Hong Kong and Japan inks tax agreement

Hong Kong residents receiving dividends from Japan will now pay at least 5% withholding tax for a company holding.

Hong Kong on Tuesday signed an agreement with Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

Secretary for Financial Services & the Treasury Professor KC Chan signed the agreement in Hong Kong with Japanese Consul-General Yuji Kumamaru, according to a government report.

This is the 16th comprehensive agreement for the avoidance of double taxation concluded by Hong Kong with its trading partners, coming after those with Belgium, Thailand, the Mainland, Luxembourg, Vietnam, Brunei, the Netherlands, Indonesia, Hungary, Kuwait, Austria, the UK, Ireland, Liechtenstein and France.

Under the agreement, double taxation will be avoided in that any Japanese tax paid by companies will be allowed as a credit against the tax payable in Hong Kong in respect of the income, subject to the provisions of the tax laws of Hong Kong.

In the absence of an agreement, Hong Kong residents receiving dividends from Japan not attributable to a permanent establishment in Japan will be subject to a Japanese withholding tax, which is 20%. Under the agreement the withholding tax is capped at 5% for a company holding directly or indirectly for a period of six months at least 10% of the voting shares of the company paying the dividends, and 10% for other cases.

Hong Kong residents receiving royalties from Japan are subject to a current withholding tax at 20% in Japan. Under the agreement, the royalties withholding tax rate will be capped at 5%. The Japanese interest withholding tax on Hong Kong residents will be reduced from the current rate of 20% to 10%.

Hong Kong airlines operating flights to Japan will be taxed at Hong Kong’s corporation tax rate. Profits from international shipping transport earned by Hong Kong residents that arise in Japan, which are currently subject to tax there, will enjoy tax exemption under the agreement.