Withholding Tax in Hong Kong Explained: A Complete Guide
- Published: 10 June 2025
- 8 min read
- Tax, Bookkeeping
Rodney Wong
Author
Rodney helps customers in Hong Kong navigate the details and benefits of our products and services, showing how technology can be a game changer for their business. A strong advocate for the power of the written word, he makes tech topics accessible, relevant, and, above all, practical—empowering entrepreneurs to pursue their big ideas.
The Hong Kong withholding tax automatically deducts part of your income and sends the deducted amount to the tax authorities. This ensures the timely payment of taxes and simplifies tax management for individuals and corporations. This article will explain what Hong Kong withholding tax is, how it works, and the types you might encounter.
Key Takeaways
- Hong Kong withholding tax is deducted at the source from specific income types such as royalties and payments to non-residents, ensuring timely tax compliance. Both Hong Kong and foreign entities are subject to WHT.
- There are different withholding tax rates based on the income source and recipient relationship, with rates varying from 2.475% to 16.5% depending on the circumstances.
- A person's final income tax owed is determined by the withholding amount, tax deductions and tax credits.
- Osome provides support for corporations to manage withholding tax complexities, ensuring compliance and accuracy in tax reporting.
What Is Withholding Tax?
Hong Kong withholding tax, often abbreviated as WHT, is a tax deducted at the source from an individual or entity’s income. This means that before you see your earnings, a portion has already been set aside to fulfil your tax obligations. The employers are liable for sending the amount to the Inland Revenue Department (IRD) to fulfil this obligation. While Hong Kong's income tax system employs a two-tiered structure, the Withholding Tax (WHT) does not follow the same rules and applies unique tax rates to different individuals and corporations.
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In Hong Kong, withholding tax applies to specific types of income, such as royalties and license fees paid to non-resident sportspeople and entertainer payments. This system ensures that tax obligations are promptly met as income is earned, rather than deferred until the end of the tax year. Note that dividends paid by corporations to their shareholders are often excluded from withholding.
Withholding Tax Meaning with Example
At its core, Hong Kong withholding tax refers to the income tax deducted directly from an employee’s earnings by the employer, which is then paid to the government. This system facilitates regular tax payments, reducing the burden of a lump sum payment at year-end. Think of it as a pay-as-you-go approach to meeting your tax obligations.
Example
If a person earns HK$50,000 per month and the tax rate is 10%, the employer withholds HK$5,000 from the paycheck each month. This HK$5,000 is then remitted to the government as a prepayment against the employee’s annual tax liability. If the withholding is too much, the employee may receive a refund when filing their tax return.
Employers adjust the amount of withholding based on factors like income, filing status, and claimed allowances on the employee’s W-4 form. At the end of each tax year, employees receive a Form W-2 detailing the total withholding, providing transparency and ease of filing.
Types of Withholding Taxes
WHTs can be broadly categorised into several types, each serving a unique purpose and applying to different income sources for taxpayers, including the need to file.
Type of Withholding Tax 🧾 | Description 📌 | Key Features 🔍 |
|---|---|---|
| Resident Withholding Tax 🇭🇰 | Employers deduct tax from employee wages and remit it to the government as an advance on income tax. | Applies to wages, service fees and royalties, but typically excludes dividends and interests; Based on income level and filing status. |
| Non-Resident Withholding Tax 🌐 | Imposed on non-residents earning income in a jurisdiction (e.g., royalties, profits). | In Hong Kong, applies to HK-sourced income for non-residents; royalties are taxed. |
Resident Withholding Tax
Income tax withholding for residents applies to resident corporations, Hong Kong entities, and individual residents. This applies to wages, direct payments for services rendered, entertainer payments, royalty payments on intellectual property, and other specific payments incurred by a Hong Kong entity. However, dividend income and interest received by residents are typically not subject to withholding. WTH is calculated every tax year or calendar year, depending on the entity's accounting policies.
One thing to note is that income earned from foreign sources is not subject to withholding thanks to Hong Kong's territorial tax system. This encourages Hong Kong entities to explore foreign markets and establish branch offices worldwide, significantly enhancing Hong Kong's international commerce capabilities.
Non-resident withholding tax
Non-resident individuals and entities who earn income within Hong Kong's territory pay a non-resident withholding tax. This applies to non-resident corporations and individuals with Hong Kong source income. Royalty payments made to a non-resident person are also subject to withholding in Hong Kong.
Non-resident corporations earning profits sourced from Hong Kong are similarly taxed to ensure compliance and revenue collection. Royalties paid by a Hong Kong company to non-resident individuals and entities are also subject to withholding in Hong Kong.
Osome provides expert guidance to corporations navigating the complexities of non-resident withholding tax regulations in Hong Kong, ensuring central management of taxes and compliance, and helping individuals understand their obligations as natural persons.
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Withholding Tax Rates
Withholding tax rates in Hong Kong vary depending on the type of income and the payer-recipient relationship. For royalty payments to non-resident companies and persons, a 16.5% WHT rate applies to intellectual properties, television broadcasts, and sound recordings previously owned by a Hong Kong-controlled corporation, known as associates. A 4.95% rate applies to royalties on copyrights, patents, trademarks, and franchises.
If the destination jurisdiction holds a tax treaty with Hong Kong, the rates can be lowered to 2.475% - 4.95%. So far, Hong Kong has established treaties with 50 different jurisdictions regarding WHT on royalties, requiring a certain percentage to be withheld by the paying company.
Payments to non-resident individuals not sourced from a Hong Kong-controlled corporation have a 4.5% withholding tax rate. Most foreign services are exempt from withholding, except for artist and entertainer payments. A 10% tax rate is applicable under a direct agreement, 11% if paid through an agent, and 16.5% if paid through a resident agent.
Osome assists businesses in reducing their withholding liabilities by providing insights on applicable tax treaties and trade law exemptions, ensuring they take advantage of any available exempt services provide benefits to maximise their profit and remain compliant.
Withholding Tax Treatment
Hong Kong withholding tax is generally classified as a direct tax, and the tax withheld is not passed on to consumers. Unlike indirect taxes, which can be shifted to another party, WHT is deducted at the source of income, making it non-transferable.
In accounting, it is recorded as a liability until it is remitted to the tax authority. This means that businesses must carefully track these amounts to ensure compliance and accurate financial reporting.
Whether Hong Kong WHT is classified as an expense depends on the accounting policies adopted by a business. Some jurisdictions may allow the tax to be treated as a deductible expense, which can reduce the effective tax burden on firms.
Accounting for Withholding Tax
Employers deduct WHT from employee wages and remit it directly to the government as an advance payment on their tax liabilities. This process requires careful planning and management to ensure compliance and avoid potential penalties.
Accurate tax calculations are essential for preventing errors and financial complications. Hong Kong entities must create specific accounts in their accounting systems to track liable tax withheld until they are paid to the tax authority. Once remitted, a transaction must be recorded to move the amounts from the WHT receivable account to the withholding tax account.
Keeping accurate financial records is vital, and proof of tax remittance, such as a certificate from the tax authority, should be documented in the accounting system to control transparency and accountability in financial reporting.
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Is Withholding Tax an Expense?
Hong Kong withholding tax is pay-as-you-go and collects taxes as income is generated. This ensures companies gradually fulfil their tax obligations, avoiding large year-end tax bills. For businesses, this affects cash flow and financial planning beyond mere compliance.
Depending on the company's accounting policies and structure, WHT is sometimes classified as an expense. Applying payments against obligations requires a journal entry that debits either an expense or equity account, which in turn affects taxable income calculations and overall tax liabilities.
How Osome Can Help with Withholding Tax?
Managing your Hong Kong withholding tax can be complex and time-consuming for corporations. By utilising professional guidance, companies can reduce errors and ensure accurate management.
Osome’s accounting services help you stay on top of tax requirements, including accurate withholding tax reporting. Our experts ensure compliance and streamline your finances so you can focus on growing your business.
Summary
Hong Kong charges WHT on most income sources, such as wages, service charges and royalties, but excludes dividends and interests paid to shareholders. Understanding and managing Hong Kong withholding tax is crucial for Hong Kong entities, corporations and persons alike. It ensures that tax obligations are met promptly, reducing the burden of large tax payments at the end of the year. By grasping the various WHT types, rates, and treatments, corporations can better navigate their financial responsibilities. Osome can simplify the process with valuable support in tax management, allowing corporations to focus on growth and success.
FAQ
What is withholding tax?
Withholding tax deducts a percentage directly from your earnings and sends it to the government, serving as an advance payment towards your overall obligations. This mechanism ensures that WHT is collected efficiently at the source of income.
How is withholding tax calculated?
WHT is calculated by considering your income level, filing status, and the number of allowances you claim, allowing employers to adjust the withholding amount accordingly. Interests and dividends are typically excluded from WHT.
What are the withholding tax rates in Hong Kong?
Withholding tax rates in Hong Kong range from 2.475% to 4.95% for royalty payments to treaty jurisdictions, and up to 16.5% for payments to non-resident companies in non-treaty jurisdictions on sound recordings and other forms of intellectual property previously owned by a Hong Kong entity (or its associate). These rates are crucial for compliance and financial planning in cross-border transactions.
Is withholding tax considered an expense for businesses?
Hong Kong WHT is typically classified as a liability for corporations, not an expense, although this may vary based on specific accounting policies.
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