hong kong foreign tax credit
Income derived from renting out real properties by owners in Hong Kong is subject to property tax, which is charged at a standard rate of 15 percent of the property's net assessable value for the relevant year of assessment. the specified economic activities are carried out by the outsourced entity in Hong Kong; the MNE entity has exercised adequate monitoring and control on the carrying out of the specified economic activities by the outsourced entity; the outsourced entity is generally expected to charge the MNE entity a fee for the specified economic activities performed subject to the application of transfer pricing rules; the number of qualified employees employed and the amount of operating expenditure incurred by the outsourced entity in Hong Kong are commensurate with the level of specified economic activities carried out by the outsourced entity; and. A foreign tax credit is available to Hong Kong tax residents in respect of income derived from and taxable in a jurisdiction that has entered into a CDTA with Hong Kong SAR and the same income is subject to tax in Hong Kong SAR. Usually the starting point of the calculation will be the financial statements of the taxpayer adjusted in accordance with the tax legislation. The IRD will also provide examples to illustrate the meaning of holding and managing equity participations in its administrative guidance or the Departmental Interpretation and Practice Note (DIPN) to be issued. Readers may refer to the example of a transitional measure for tracking and tracing provided in Annex A of the BEPS Action 5 Report. Allrights reserved. If the foreign tax is chargeable for the taxable period in which the sum accrues, the applicable rate will be the corporate tax rate of the foreign jurisdiction applicable for that taxable period. In other words, unilateral tax credit will be provided when the income is received in Hong Kong. Please see www.pwc.com/structure for further details. The proportion of research and development (R&D) expenditures is a proxy for substantial economic activities. If the MNE entity fails all exceptions, specified foreign-sourced income will be subject to profits tax in the year of assessment in which such income is received by the MNE entity in Hong Kong (i.e. No withholding tax is levied on the distributing Hong Kong company. The Hong Kong Special Administrative Region (Hong Kong) adopts the territoriality basis of taxation, whereby only income / profit sourced in Hong Kong is subject to tax and that derived from a source outside Hong Kong by a local resident is in most cases not taxed in Hong Kong. A Hong Kong branch of a foreign corporation is treated the same way as a locally incorporated company and is subject to similar corporate and tax obligations as a resident company. You can apply for permanent residence under one of the . For foreign WHT paid on an income by a Hong Kong resident person in a DTA jurisdiction, despite no deduction is allowed, double tax relief may be available by means of a tax credit under the applicable DTA if the same income is subject to profits tax in Hong Kong. Conditions for the participation requirement. Dealing in OTC derivative products which means: entering into or offering to enter into an OTC derivative transaction; or, inducing or attempting to induce another person to enter into or to offer to enter into an OTC derivative transaction. To obtain tax certainty and reduce compliance burden, MNE entities are encouraged to apply to the Commissioner for advance rulings on their compliance with the economic substance requirement with effect from the coming into operation of the Amendment Ordinance on 1 January 2023. The loan interest was not received as a result of, or consequent upon, the insurance business carried on by the insurer in Hong Kong. By submitting your email address, you acknowledge that you have read the Privacy Statement and that you consent to our processing data in accordance with the Privacy Statement. the contractual rights and obligations normally created, and the commercial and financial relationships normally entered into, between independent persons under an arrangement of the kind in question. 571) (SFO) to carry on a business in any regulated activity as defined by Part 1 of Schedule 5 to that Ordinance. 528); or. The participation requirement provides an alternative to the economic substance requirement to facilitate an MNE entity which receives foreign-sourced dividend or disposal gain in Hong Kong to claim tax exemption. The loss may only be set off to the extent that the assessable profits concerned are derived from specified foreign-sourced income that is chargeable to profits tax under the new FSIE regime. The economic substance requirement allows an MNE entity to outsource some or all of its specified economic activities. Hong Kong does not tax capital gains. Under the 2-tiered profits tax rate regime (effective from April 1, 2018), the profits tax rate for the first HKD2 million of profits of corporations will be lowered to 8.25 percent; profits above that amount will continue to be subject to the normal tax rate of 16.5 percent. Find out more. "When employees file their income tax return in Canada, they could claim a credit," says Poitras. Stress in the banking sector will weigh on lending against real estate and is likely to delay the recovery. The Hong Kong government agrees to co-operate with and has committed to the EU to amend the Inland Revenue Ordinance by the end of 2022 and implement relevant measures in 2023 to support the combating of cross-border tax evasion. Although group companies in Hong Kong are, subject to certain exceptions, required to prepare consolidated financials for accounting purposes, Hong Kong does not allow groups of companies to file consolidated profits tax returns. The European Union announced in October 2021 the inclusion of Hong Kong in its watchlist on tax co-operation as it considered that the non-taxation of certain foreign sourced passive income (such as interest and royalties) in Hong Kong might lead to situations of "double non-taxation". Ad valorem stamp duty is payable for the transfers or sales of shares or immovable property in a reorganization (see Stamp duty). Taxpayers pay whichever is lower. Insurance business activities which generally include: providing client service in relation to insurance, investing income generated from (a) and (b) above to match assets and liabilities and honor future claims payment, Authorized institution within the meaning of the BO (i.e. Salaries tax is levied on net chargeable income (assessable income less personal deductions and allowances) at progressive rates ranging from 2% to 17%, or at a flat rate (maximum rate) of 15% on assessable income less personal deductions, whichever calculation produces the lower tax liability. report the amount of chargeable specified foreign-sourced income in the profits tax return and designated form for the year of assessment in which the income is received in Hong Kong; notify the Commissioner in writing that it is chargeable to profits tax within 4 months after the end of the basis period of the year of assessment during which the income is received in Hong Kong in case no profits tax return has been issued to it for the year of assessment concerned; notify the Commissioner in writing of the withdrawal, abandonment or refusal of a patent application made under Cap. 514 or under the law of any place outside Hong Kong is not chargeable to profits tax in a year of assessment due to the operation of the nexus requirement and the patent application is withdrawn, abandoned or refused in a subsequent year of assessment, the excepted portion of the income would be regarded as specified foreign-sourced income received in Hong Kong in that subsequent year of assessment and be chargeable to profits tax. A foreign-sourced disposal gain is charged to corporate income tax in Jurisdiction A at 10% under a preferential tax regime of Jurisdiction A. Definition of "pure equity holding entity" (PEHE) , Get the latest KPMG thought leadership directly to your individual personalized dashboard, Latest updates on the foreign-sourced income exemption regime in Hong Kong, Download a PDF version of this article Opens in a new window, View Print friendly version of this article Opens in a new window, Hong Kong Tax Alert - Issue 21, October 2022, Hong Kong Tax Alert - Issue 24, November 2022, https://www.gld.gov.hk/egazette/pdf/20222643/es32022264319.pdf, Legislative Council of the Hong Kong Special Administrative Region - Bills Committee (legco.gov.hk), https://www.legco.gov.hk/yr2022/english/bc/bc06/papers/bc06cb1-833-1-e.pdf. contractual rights and obligations created) and substance (i.e. The new rules regarding tax credit apply to tax payable for the year of assessment 2018/19 and thereafter. Generally, only: Any other item of income is exempt from tax. A foreign tax credit of up to 15% for any foreign tax withheld at source on property income (other than income from real property) is allowed, although the credit cannot exceed Canadian tax payable on the foreign income. Any tax credit allowed will be set off against the profits tax payable in respect of the specified foreign-sourced income concerned. A taxpayer could claim the entire $1,000 as a tax credit, which is a dollar-for-dollar reduction in taxes, and the . 32), the Limited Partnerships Ordinance (Cap. if $100 of income is earned by the H ong Kong branch of a U nited Kingdom company and $20 of withholding tax is levied, if credit relief of $20 were claimed in the U nited . Providing a financial accommodation in order to facilitate: the acquisition of securities listed on any stock market, whether a recognized stock market or any other stock market outside Hong Kong; and. 41), Lloyds or an approved association of underwriters; an authorized institution as defined by section 2(1) of the Banking Ordinance (Cap. The said rates apply on all assessable income with only a few exceptions. The purpose is to allow sufficient time for taxpayers to adapt to the tracking and tracing requirements while still complying with the general principles of the nexus approach. As the mode of operation of MNE entities varies from industry to industry, it is neither feasible nor appropriate to specify any minimum thresholds for determining whether the adequacy tests are satisfied for the purposes of economic substance requirement. Dividends distributed by a Hong Kong company to its shareholders are tax exempt. a U.S. 401(k) or 403(b) plan) or foreign retirement arrangements (e.g. whether office premises have been used for undertaking the specified economic activities and whether the premises are adequate for such activities. The dividend and interest were received as a result of, or consequent upon, the securities trading business carried on by the dealer in Hong Kong. Foreign taxes on wages, dividends, interest, and royalties generally qualify for the credit. There is no group loss relief (eg, loss consolidation, loss transfer) for taxpayers in group companies. Under the new FSIE regime, certain foreign-sourced income accrued to a member of an MNE group (MNE entity) carrying on a trade, profession or business in Hong Kong is to be regarded as arising in or derived from Hong Kong and chargeable to profits tax when it is received in Hong Kong. However, the CRA does not consider social security . 310); and the Companies Ordinance (Cap. November 13, 2012. 3 months) or with a period of call or notice of less than that period, other than any float or SVF deposit as defined bysection 2of the Payment Systems and Stored Value Facilities Ordinance (Cap. Foreign tax credit. The headline rate needs not to be the actual tax rate imposed on the income concerned. It's time to get ready for a calendar of key deadlines to add to your 2023 calendar! 155) (BO); or. Advising on OTC derivative products which means: giving advice on whether an OTC derivative transaction should be entered into, which transaction should be entered into, the time at which or the terms and conditions on which a transaction should be entered into; or, issuing analyses or reports, for the purpose of facilitating the recipients to make decisions on whether an OTC derivative transaction should be entered into, which transaction should be entered into, the time at which or the terms and conditions on which a transaction should be entered into, Providing services to another person for the clearing and settlement of OTC derivative transactions through a central counterparty (whether located in Hong Kong or elsewhere), whether or not as a member of the central counterparty, A person that is, or acts for, an MNE group or an entity included in an MNE group, A legal person (other than a natural person); or an arrangement that prepares separate financial accounts, such as a partnership and a trust, A group that includes at least one entity or permanent establishment that is not located or established in the jurisdiction of the ultimate parent entity of the group, the income is received in Hong Kong by an MNE entity carrying on a trade, profession or business in Hong Kong irrespective of its revenue or asset size; and. 2018/19 onwards). The HKSAR Government has agreed with the EU to adopt the headline rate approach. Save for specific exemptions, ad valorem stamp duty is levied on sale or transfer of real properties in Hong Kong at applicable rates depending on the type of immovable property being transferred. Income from real properties situated in Hong Kong can be subject to tax. For the purpose of ascertaining the R&D fraction in respect of a qualifying intellectual property to which the income relates, R&D expenditures (including capital expenditure) are classified as follows: As a transitional measure, an MNE entity is allowed to apply a ratio where qualifying expenditures and overall expenditures are calculated based on a 3-year rolling average. a DTA territory. the MNE entity has continuously held not less than 5% of equity interests in the investee entity concerned for a period of not less than 12 months immediately before the foreign-sourced dividend or disposal gain accrues. Error! Rather, the basis for taxation is whether or not a person carries on a trade, profession or business in Hong Kong. Hong Kong taxpayers are prompted to file tax returns. Please refer to the Taxes on corporate incomesection for other tax incentives that can be enjoyed by both foreign and Hong Kong companies. For foreign taxes payable/paid by a Hong Kong tax resident on specified foreign-sourced income deemed taxable under the refined FSIE regime, foreign tax credits are available irrespective of whether or not the foreign taxes are paid in a jurisdiction that has entered into a CDTA with Hong Kong SAR. In addition, residential property transactions in Hong Kong can attract ad valorem stamp duty, Buyer's Stamp Duty and Special Stamp Duty. The Amendment Ordinance provides for, among others, the following new requirements relating to double taxation relief: The above requirements apply in relation to tax payable for a year of assessment beginning on or after 1 April 2018 (i.e. means the non-qualifying expenditure incurred in respect of the same qualifying intellectual property. The headline rate of corporate income tax in Jurisdiction A is 20%. Your message was not sent. Any that portion of loss not so set off may be carried forward and set off, in accordance with section 19C of the IRO, against the assessable profits of the MNE entity in subsequent years of assessment. Dividends received by a Hong Kong company are not subject to tax, nor are dividends paid by a Hong Kong company to its shareholders, whether or not in Hong Kong. Under the proposals: Section 16 (1) (c) will be expanded to cover a wider range of overseas tax charged on a gross, withholding basis; NE does not include interest payments and payments for any land or buildings, or for any alteration, addition or extension to any building. On 1 January 2023, the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (the Amendment Ordinance), which amended the provisions in relation to the FSIE regime under the Inland Revenue Ordinance (Cap. Where Hong Kong has a double taxation arrangement with the other jurisdiction, a full credit for tax paid may be available in Hong Kong. the highest corporate tax rate) of the jurisdiction in which the specified foreign-sourced income, underlying profits or related downstream income is taxed. This temporary public policy for Hong Kong residents who are currently in Canada provides a pathway to permanent residence for eligible applicants and their families. The proposal is expected to become effective on 1 January 2023 with no grandfathering arrangement. In respect of the 2018/19 tax returns received on or after 1 January 2019, the above requirements have to be duly observed. The tax rates in Hong Kong are as follows: Net taxable income (2018/2019) Rate. A foreign-sourced disposal gain of HK$5 million is charged to corporate income tax in Jurisdiction A under a progressive rates regime. If the Commissioner is of the opinion that the main purpose, or one of the main purposes, of entering into an arrangement is to obtain a tax benefit in relation to a liability to pay profits tax, the participation exemption will not apply. The Agreement limits the . 6) Ordinance 2018 (the Amendment Ordinance) was enacted on 13 July 2018. Affected taxpayers should consider seeking professional advice to ensure they have fully utilized available reliefs in foreign jurisdictions before claiming tax credits in Hong Kong. disposal gain from the sale of equity interests in an entity (disposal gain). U.S. traditional IRA), without using or requiring RRSP contr. For more details on advance ruling, please click here. QE does not include interest payments, payments for any land or buildings, or for any alteration, addition or extension to any building and acquisition of intellectual property. Adjustments can be made for items of income for example, excluding offshore profits or items of deductions for example, adjusting amortization claims. Where a taxpayer carries on multiple trades, profession or businesses in Hong Kong, the losses in one can be utilized against the profits of the other. Hong Kong SAR does not have any specific incentives for foreign investment, except that offshore funds may be exempt from profits tax under certain circumstances. It has been applied by the OECD Forum on Harmful Tax Practices to evaluate the harmfulness of preferential tax regimes for IP income put in place by tax jurisdictions. For sale or transfer of immovable property in Hong Kong, ad valorem stamp duty at applicable rates is payable depending on the type of immovable property being transferred. Regardless of whether the employees are residents in Hong Kong, employers are not required to withhold tax for employees. An income-by-income basis (i.e. This seeks to ensure that there is a direct nexus between the income receiving benefits and the expenditures contributing to that income. The MNE entity remains responsible for ensuring accurate information is reported on its return, including precise details of the resources employed by the outsourced entity. there must be no double counting if the outsourced entity provides services to more than one MNE entity. Prevailing Regulation regarding Taxation of Foreign Income in Hong Kong After the transitional period of 3 years, the MNE entity would need transition from using the 3-year average to the R&D fraction. Hong Kong: Moldova: Sweden: Bangladesh: Hungary: Mongolia: Switzerland: Barbados: Iceland: Morocco: Taiwan: Belgium . The latest international tax standards require a taxpayer benefitting from a preferential tax treatment in a jurisdiction to have substantial economic presence in the jurisdiction, and to establish an explicit link between the relevant income and real activities in the jurisdiction. The R&D fraction is calculated in accordance with the following formula and capped at 100%. The R&D fraction is used to calculate the excepted portion of qualifying IP income received by an MNE entity, which is ascertained in accordance with the following formula: What is R&D expenditure for the purpose of ascertaining the R&D fraction. CDTA. 1 This Act may be cited as the Canada-Hong Kong Tax Agreement Act, 2013. For income derived from services rendered in a DTA territory, a taxpayer will be entitled to claim credit in respect of foreign tax payable on the income under section 50 of the IRO; The relief under section 8(1A)(c) or foreign tax credit granted under section 50 must not exceed the relief that would be allowed had the taxpayer taken reasonable steps to minimise his or her foreign tax liability under the laws of the foreign territory or the CDTA concerned; and. If you reside overseas in Hong Kong you may be able to qualify for the Foreign Earned Income Exclusion (FEIE), using IRS Form 2555. In this regard, foreign-sourced interest, dividend and disposal gain that are incidental to the entitys business refer to the income that accrues as a result of, or consequent upon, the relevant business. The regime is a special tax incentive for income derived from carrying out substantive activities in a special economic zone of Jurisdiction A. Revision of method of double taxation relief for individuals According to the Urban Land Institute Asia Pacific Centre for Housing, the median price of Singapore's private homes is $1.2 million, compared to $1.16 million in Hong Kong. Hong Kong enacts legislation to allow a tax deduction for foreign taxes charged on gross income basis | EY - Global Trending The Board Imperative: Is your people strategy human enough? the imparting of, or undertaking to impart, knowledge directly or indirectly connected with the use (whether in or outside Hong Kong) of the property. This headline rate need not be the actual tax rate imposed on the income or profits concerned. The FTC will be limited to the amount of Hong Kong profits tax attributable to the passive income . 10%) for foreign tax credit claim on the underlying profits out of which the dividends are paid is consistent with the threshold stipulated in Hong Kongs tax treaties with the Mainland and Vietnam, which are the only existing tax treaties allowing Hong Kong to provide tax credit in respect of underlying profits out of which dividends are paid. Hong Kong has a progressive tax rate, which is capped at 17% much lower than . sourced and not subject to Hong Kong. A mall in Hong Kong's premier shopping district of Tsim Sha Tsui rented three floors to a dining and entertainment group for almost $900,000 a month, the biggest lease by size . Effect of withdrawal, abandonment and refusal of patent application. If the employee's monthly relevant income falls under HKD7,100 (approximately USD915), their monthly contributions to MPF are not required, but the employer's contributions remain the same. Applications for the Commissioners opinion on compliance with economic substance requirement (i.e. A foreign-sourced dividend is charged to withholding tax in Jurisdiction A at 10%. Where Hong Kong has a double taxation arrangement with the other jurisdiction, a full credit for tax paid may be available in Hong Kong. Residence is generally not relevant for Hong Kong tax purposes. The relief under section 8(1A)(c) of the Inland Revenue Ordinance (Cap. 112) (IRO), came into operation. year of receipt). means the qualifying R&D expenditure incurred in respect of the qualifying intellectual property to which the qualifying IP income relates; and. In such case, Hong Kong would follow the common law tests of residential ties for individuals and management or control for other entities. A taxpayer can voluntarily request for a ruling in specified areas, such as the application of the locality of profits rules or the general anti-avoidance provision, royalty payments, stock borrowing or lending and interest income exemption. 112) (IRO), came into operation. An Agreement between the Government of Canada and the Government of the Hong Kong Special Administrative Region of the People's Republic of China for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed on November 11, 2012, in Hong Kong. Providing automated trading services by means of electronic facilities, not being facilitates provided by a recognized exchange company or a recognized clearing house, whereby: offers to sell or purchase securities or futures contracts are regularly made or accepted in a way that forms or results in a binding transaction in accordance with established methods, including any method commonly used by a stock market or futures market; offers to enter into OTC derivative transactions are regularly made or accepted in a way that forms or results in a binding transaction in accordance with established methods; persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of securities or futures contracts in a way that forms or results in a binding transaction in accordance with established methods, including any method commonly used by a stock market or futures market; persons are regularly introduced, or identified to other persons: in order that they may negotiate or conclude OTC derivative transactions in a way that forms or results in a binding transaction in accordance with established methods; or. Source is a practical, hard matter of fact. Depending on individuals actual income positions, it may be more beneficial for individuals subject to both profits tax and property tax to elect personal assessment, which allows certain deductions and computation of tax liabilities at progressive rates applicable. If you let your employees work abroad, make also sure to have a conversation with them about potential non-resident taxes they may have to pay on their salaries locally. See Tax rates. Factors that will be taken into account include: Outsourcing of specified economic activities. The Inland Revenue Department (IRD) usually issues profits tax returns to taxpayers from the first working day of April each year. Each case will be considered on its own facts and circumstances. Foreign Earned Income Exclusion. Please try again. All member jurisdictions of the Inclusive Framework on BEPS with IP regimes have either adopted the nexus approach or abolished their non-compliant regimes. > New Requirements Relating to Double Taxation Relief Salaries Tax, Tax Information - Individuals / Businesses, Replies to Questions on Estimates of Expenditure, Departmental Interpretation and Practice Notes, Statement of Policies and Practices in relation to Personal Data, Facsimile Transmission of Information, Form and Documents, Tax Concessions for Family-owned Investment Holding Vehicles, Relief Measure: Conditional waiver of surcharges for instalment settlement of demand notes for the Year of Assessment 2021/22, Tax Issues arising from the COVID-19 Pandemic, Relief Measure: Conditional waiver of surcharges for instalment settlement of demand notes for the Years of Assessment 2020/21, Relief Measure: Conditional waiver of surcharges for instalment settlement of demand notes for the Years of Assessment 2019/20, Tax Exemptions in respect of Relief Measures under the Anti-epidemic Fund, Relief Measure: Conditional waiver of surcharges for instalment settlement of demand notes for the Year of Assessment 2018/19, Double Taxation Relief and Exchange of Information Arrangements, CEPA - Requisition for copies of tax documents, Charitable Donations and Tax-Exempt Charities, Obtaining Duplicate Tax Return for Individuals, Submission of Employer's Return in Computerized Format, e-Application for Preparation of IR56 Form(s) by Using Employers Self-developed Software, Block Extension Scheme For Tax Representative, Special Arrangement in times of Tropical Cyclones and Rainstorms, Assistance to persons with disabilities in accessing IRD offices premises. December 09, 2022 John Timpany of KPMG China provides an overview of the foreign-sourced income exemption regime scheduled to become effective from January 1 2023 and discusses what actions businesses should take to prepare for it. Under the nexus approach, only income from a qualifying IP asset can qualify for preferential tax treatment based on a nexus ratio which is defined as the qualifying expenditures as a proportion of the overall expenditures that have been incurred by a taxpayer to develop an IP asset. The tax credit approach is adopted by Hong Kong in all existing DTAs. On 1 January 2023, the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (the Amendment Ordinance), which amended the provisions in relation to the FSIE regime under the Inland Revenue Ordinance (Cap. There is no controlled foreign corporation (CFC) regime in Hong Kong. Giving advice concerning compliance with or in respect of rules made under section 23 or 36 of the SFO, Giving advice concerning any offer to dispose of securities to the public, any offer to acquire securities from the public, or acceptance of any offer aforesaid, Giving advice to a listed corporation or public company or a subsidiary of the corporation or company, or to its officers or shareholders, concerning corporate restructuring in respect of securities. However, if the income concerned is taxable under a special tax legislation (e.g. withholding tax on royalties, licensing fees, service fees management feesand ), subject to the provisions in section 16(1)(c), are not deductible. Factors that will be taken into account include: As regards foreign-sourced IP income, a nexus requirement is in place to determine the extent of such income to be exempt from profits tax. 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