Japan–Hong Kong Tax Treaty (Withholding Tax Rates on Dividends, Interest and Royalties)
Does a Japanese company need to withhold tax when it pays dividends, interest or royalties to a Hong Kong company? If so, at what rate? And what about payments made by a Hong Kong company?
Japan and Hong Kong have a comprehensive double tax agreement (signed in 2010, effective in Japan from 1 January 2012 and in Hong Kong from the 2012/13 year of assessment). The withholding tax rate on a payment is the lower of the domestic law rate and the treaty rate.
Conclusion: Withholding Tax Rates Actually Applied
Type of payment | Japanese company → Hong Kong company | Hong Kong company → Japanese company |
Dividends | 5% or 10% (Note 1) | 0% |
Interest | 10% | 0% |
Royalties | 5% | 4.95% (Note 2) |
(Note 1) 5% if certain shareholding requirements are met; otherwise 10% (see "2. Treaty Rates").
(Note 2) Royalties paid between associates for intangible assets previously owned in Hong Kong are taxed at 16.5% under domestic law, but the treaty reduces this to 5%.
* The treaty rates on payments from Japan assume that an Application Form for Income Tax Convention has been filed in advance. Without it, tax is withheld at the domestic rate of 20.42%.
1. Domestic Withholding Tax Rates
Type of payment | Japanese domestic law | Hong Kong domestic law |
Dividends | 20.42% (15.315% for listed shares where holding is under 3%) | None |
Interest | 20.42% (loan interest) / 15.315% (bond and deposit interest) | None |
Royalties | 20.42% | 4.95% (16.5% in certain cases) |
Japan's 20.42% consists of 20% income tax plus the special reconstruction income tax (2.1% of the income tax).
From 1 January 2027, the special reconstruction income tax falls to 1.1% and a new 1% special defense income tax is added. The total remains 2.1%, so the 20.42% and 15.315% rates do not change.
In Hong Kong, only royalties are subject to withholding tax. For royalties received by a non-resident, 30% of the amount is deemed taxable, so for a corporation the rate is 16.5% × 30% = 4.95%.
However, if the recipient is an associate of the payer and the intangible asset was at any time owned by a person carrying on business in Hong Kong, 100% is deemed taxable and the rate is 16.5%.
2. Treaty Rates
Type of payment | Treatment under the treaty |
Dividends (Article 10) | 5% if received by a company holding at least 10% of the voting shares for at least 6 months; otherwise 10% |
Interest (Article 11) | 10% (exempt if received by the government, central bank, etc.) |
Royalties (Article 12) | 5% |
Where a treaty rate applies, it is the maximum rate. The special reconstruction income tax and special defense income tax are not added on top.
3. When a Japanese Company Pays a Hong Kong Company
For dividends, interest and royalties alike, the treaty rate is more favorable than the domestic rate of 20.42%.
However, the treaty rate does not apply automatically. The Hong Kong recipient must prepare an Application Form for Income Tax Convention and submit it through the Japanese payer to the payer's district tax office by the day before the payment date.
Type of payment | Form | Rate after treaty |
Dividends | Form 1 | 5% or 10% |
Interest | Form 2 | 10% |
Royalties | Form 3 | 5% |
If payment is made without filing the form, tax is withheld at 20.42%. The recipient can later recover the difference by filing an Application Form for Refund of the Overpaid Withholding Tax (Form 11).
Once an intra-group dividend or loan interest payment is decided, it is safest to prepare the form before the payment date.
4. When a Hong Kong Company Pays a Japanese Company
Under Hong Kong domestic law, there is no withholding tax on dividends or interest.
Royalties are normally taxed at 4.95%. As this is below the treaty maximum of 5%, the domestic rate of 4.95% applies.
The treaty matters only in the 16.5% case (royalties between associates for intangible assets previously owned in Hong Kong). In that case, the treaty maximum of 5% applies.
5. Points to Note When Using the Treaty
Principal purpose test: If the tax authorities determine that obtaining treaty benefits was one of the principal purposes of a transaction, the treaty reduction will be denied (Article 7 of the MLI).
Tax in Hong Kong: Dividends, interest and royalties received from Japan may fall within Hong Kong's FSIE (foreign-sourced income exemption) regime. Tax withheld in Japan can be credited against Hong Kong tax.
Tax in Japan: Dividends received by a Japanese company from a Hong Kong subsidiary (holding of at least 25% for at least 6 months) are 95% excluded from taxable income under the foreign dividend exclusion regime.
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