The summary of the new DTA and its prospective impact are stated below.
Hong Kong as a Business Hub in Asia
In Hong Kong, a lot of international companies locate the offices to control their business in Asia. The reasons are as follows:
1. High flexibility of business infrastructures such as finance, currency exchange, and accounting. The UK-oriented systems are still maintained.
2. Fitted business environment for foreign companies aiming to expand business into developing countries in Asia. By locating their investment or trading subsidiaries in Hong Kong, many of such companies can reduce the risks associated with breaking into developing countries directly.
3. The government's encouragement of business expansion in Hong Kong by foreign companies. In order to be an international business hub in Asia, Hong Kong government provides tax relief systems for foreign companies. It is one of the most attractive elements for such companies.
Taxation System in Hong Kong
In Hong Kong, the corporate tax rate is 17.5% and the income tax rate for individuals is 16% at a maximum. No local tax is charged.
Only business income and employment income are taxable. Income from transferring real property and stocks is nontaxable.
(If income from transferring properties is recognized as business income, it will be taxable.)
In addition, gift and estate tax are not charged. Therefore, transferring properties among individuals is nontaxable.
Hong Kong does not impose tax on income earned overseas. Income earned overseas by companies established in Hong Kong and residents in Hong Kong is nontaxable.
Tax relief on income paid from Japan to Hong Kong
Current withholding tax rate Withholding tax rate by the new DTA
Dividends 20% 10% (5%)*
Interest 20% 10%
Royalties 20% 5%
*The 5% rate applies where the beneficial owner is a company that holds directly at least 10% of the voting shares of the distributing company; otherwise, the rate is 10%.
In Hong Kong, because any income earned overseas is nontaxable, incomes mentioned above are nontaxable.
Tax relief on income paid from Hong Kong to Japan
In Hong Kong In Japan
Dividends Nontaxable Subject to the Foreign Dividend Exemption system
Interest No withholding tax Taxable as interest income
Royalties 5% withholding tax Taxable as royalty income
Tax paid as withholding tax in Hong Kong is deductible as tax credit in Japan.
As stated above, it is expected that this DTA enables more foreign companies to establish their subsidiaries in Hong Kong to invest in Japan (Singapore has been playing such function so far).
However, Japanese tax haven rules apply to income earned in Hong Kong. When Japanese companies establish their subsidiaries in Hong Kong to invest in other companies in Hong Kong or other countries, Japanese tax haven rules may be imposed. Once the rules are imposed on the companies, income earned by Hong Kong subsidiaries is deemed taxable income earned domestically. Schemes for business strategies need to be thoroughly investigated so that requirements prescribed by tax law can properly be met.
To be eligible for the new DTA, appropriate procedures associated with tax services should be taken.
If you are considering overseas business strategies for the future, please do not hesitate to contact us.
* The counseling prior to providing consulting services is free of charge.
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