All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Hong Kong: Hong Kong SAR’s long-standing practice on foreign withholding taxes

Sponsored by


Lewis Lu and Curtis Ng of KPMG look at changes by Hong Kong SAR’s Inland Revenue Department to its foreign withholding tax treatment that could increase of the cost of doing business for multinational groups

In July 2019, the Hong Kong Inland Revenue Department (IRD) released a revised Departmental Interpretation and Practice Notes No. 28 – Profits Tax: Deduction of Foreign Taxes (DIPN 28). The IRD's interpretation deviates significantly from long-standing law and practice.

In particular, the IRD expressed the view that foreign income taxes imposed on gross income (for example, withholding tax imposed on gross royalties, service fees and management fees) are no longer deductible under the general deductibility rules of section 16(1). Interestingly, the first version of the revised DIPN 28 was issued in July 2019, this was subsequently updated a month later by the IRD to amend the second paragraph to explicitly state that withholding tax was not deductible.

As a general rule, a deduction for profits tax paid or similar foreign taxes is not available under the Inland Revenue Ordinance (IRO) (section 17(1)(b) and section 17(1)(g)). Section 16(1)(c) allows a deduction for foreign taxes (where they are substantially similar to Hong Kong SAR profits tax – namely, tax on profits not tax on gross income) imposed on sums which are assessable to profits tax under specified deeming provisions.

In 1991, the Board of Review held in D43/91 that taxes on gross receipts were outgoings or expenses incurred in the production of profits within the meaning of section 16(1), and such deduction should not be excluded under section 17(1)(b) of the IRO.

The original DIPN 28 was consistent with this view and made it clear that where an amount of foreign tax does not qualify for deductions under section 16(1)(c), it may still be deductible pursuant to the general deductibility rules in section 16(1), but only where the tax is an expense that must be borne, regardless of whether or not a profit is derived, and not an appropriation of profit. On this basis, foreign withholding taxes imposed on gross income and payable irrespective of whether the taxpayer earned a profit such as management fees, interest and royalties were deductible.

In 2018, section 16(1)(c) was revised and section 16(2J) was introduced. The effect of these amendments was that section 16(1)(c) (the deduction for profits tax type foreign taxes) was no longer available where the tax is paid in a jurisdiction which has a double tax agreement (DTA) with Hong Kong SAR. This is a reasonable amendment to the IRO.

What are the key changes causing concern?

The revisions to DIPN 28 represent a change in long-standing practice. The revised DIPN 28 states the following in paragraph 1:

"Since a tax on profits or income is an application of the profits and not an outgoing or expense incurred in producing chargeable profits, the tax is not deductible. The assessable profits of a trade, profession or business are the profits before, and not after, deduction of profits tax." (emphasis added)

The revised DIPN 28 also removes the comment:

"…tax can properly be described as a charge on earnings (rather than on profits) that is payable regardless of whether or not a profit is made. As the tax is not an appropriation of the profits, a deduction is allowable under section 16(1). Typically such foreign taxes will take the form of a withholding tax on income derived by way of interest or royalties…"

For multinational groups with their global or regional head offices situated in Hong Kong SAR, or groups with service centres or intellectual property holdings in Hong Kong SAR, the revised policy may have a significant adverse impact and increase in the overall cost of doing business in Hong Kong SAR.

The revisions also provide a clarification on the types of income deductible within section 16(1)(c). Paragraph 2 states: "…foreign taxes on profits or income (e.g. withholding tax on royalties, licensing fees, service fees and management fees), subject to the provisions in section 16(1)(c), are not deductible."

The potential impact is as follows. Section 16(1)(c) provides a deduction for foreign profits tax where two specific tests are satisfied:

1) The foreign tax is applied on profits and not on gross income; and

2) Where the income is deemed assessable under specific deeming provisions in section 15 including gain on disposal/maturity of a certificate of deposit or bill of exchange.

There is a very narrow scope for the application section 16(1)(c). Its operation is limited to foreign taxes, which are taxed substantially the same as profits tax (tax on profits and not on gross receipts), and income will need to arise from 'interest' and related debt securities, where the income is not taxed under the general charging provisions in section 14.

Based on the above, the scope of application of section 16(1)(c) has never and could never cover royalties, licensing fees, service fees and management fees and as such it could be argued that the commentary included within paragraph 2 is largely irrelevant. That said, it could be read as a specific statement that withholding taxes on royalties, interest and services fees are more like an application of profits and therefore not deductible. If this view is correct, it represents a significant shift in the long-standing assessing practice.

T: +86 10 8508 5002 and +86 10 8508 5000
E: and

more across site & bottom lb ros

More from across our site

Vikas Garg talks to reporter Siqalane Taho about how regulation, technology and the goods and services tax has affected the manufacturing company.
A major shift is underway in tax as the profession transitions from a mostly accounting and finance sector to a hybrid industry that requires significant IT skills, say tax experts.
The Biden administration is about to give $80 billion to the Internal Revenue Service to enhance the tax authority’s enforcement processes and IT systems.
Audi, Porsche, and Kia say their US clients will face higher prices under the Inflation Reduction Act after the legislation axes an important tax credit for electric vehicle production.
This week Brazil’s former President Luiz Inacio Lula da Silva came out in support of uniting Brazil’s consumption taxes into one VAT regime, while the US Senate approved a corporate minimum tax rate.
The Dutch TP decree marks a turn in the Netherlands as the country aligns its tax policies with OECD standards over claims it is a tax haven.
Gorka Echevarria talks to reporter Siqalane Taho about how inflation, e-invoicing and technology are affecting the laser printing firm in a post-COVID world.
Tax directors have called on companies to better secure their data as they generate ever-increasing amounts of information due to greater government scrutiny.
Incoming amendments to the treaty could increase costs on non-resident Indian service providers.
Experts say the proposed minimum tax does not align with the OECD’s pillar two regime and risks other countries pulling out.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree