This alert explains the administrative procedures which Hong Kong payers should follow when seeking to apply a lower rate of withholding on royalties under a comprehensive double taxation agreement (CDTA) and related issues.

Administrative procedures

When a Hong Kong person pays royalties to a non-Hong Kong resident, the Hong Kong payer is required, under the domestic tax law of Hong Kong, to withhold out of the payment a certain amount to cover the tax liability of the non-Hong Kong resident in Hong Kong (the normal withholding is at an effective rate of 4.95% and 4.5% for corporate and individual recipients respectively).

The withholding rates under the domestic tax law would however be reduced to 4% or 3% under a number of CDTAs that Hong Kong has entered into with other jurisdictions (e.g., those with Jersey, the Netherlands, the United Kingdom).

In their 2012 annual meeting with the Inland Revenue Department (IRD), representatives of the Hong Kong Institute of Certified Public Accountants asked what procedures a Hong Kong payer was required to follow in order to withhold at the reduced tax rate provided for in a CDTA.

In reply, the IRD indicated that a non-resident recipient wishing to enjoy the reduced rate of withholding under a CDTA must inform the Hong Kong payer that they are a resident of the relevant jurisdiction.  Thereafter, the Hong Kong payer should write to the IRD to apply for approval for withholding at the relevant treaty rate enclosing a copy of the tax resident certificate of the non-Hong Kong resident issued by the relevant CDTA jurisdiction.  If the IRD accepts the application, the IRD will inform the Hong Kong payer and the non-Hong Kong resident recipient accordingly.  The Hong Kong payer can then withhold at the reduced rate.

The IRD noted that it is the duty of the Hong Kong payer to withhold the correct amount of tax at all times. Therefore, when the non-Hong Kong resident recipient ceases to be a resident of the relevant CDTA jurisdiction, the Hong Kong payer should notify the IRD of the change within 30 days and withhold payment at the normal rate as from the date of change.

The IRD added that in cases where the Hong Kong payer is not certain of the recipient’s resident status, or where the IRD has not allowed the Hong Kong payer to withhold payment at the reduced rate, the Hong Kong payer should deduct the withholding tax at the normal rate under the domestic tax law of Hong Kong.

The IRD further noted that if a non-Hong Kong resident wishes to be taxed at a reduced treaty rate, the Hong Kong payer must provide various details when submitting the annual tax return (Form BIR54) on behalf of the non-Hong Kong resident.  The relevant details include the nature and amount of the sum accrued to or received by the recipient, the jurisdiction of which the recipient is a resident and documentary evidence in support of the resident status of the recipient.