Kong is typically within one month from the tax return issuance date. However, certain extensions may apply under specific circumstances.
● Regular Filing Deadline
In general, companies have to file their Profits Tax return, along with any necessary supplementary forms and other relevant documents, within one month from the issuance date of the tax return.
● Extension for Electronic Filing
Upon request, an additional one-month extension beyond the standard due date is granted for tax returns filed electronically.
● Specific Extension Scenarios
In 2023, the Inland Revenue Department (IRD) granted an extension for filing 2022/23 Profits Tax returns, allowing taxpayers with an accounting period ending between December 1, 2022, and December 31, 2022, to submit their returns between August 15 and August 29.
Consequences of Not Filing/Late Filing Withholding Tax Returns in Hong Kong
Failure to file or filing withholding tax returns late in Hong Kong can result in penalties and potential legal actions such as:
● Penalties
If the withholding tax is not properly withheld or the reporting obligations are not met, penalties and even prosecution may follow.
The Hong Kong payer is responsible for ensuring that all tax filing requirements are fulfilled and taxes are paid on behalf of non-residents. Neglecting these responsibilities can lead to the payer being held accountable for penalties and/or prosecution as if the tax were their own.
● Recovery Actions
If the tax remains due, it will default, and the full amount of the outstanding tax becomes immediately recoverable.
The Commissioner of Inland Revenue has the authority to initiate recovery measures, which may include imposing a 5% surcharge on the unpaid tax, sending recovery notices to third parties, and pursuing legal action.
Hong Kong withholding tax applies solely to royalty payments and payments given to entertainers or sportspeople. However, with the recent signing of more than 40 double taxation treaties, businesses and individuals can potentially benefit from reduced withholding tax rates, making Hong Kong an attractive destination for international transactions.
If you are looking for help with HK withholding tax, you can contact our specialists. At Gryffin Capitalist, we can help you with Hong Kong offshore company formation, bookkeeping and accounting, bank account opening, and more.
Frequently Asked Questions (FAQs)
What is the withholding tax in Hong Kong?
Withholding tax in Hong Kong applies to non-residents and varies based on the type of payment. The tax rates range from 4.5% to 16.5%.
What is the HK withholding tax calculation?
The domestic withholding tax (WHT) rate on royalty income in Hong Kong ranges from 2.475% for assessable profits of HKD 2 million or less, and 4.95% for profits exceeding HKD 2 million. (The highest cap is 4%, as per applicable tax treaties)
What is the royalty withholding tax in Hong Kong?
In Hong Kong, royalty withholding tax rates differ depending on the recipient's residency and relationship with the payer. For non-resident companies, the rate is 16.5% if they are affiliated with the payer and 4.95% if they are not. For non-resident individuals, the rate is 15% for affiliates and 4.5% for non-affiliates.
What is the regular filing deadline for Hong Kong Withholding Tax?
Hong Kong withholding tax must be filed within one month from the issuance date of the tax return.
What are the recovery actions taken for failing to file the HK withholding tax returns?
In case of a failure to file the tax returns, the Commissioner of Inland Revenue may initiate recovery measures, which may include imposing a 5% surcharge on the unpaid tax, sending recovery notices to third parties, and pursuing legal action.
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