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June 23, 2021
2021-1240

Hong Kong enacts legislation to allow a tax deduction for foreign taxes charged on gross income basis

Hong Kong enacted the Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021 (the New Law) on 11 June 2021.1 The New Law allows a tax deduction for foreign taxes charged on a gross income basis and applies to tax years beginning on or after 1 April 2021.

Many stakeholders had lobbied the Hong Kong Government to reinstate the Inland Revenue Department’s previous assessing practice of allowing a tax deduction for foreign taxes charged and paid on a gross income basis in respect of all types of income. Stakeholders noted that the reinstatement of this practice, which had applied up until June 2019, would benefit taxpayers. The New Law was passed to address some of these concerns.

The New Law allows:

  • A tax deduction for foreign taxes on non-interest income (e.g., royalties) that were charged on a gross income basis and were either paid: (i) by a Hong Kong resident person in a non-Hong Kong tax treaty partner jurisdiction; or (ii) by a non-Hong Kong resident person in both a Hong Kong tax treaty and a non-Hong Kong’s tax treaty partner jurisdiction.
  • A non-Hong Kong resident to claim a deduction for foreign taxes paid in respect of certain interest income from a Hong Kong tax treaty partner jurisdiction.2

The New Law imposes new restrictions that limit a non-Hong Kong resident person from claiming a tax deduction in Hong Kong for foreign taxes paid as summarized above only to the extent that such foreign taxes are not relieved from double taxation (by deduction or other method) in the jurisdiction of residence of the non-Hong Kong resident person.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

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ENDNOTES

  1. The New Law was published in the Hong Kong Official Gazette on 11 June 2021.
  2. The existing rule allowing Hong Kong resident and non-Hong Kong resident persons to claim a deduction for tax paid in respect of interest income from a non-treaty partner jurisdiction will remain unchanged.
 

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