A guide to Hong Kong withholding tax for entrepreneurs

What is a withholding tax in Hong Kong?

At its core, withholding tax is a method of collecting tax at the source of income. Instead of the recipient of the income being responsible for paying the tax directly to the government, the entity making the payment (the payer) is required to deduct or "withhold" the tax from the payment and remit it to the tax authority. In Hong Kong, this authority is the Inland Revenue Department (IRD)³.

This system is a crucial element of Hong Kong's territorial tax system, which primarily taxes income that arises in or is derived from Hong Kong. Withholding tax is one of the mechanisms used to collect tax from non-residents who earn specific types of Hong Kong-sourced income but may not have a physical presence or file a tax return in the jurisdiction. It ensures that the government can efficiently collect revenue on income generated within its borders, regardless of where the recipient is located⁴.

The main types of payments subject to withholding tax in Hong Kong are royalties and license fees for the use of intellectual property, as well as payments to non-resident entertainers and athletes for performances within the city.

Why you need to understand the withholding tax system

If you're making payments to overseas entities or any non-resident earning income from Hong Kong, understanding the withholding tax system isn't just good practice—it's a legal necessity. The implications of non-compliance can be severe, impacting both financial health and operational integrity⁵.

Firstly, compliance is mandatory. The legal obligation to withhold tax rests on the Hong Kong-based payer. Failure to withhold the correct amount of tax and remit it to the IRD by the specified deadline can result in significant penalties, including financial fines and, in serious cases, legal action. The IRD is vigilant in enforcing these rules, and ignorance of the law is not considered a valid defense⁶ ⁷.

Secondly, a firm grasp of withholding tax is fundamental to effective financial management and tax planning. Knowing when to withhold tax, how much to withhold, and how Double Taxation Agreements (DTAs) might affect these rates allows businesses to forecast their cash flow accurately. It enables them to structure cross-border transactions in the most tax-efficient manner possible, preventing unforeseen tax liabilities that could erode profits⁸ ⁹.

Finally, understanding the system helps in avoiding common and costly mistakes. Many businesses, particularly SMEs, inadvertently fail to withhold tax on payments for software licenses or royalties, mistakenly believing these are simple service fees. Such errors can be uncovered during an IRD audit, leading to back taxes, interest, and penalties. By being proactive and knowledgeable, you can manage your tax obligations efficiently, maintain a good standing with the IRD, and safeguard your business from unnecessary financial risks¹⁰.

How withholding tax works

The mechanics of the withholding tax system are straightforward in principle, involving three key parties: the payer, the payee, and the IRD. The process ensures that tax on Hong Kong-sourced income is captured before the funds leave the jurisdiction³.

Here's a step-by-step breakdown of the process:

Identify the payment

A Hong Kong-based company or individual (the payer) arranges to make a payment to a non-resident individual or company (the payee). The payer must first determine if this payment falls within the scope of Hong Kong's withholding tax rules (e.g., it's a royalty payment).

Calculate the tax

The payer calculates the amount of tax that needs to be withheld. This involves applying the correct tax rate to a specific portion of the payment, known as the assessable profits. The applicable rate depends on whether the payee is a corporation or an unincorporated business, and the assessable profits can vary depending on the nature of the income.

Withhold and pay

The payer deducts the calculated tax amount from the gross payment due to the payee. The payee receives the net amount (gross payment minus the withheld tax).

Remit to the IRD

The payer is then responsible for remitting the withheld tax amount to the Inland Revenue Department. This payment must be made within the timeframe stipulated by the IRD¹⁴.

Reporting

The payer must also fulfil reporting obligations, which typically involve filing specific forms with the IRD to declare the payment made, the amount withheld, and details of the non-resident payee.

For the non-resident payee, the amount withheld isn't a final, unrecoverable cost. It's considered a pre-payment of their Hong Kong profits tax liability. The IRD credits this amount against the payee's total tax obligation for that year. If the withheld amount exceeds the final tax liability, the payee may be eligible for a refund, although this often requires filing a Hong Kong profits tax return.

Scope of withholding tax in Hong Kong

Unlike some jurisdictions with broad withholding tax regimes, Hong Kong's system is narrowly focused on specific types of income paid to non-residents. It's crucial to identify which payments are subject to these rules to ensure compliance.

The two primary categories are payments for intellectual property and certain service fees, particularly those for entertainers and athletes⁴ ¹⁰.

Intellectual property

This is the most common area where withholding tax applies. Payments made to a non-resident for the use of, or the right to use, intellectual property (IP) in Hong Kong are subject to withholding tax. This covers a wide range of intangible assets, including:

• Patents, copyrights, and trademarks
• Designs, models, and secret formulas or processes
• Films, tapes, and sound recordings
• Software licenses
• "Know-how" or industrial, commercial, or scientific expertise

Essentially, suppose a Hong Kong entity pays a foreign company for the right to use its brand, sell its patented product, or use its proprietary software. In that case, that payment is considered a royalty and is subject to withholding tax. The payer in Hong Kong is obligated to withhold the tax before remitting the payment to the non-resident IP owner.

Service fees

Hong Kong does not levy a general withholding tax on all service fees paid to non-residents. However, the rules apply to a specific and high-profile category: payments to non-resident entertainers and athletes.

When a non-resident entertainer (such as a musician, actor, or public speaker) or a sportsperson receives payment for performing in Hong Kong, the person or entity making the payment (e.g., the event promoter, sponsor, or venue) is required to withhold tax. This ensures that tax is collected on the income generated from their appearance in the city. The rules apply to any fees, prizes, or income received in connection with their performance in Hong Kong.

It's important to distinguish these specific cases from general consultancy or professional service fees. Payments made to a non-resident for services performed entirely outside of Hong Kong aren't subject to Hong Kong tax. If a non-resident performs services within Hong Kong, they may be liable for profits tax, but the payer is generally not required to withhold tax unless the payment falls into a specific category, like royalties or entertainer fees.

Understanding withholding tax rates in Hong Kong

The withholding tax rate in Hong Kong is not a single, flat percentage. Instead, it is calculated by applying the prevailing profits tax rate to a portion of the payment known as the "deemed assessable profits." The profits tax rate differs for corporations and unincorporated businesses (including individuals)⁶ ⁷.

As of 2025, the profits tax rates are:

• For corporations: 16.5%
• For unincorporated businesses/individuals: 15%

The key is determining the deemed assessable profits. For royalties and IP license fees, this is governed by Section 21A of the Inland Revenue Ordinance:

1. Standard Case: For most royalty payments, the deemed assessable profits are 30% of the gross payment. Therefore, the effective withholding tax rate is calculated as follows:
   
   1. For payments to a non-resident corporation: 30% of the gross payment × 16.5% = 4.95% of the gross payment
   2. For payments to a non-resident individual or unincorporated business: 30% of the gross payment × 15% = 4.5% of the gross payment
2. Affiliated Case / IP Previously Owned in Hong Kong: If the IP was previously owned by a person carrying on business in Hong Kong, or if the payer and payee are associated parties, the deemed assessable profits are 100% of the gross payment. This significantly increases the effective withholding tax rate:
   
   1. For payments to a non-resident corporation: 100% of the gross payment × 16.5% = 16.5% of the gross payment
   2. For payments to a non-resident individual or unincorporated business: 100% of the gross payment × 15% = 15% of the gross payment

It's crucial to note that these rates can be reduced or eliminated if a Double Taxation Agreement (DTA) exists between Hong Kong and the recipient's country of residence. Many of Hong Kong's DTAs cap the withholding tax rate on royalties at a much lower percentage, often around 5%, providing significant tax relief.

For non-resident entertainers and athletes, the calculation is different. The payer must withhold tax based on the entertainer's estimated net income from the performance, typically determined in consultation with the IRD.

Withholding tax vs Income tax: Are they the same in Hong Kong?

It's a common point of confusion, but withholding tax and income tax are not the same thing. Rather, withholding tax is a mechanism for collecting income tax.

• Income Tax (Profits Tax or Salaries Tax): This is the primary tax levied on the net income or profits of an individual or business. The taxpayer is responsible for calculating their taxable income (revenue minus allowable expenses and deductions), filing a tax return with the IRD, and paying the tax due. It is a tax on net profit.
• Withholding Tax: This isn't a separate type of tax but a method of payment and collection. It's deducted from the gross payment before it reaches the recipient. The amount withheld is then remitted to the IRD on behalf of the recipient. This amount is treated as a credit or a payment on account of the recipient's final income tax (profits tax) liability in Hong Kong.

Think of it this way: income tax is the ultimate destination (the total tax owed), while withholding tax is one of the vehicles used to get there. For a non-resident earning royalties from Hong Kong, the 4.95% withheld from their payment is an advance payment towards their 16.5% profits tax liability on their deemed 30% profit margin. The withholding system simply ensures the IRD collects a portion of this tax upfront, reducing the risk of non-payment by a party with no physical presence in the jurisdiction.

Understanding double taxation and double tax relief

Double taxation is a significant concern in international business. It occurs when the same income is taxed in two different countries—once in the country where the income is sourced and again in the country where the recipient is a resident. For example, a UK company receiving royalties from Hong Kong could be taxed on that income by the Hong Kong IRD (via withholding tax) and then again by the UK's HMRC.

To prevent this and facilitate international trade and investment, Hong Kong has established a wide network of Double Taxation Agreements (DTAs), also known as tax treaties, with over 50 jurisdictions worldwide. These bilateral agreements serve two main purposes:

• Avoid Double Taxation: They allocate taxing rights between the two jurisdictions, ensuring that income is taxed primarily in one place or providing relief if it is taxed in both.
• Prevent Fiscal Evasion: They establish frameworks for the exchange of tax information between authorities to combat tax avoidance and evasion.

For withholding tax purposes, DTAs are incredibly important as they often prescribe reduced tax rates on cross-border payments like royalties, interest, and dividends.

Who can claim benefits under double tax relief?

To benefit from a DTA, an individual or company must be a "tax resident" of one of the two contracting jurisdictions. The definition of a tax resident varies by DTA but typically includes:

• For individuals: A person who is liable to tax in a jurisdiction by reason of their domicile, residence, or a similar criterion.
• For companies: A company that is incorporated in or has its place of effective management in a jurisdiction.

A person or company that is liable to tax only on income from sources within a jurisdiction (such as a non-resident in Hong Kong) is generally not considered a resident for DTA purposes. To claim benefits such as a reduced withholding tax rate, the payee must typically provide a Certificate of Resident Status from their home country’s tax authority to the Hong Kong payer.

However, the Hong Kong payer must obtain this certificate before applying the DTA rate; otherwise, the IRD won’t accept the reduced rate.

Methods of double tax relief in Hong Kong

DTAs and Hong Kong's domestic law provide relief from double taxation primarily through two methods:

• Reduced withholding tax rates: This is the most direct form of relief for cross-border payments. For example, while Hong Kong's domestic withholding tax rate on royalties can be as high as 16.5%, a DTA might cap this rate at 5%. The Hong Kong payer would then only need to withhold 5% from the payment, provided the recipient qualifies under the DTA. This provides immediate cash flow benefits.
• Tax credit method: This method is used by the country of residence. If a Hong Kong resident receives income from a treaty partner country and pays tax there, Hong Kong will allow a tax credit for the foreign tax paid. This credit is deducted from the Hong Kong tax payable on the same income. For instance, if a Hong Kong company earns income from Japan and pays Japanese tax, the IRD will allow a credit for the Japanese tax paid against the Hong Kong profits tax liability, ensuring the income is not fully taxed twice. This is the principal method Hong Kong uses to provide double tax relief to its own residents.

Streamline your payments and compliance with Aspire

Navigating the corporate tax system in Hong Kong is essential if you’re operating in the region. But effective tax compliance starts with clear financial reporting and proper recordkeeping, so you can accurately determine your assessable profits.

From our experience, we’ve seen how small and new businesses often struggle with preparing financial reports, mainly because of manual processes. These practices are not only time-consuming but also prone to human error, resulting in inaccurate financial data and misinformed decision-making.

This is where Aspire’s Business Account can help. It streamlines manual processes and gives you full visibility over your finances, enabling you to prepare more accurate, tax-ready financial reports.

With Aspire, you can:

• Get a complete view of your cash inflows and outflows, including the status of accounts payable, receivable, and recurring payments, in real time. This makes it easier to create and categorise cash flows for your cash flow statements.
• Gain real-time visibility into business expenses and invoice statuses.
• Simplify cross-border payments and international transactions with detailed, upfront invoice documentation.
• Save up to 50% of time spent on manual accounting tasks with smart automation.
• Eliminate manual data entry entirely through real-time syncing with Xero and QuickBooks.

With Aspire, you can spend less time on administrative tasks and more time growing your business.