Do I withhold tax on royalties paid to a non-resident from Hong Kong?

Hong Kong has no general withholding tax, but a specific rule for royalties and similar sums.

Which payments. Sums paid for the use or right to use in Hong Kong of patents, designs, trade marks, copyright material, secret processes or similar rights are deemed to arise from a Hong Kong business, even if the recipient is a non-resident with no Hong Kong presence (section 15). Payments for use outside Hong Kong can also be taxable if the payer deducts them in computing its own Hong Kong profits.

How much. Under section 21A the assessable profit is deemed to be 30% of the gross sum. At the corporate rate of 16.5% this works out at an effective rate of 4.95% (30% x 16.5%); at the 15% unincorporated rate it is 4.5%. If the non-resident qualifies for the two-tiered rates (no connected entity, or none that has elected), the effective rate on the first HK$2 million can be lower; the payer checks this with the non-resident and declares it in the return.

Exception. If the IP was previously owned by someone carrying on business in Hong Kong and the payment goes to an associate (a connected person, such as a related company), 100% of the sum is taxed.

Payer's duties

• The non-resident is assessed in the payer's name; the payer must deduct enough tax at the time it pays or credits the sum.
• Complete the non-resident's profits tax return (Form BIR54) accordingly.
• Check whether a double taxation agreement reduces the tax, and whether the deduction is allowed in your accounts.