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Hong Kong – Japan Double Tax Treaty

Hong Kong – Japan Double Tax Treaty

Double taxation relief is secured between Hong Kong and Japan through a comprehensive double taxation agreement. This bilateral document allows for the avoidance of double taxation for individuals and/or companies that are residents of both jurisdictions and at the same time it serves as a tool for the prevention of fiscal evasion.

Our lawyers in Hong Kong can help investors from Japan who are interested in benefiting from the provisions of this treaty as well as other investors who are looking to know more about Hong Kong’s comprehensive double tax treaty network.

The provisions of the double tax treaty apply based on residency and they encourage bilateral trade and mutual foreign investments in Hong Kong and Japan. The first treaty of this kind between the two jurisdictions was signed in November 2010.

In this article, our team of tax lawyers in Hong Kong presents the main functions of the tax treaty, the manner in which tax exemptions can apply and how income from business activities is treated when a foreign company from Japan has a permanent establishment in Hong Kong.

The provisions of the Hong Kong-Japan double tax treaty

Both Hong Kong and Japan impose taxes on the income derived by persons and companies on their territory. In order to avoid the taxation of income both in the country where it is produced and in the country where the individual or company usually resides, Hong Kong and Japan have agreed to sign a double tax treaty that clarifies the taxation method on income. According to the treaty, income from business activities from one jurisdiction by a resident of the other signatory state are subject to tax in the first jurisdiction only if they are performed via a permanent establishment. For the purpose of the treaty, the permanent establishment can be a fixed place of business from where the company managed part or the entirety of its activities. This can include:

  • • a branch;
  • • a place of management;
  • • an office;
  • • a factory;
  • • a workshop;
  • • a mine, quarry, gas well or another extraction location for natural resources. 

A permanent establishment does not include a place used only for storage, delivery or display purposes as well as a place that is being used solely for collecting information for the company, or where preparatory or auxiliary activities are underway. One of the agents at our law firm in Hong Kong can give you complete details about the definition of a permanent establishment for the purpose of a double tax treaty.

The taxes for which the treaty applies in the case of Hong Kong are the profits tax, the salaries tax, and the property tax. For Japan, the double tax treaty applies for the income tax, the corporate tax, and the local inhabitant taxes.

This treaty is useful both for Hong Kong employees who are dispatched to work in Japan for a longer period of time but also for Japan branches in Hong Kong and vice versa. 

Several types of income defined in the treaty are only taxed in the jurisdiction in which they are produced. We briefly list them below:

  1. Income from a permanent establishment: as defined above, the income received in a jurisdiction by a branch, office, factory, etc.
  2. Income from immovable property: derived by a resident of a signatory state from immovable property; included here is income from forestry or agriculture.
  3. Income from employment: salaries, wages and other forms of remuneration are only taxable in the contracting state where the employee is paid.
  4. Pension: pensions and alimony are only taxable in the state in which they are received.
  5. Artist’s and sportsmen’s income: income received by artists or sportsmen is also taxed solely in the country where it is received.
  6. Director’s fees: the same applies to the fees and the payments received by a director who is resident of one state and it is paid by a company in another state where he engages in his work.

Other types of income can include payments made to students and government service salaries, wages or other payments Our team of lawyers in Hong Kong can provide Japanese investors with complete details on the types of income defined in the double tax treaty.

Lower withholding tax rates under the double tax treaty

The double tax treaty between Japan and Hong Kong encourages mutual investments between the two jurisdictions by lowering the withholding tax rates or eliminating them completely. The list below includes information on the manner in which the withholding taxes are reduced:

  • – Dividends: a tax rate of 5% or 10% with a limitation on relief and a condition for the company receiving the payment to own part of the company making the dividend payment.
  • – Interest: a 0% tax rate with no limitation on relief under the treaty; conditions apply.
  • – Royalties: the treaty allows for a 5% tax rate and it applies to all beneficiaries.
  • – Capital gains: 30% rate, the corporate tax rate applicable in Japan for two types of shares and 0% for some other types.

The capital gains on stock sales are subject to a tax rate of 30% for shares of bankrupt financial institutions and shares of a real property holding company. For others, the rate of 0% applies. The condition for the reduced withholding tax on dividends is that the company receiving the dividend payment holds at least 10% of the shares, the voting right of the company making the payment (owned directly or indirectly). The ownership must be for at least six months, ending on the date on which the dividend entitlement is calculated.

Because Hong Kong has a low tax regime, dividends from Hong Kong to Japan remain at the low 0% rate under the Special Administrative Region’s domestic law, meaning that they are not subject to the treaty.

Other details about the treaty

Tax treaty abuse is prohibited and the authorities from the signatory states have taken adequate measure to prevent this from happening. An article in the treaty contains a limitation on relief for certain types of dividends, interest, royalties, and other income, in the event in which the main purpose of the party benefiting from the provision was to take advantage of the reduction scheme. One of our lawyers in Hong Kong can provide you with more details on the measures that are in place for the prevention of treaty abuse.

The Hong Kong-Japan agreement for the avoidance of double taxation and the prevention of fiscal evasion also includes a clause for the exchange of information between the two signatory states. This is done for the purpose of allowing both parties to carry out the provisions under the treaty. Both parties shall deliver the required information upon request.

For additional information with respect to this double tax treaty or other issues concerning foreign investments in the city please contact our Hong Kong law firm.