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In our May 2022 Issue of Newsletter, we will discuss certain tax issues addressed in the 2021 Annual Meeting between the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and the Inland Revenue Department (“IRD”).

3.  Provisional tax payable on royalties

Hong Kong Royalty payers may enjoy lower withholding tax rates under Double Taxation Agreement Benefits

HKICPA raised the questions on Provisional tax payable due to the following two recent Hong Kong Tax developments:-

  • Annual Profits Tax Reduction / Rebates have become common in recent years to reduce the burden of taxpayers; and
  • Hong Kong has been expanding its Double Taxation Agreement (“DTA”) Network.

As a result of the above, there are two common methods in calculating the Hong Kong Profits Tax Liabilities arising from the payment of royalties to non-residents:-

  1. Tax liabilities computed under Hong Kong Domestic Tax Law (e.g., 4.95% = 16.5% * 30%) less Tax Reduction; and
  2. Tax liabilities computed under DTA (i.e., Tax Treaty rates without Tax Reduction).

As Tax Reduction is available in Method 1 but not in Method 2, there will be occasions that Final Tax Liabilities are lower for Method 1 while Provisional Tax Liabilities are lower for Method 2. 

HKICPA would like to confirm if the Inland Revenue Department (“the IRD”) allows taxpayers to use different methods in calculating Final and Provisional Tax Liabilities, and the IRD confirmed this approach is acceptable.

Points to note

Based on our experience, many taxpayers overlook the tax benefits they can obtain in royalty withholding tax in Hong Kong. Below are the two tax saving ideas they may consider:-

Tax Saving Methods

Actions to be taken

1. Two-tiered Tax rates

Taxpayers should review the shareholding structure of the royalty recipients

2. DTA Benefits (e.g., 3% Tax rates)

Taxpayers should examine whether the DTA can provide a lower royalty withholding tax rate

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