Does a double tax treaty exist between Hong Kong and the UK

The Hong Kong UK Double Tax Treaty

The Hong Kong UK double tax treaty is a comprehensive double taxation agreement between Hong Kong and the United Kingdom that came into force on 23 December 2011. It is the full name of the arrangement formally called the "Agreement between the Government of the Hong Kong Special Administrative Region of the People's Republic of China and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains." The agreement was signed on 21 June 2010 and entered into force after both sides completed their domestic procedures.

The treaty applies to taxes on income and on capital gains. In Hong Kong this means profits tax, salaries tax and property tax under the Inland Revenue Ordinance (Cap. 112). In the United Kingdom it covers income tax, corporation tax and capital gains tax.

Double Taxation Agreement Hong Kong United Kingdom

The double taxation agreement between Hong Kong and the United Kingdom operates on the same model as Hong Kong's other comprehensive DTAs. Its primary purpose is to prevent a resident of one jurisdiction from being taxed twice on the same income by the other jurisdiction.

The treaty allocates taxing rights. Some types of income are taxable only in one jurisdiction. Others may be taxed in both, but the jurisdiction of residence must then give relief, usually as a credit for tax paid in the source jurisdiction.

The agreement also includes provisions for the exchange of information between the Inland Revenue Department of Hong Kong and Her Majesty's Revenue and Customs in the United Kingdom, and for mutual assistance in the collection of tax debts.

Hong Kong UK Tax Treaty Benefits

The treaty provides reduced withholding tax rates on cross-border payments between Hong Kong and the United Kingdom. The table below shows the key rates for income paid from one jurisdiction to a resident of the other.

Type of income	Rate under the treaty	Domestic rate if no treaty
Dividends (where the beneficial owner is a company holding at least 10% of the payer's capital)	0%	Hong Kong: 0% (no withholding); UK: 0% on most distributions
Dividends (other cases)	0%	Hong Kong: 0%; UK: 0%
Interest	0%	Hong Kong: 0%; UK: 20% on annual payments
Royalties	3%	Hong Kong: 4.95% (corporations); UK: 20%

For royalties, the treaty rate of 3% applies to payments for the use of literary, artistic or scientific copyrights, patents, trade marks, designs or models, plans, secret formulas or processes, or information concerning industrial, commercial or scientific experience.

Withholding Tax Hong Kong UK

Hong Kong does not impose withholding tax on dividends or interest paid to non-residents under its domestic law. The withholding tax Hong Kong UK treaty therefore confirms this position and prevents the UK from imposing withholding on certain payments to Hong Kong residents. For royalties, the treaty reduces Hong Kong's withholding from the domestic rate to 3% of the gross amount.

The UK's domestic withholding tax on certain interest and royalty payments is eliminated or reduced by the treaty when the payment is made to a Hong Kong resident who is the beneficial owner.

IRD UK DTA

To claim treaty benefits, a Hong Kong resident must submit a claim to the UK tax authority using an HMRC form that includes a certificate of residence. The Inland Revenue Department issues a Certificate of Resident Status on application. The application to the IRD, known as an IR1313A, confirms that the company or individual is a resident of Hong Kong for tax purposes.

The IRD's treatment of the treaty is set out in its Departmental Interpretation and Practice Notes. The IRD UK DTA is administered through the IRD's double taxation relief section.

Permanent Establishment

The treaty adopts the standard definition of a permanent establishment. A permanent establishment exists where a Hong Kong resident carries on business in the United Kingdom through a fixed place of business, such as a branch, office, factory or workshop. A building site or construction project lasting more than 12 months also creates a permanent establishment.

If a Hong Kong company has a permanent establishment in the UK, the profits attributable to that establishment are taxable in the UK. The UK may not tax the company's other profits under the treaty.

The converse applies to a UK resident with a permanent establishment in Hong Kong. The Hong Kong profits tax charge on profits attributable to the establishment is then limited by the territorial source principle rather than by the treaty, because Hong Kong already only taxes Hong Kong-sourced profits.

Tax Sparing

The treaty includes a tax sparing provision. Where Hong Kong grants a tax concession or exemption that reduces the tax that would otherwise be payable, the UK treats the Hong Kong resident as having paid the full amount of Hong Kong tax that would have been due without the concession. This means the UK allows a credit for notional Hong Kong tax that was not actually paid, preserving the benefit of the Hong Kong incentive.

The tax sparing provision applies specifically to profits tax that would have been payable in Hong Kong but for a concession granted under the Inland Revenue Ordinance. It is relevant for Hong Kong companies that receive an offshore claim or another relief that reduces their Hong Kong tax charge.

Certificate of Resident Status

A Hong Kong resident must hold a current Certificate of Resident Status from the Inland Revenue Department to claim treaty benefits. The certificate confirms that the person is a resident of Hong Kong for the purposes of the double taxation agreement.

The IRD issues the certificate on application. The application requires details of the company's place of management and control, its business activities in Hong Kong, and confirmation of its tax residence status. The certificate is typically valid for the year of assessment for which it is issued.