UK–Hong Kong Double Taxation Agreement (Withholding Tax Rates on Dividends, etc.)
Does a UK company need to withhold tax when it pays dividends, interest or royalties to a Hong Kong company? If so, at what rate? And what happens when a Hong Kong company makes the payment?
The UK and Hong Kong have a comprehensive double taxation agreement (signed in 2010 and effective in Hong Kong from the 2011/12 year of assessment). The withholding tax rate on a payment is the lower of the domestic rate and the treaty rate.
Summary: Withholding Tax Rates That Actually Apply
Type of payment | UK company pays HK company | HK company pays UK company |
Dividends | 0% (Note 1) | 0% |
Interest | 0% or 20% (Note 2) | 0% |
Royalties | 3% | 3% (Note 3) |
(Note 1) Distributions paid by a UK REIT or similar property investment vehicle out of property income are subject to 15%.
(Note 2) For an unlisted operating company, the rate is 0% if HMRC has given its approval, and 20% if not.
(Note 3) If the Hong Kong domestic rate is below 3%, the domestic rate applies.
1. Domestic Withholding Tax Rates
Type of payment | UK domestic law | Hong Kong domestic law |
Dividends | None (20% on REIT property income distributions) | None |
Interest | 20% | None |
Royalties | 20% | 4.95% (16.5% in certain cases) |
In Hong Kong, only royalties are subject to withholding tax. For royalties received by a non-resident, 30% of the amount is deemed to be assessable profits, so the effective rate for a corporation is 16.5% × 30% = 4.95%.
However, if the recipient is an associate of the payer and the intellectual property was at any time owned by a person carrying on a business in Hong Kong, 100% is deemed assessable and the rate becomes 16.5%.
2. Treaty Rates
Type of payment | Treatment under the Agreement |
Dividends (Article 10) | Exempt in the source jurisdiction. Distributions from property investment vehicles are capped at 15% |
Interest (Article 11) | Exempt if the recipient meets certain conditions (unlisted companies need HMRC approval). No reduction otherwise |
Royalties (Article 12) | Capped at 3% |
3. Payments from a UK Company to a Hong Kong Company
Dividends are 0%, as the UK does not levy withholding tax on dividends under domestic law.
Royalties are 3%, as the treaty rate is lower than the 20% domestic rate.
Unlike dividends and royalties, interest is not exempt simply by applying the treaty.
Interest from the UK is exempt only if the Hong Kong recipient is a listed company, an independent financial institution, an individual, a pension fund, a government body, or similar.
Most Japanese-owned operating companies in Hong Kong are unlisted and fall into none of these categories. In that case, the exemption requires the company to apply to HM Revenue & Customs (HMRC) and have HMRC confirm that securing treaty benefits was not one of the main purposes of establishing or maintaining the company.
Hong Kong recipient | UK withholding tax rate on interest |
Listed company, independent financial institution, individual, etc. | 0% |
Unlisted operating company (with HMRC approval) | 0% |
Unlisted operating company (without HMRC approval) | 20% |
4. Payments from a Hong Kong Company to a UK Company
Hong Kong does not levy withholding tax on dividends or interest under domestic law.
Royalties are normally subject to 4.95%, reduced to 3% under the treaty. Even in the 16.5% case (payments between associates for intellectual property previously owned in Hong Kong), the treaty cap of 3% applies.
5. Points to Note When Using the Treaty
Principal purpose test: If the tax authority determines that obtaining treaty benefits was a main purpose of the transaction, the treaty reduction will be denied (Articles 10–12 and the MLI). The HMRC approval for interest is a separate procedure.
Type of payment | HMRC approval | Anti-abuse rule (principal purpose test) |
Dividends | Not required | Applies |
Interest | Required for unlisted companies | Applies |
Royalties | Not required | Applies |
Certificate of residence: A Hong Kong company may need to prove its Hong Kong residence to claim treaty benefits.
Taxation in Hong Kong: Dividends, interest and royalties received from the UK may fall within Hong Kong's foreign-sourced income exemption (FSIE) regime.
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