Is dividend income taxable in Hong Kong

Is Dividend Income Taxable in Hong Kong?

Dividend income is generally not taxable in Hong Kong. The question of whether dividend income is taxable in Hong Kong depends on the source of the dividend and the nature of the recipient. Hong Kong operates a territorial source principle under the Inland Revenue Ordinance (Cap. 112), meaning only profits that arise in or are derived from Hong Kong are chargeable to tax. Dividends paid by a Hong Kong resident company to its shareholders are not subject to profits tax because the dividend is paid out of profits that have already been taxed at the company level, and Hong Kong does not impose a secondary tax on distributed profits.

Hong Kong Dividend Tax

Hong Kong does not levy a separate dividend tax on shareholders. When a Hong Kong company distributes a dividend to its shareholders, that distribution is not chargeable to profits tax in the hands of the recipient, whether the recipient is an individual or a corporate shareholder. The Inland Revenue Department treats dividends as capital receipts rather than trading receipts, provided the shareholder is not engaged in a trade of buying and selling shares. This means that a Hong Kong resident company receiving a dividend from another Hong Kong resident company pays no profits tax on that dividend income.

Tax on Dividends in Hong Kong

The territorial source principle governs the tax treatment of dividends in Hong Kong. For a dividend to be taxable, it would have to arise in or be derived from Hong Kong. However, even Hong Kong-sourced dividends are exempt from profits tax because the legislation specifically excludes dividends from the definition of assessable profits for most recipients. The only exception would be a person carrying on a business of trading in securities, where dividends may form part of trading receipts, but even then the profits are assessable only if the trading activity produces Hong Kong-sourced profits.

Dividend Withholding Tax in Hong Kong

Hong Kong does not impose dividend withholding tax. When a Hong Kong company pays a dividend to a non-resident shareholder, there is no requirement for the company to deduct tax at source from the payment. The non-resident shareholder is not subject to Hong Kong profits tax on the dividend income because the dividend is not regarded as Hong Kong-sourced income for the recipient. This applies regardless of whether the shareholder is resident in a jurisdiction with which Hong Kong has a double taxation agreement.

Hong Kong Dividend Income and the FSIE Regime

The foreign-sourced income exemption (FSIE) regime took effect on 1 January 2023 and was expanded from 1 January 2024 to cover disposal gains. Under the FSIE regime, certain foreign-sourced dividend income received in Hong Kong by a member of a multinational group may be chargeable to profits tax unless one of the exceptions applies. The principal exception is the economic substance requirement: if the recipient company has adequate economic substance in Hong Kong, the foreign-sourced dividend remains exempt. For portfolio dividends, the participation exemption may apply where the recipient holds at least 5% of the shares in the investee company and meets certain conditions. Companies that are not members of a multinational group are not subject to the FSIE regime and continue to receive foreign-sourced dividends free of Hong Kong tax under the territorial source principle.

Offshore Dividends

Dividends that are sourced outside Hong Kong are not chargeable to Hong Kong profits tax under the territorial source principle, regardless of the residence of the recipient company. A Hong Kong company that receives a dividend from an overseas subsidiary and does not fall within the FSIE regime can treat that income as offshore and therefore not taxable. The Inland Revenue Department's Departmental Interpretation and Practice Note 21 provides guidance on the locality of profits. However, companies that are members of a multinational group should verify whether the FSIE regime requires them to meet the economic substance or participation exemption conditions, even for clearly offshore dividends, if the dividend is received in Hong Kong.

Participation Exemption

The participation exemption under the FSIE regime applies to certain foreign-sourced dividends and disposal gains. Where a Hong Kong company holds at least 5% of the shares in a foreign investee company, the dividend received may be exempt from profits tax if the investee company is subject to a tax rate of at least 15% in its jurisdiction, or if the Hong Kong company meets the economic substance requirement. The exemption covers both dividends and certain gains from the disposal of equity interests. Companies should document their eligibility for the participation exemption at the time they receive the income.

No Dividend Tax and the Territorial Source Principle

Hong Kong's approach to not taxing dividends is consistent with its territorial source principle, which taxes only profits that arise in or are derived from Hong Kong. The system avoids double taxation by taxing corporate profits once at the company level and not again when distributed. A Hong Kong resident company pays profits tax on its assessable profits at the two-tiered rates of 8.25% on the first HK$2,000,000 and 16.5% on the remainder, and the subsequent distribution of those profits as dividends carries no further tax liability for the shareholder. This makes Hong Kong an attractive jurisdiction for holding companies and investment structures.

What to Do Next

If your company receives dividend income, consider the following:

• Determine whether the dividend is Hong Kong-sourced or foreign-sourced.
• If your company is a member of a multinational group, assess whether the FSIE regime applies and whether the economic substance requirement or participation exemption is met.
• Maintain records to support the source of the dividend and, where applicable, the economic substance of your Hong Kong operations.
• Seek advice from a tax professional on the application of the FSIE regime to your specific circumstances, particularly if your company receives significant foreign-sourced dividend income.